The white-hot global housing market is showing signs of cooling as governments throughout the world raise interest rates, and mortgages become harder to come by. To the surprise of many, the pandemic drastically accelerated the housing market, eventually putting it into overdrive. In some markets, especially the United States and Canada, it became standard practice to waive inspections and make cash offers well above the asking price. Even then, it was hard for those potential buyers to finally close on homes without stretching their resources to the limit. Now that interest rates have risen significantly, and therefore monthly mortgage payments have been pushed impossibly higher, there are much fewer potential buyers making offers.
In Canada, home prices have fallen for three consecutive months. In New Zealand, which saw prices across the country rise to 145% of their pre-pandemic levels by the end of 2021, prices have also fallen for three consecutive months. Sweden witnessed a 4% fall in June, representing the steepest decline since the Great Recession. And 40% of homes in Australia are worth less than they were three months ago.
Prices are not necessarily falling everywhere, but buyer willingness has dropped considerably. Because the Fed has continued to increase interest rates (and it has signalled that it will continue to do so in the coming months), which has raised monthly payments considerably. Because of these steep rate increases, a typical monthly mortgage payment is now three-quarters higher than it was in 2019, which is why there are far fewer loan applications now than there were earlier in the year. Moreover, first-time buyers have been increasingly priced out of the American market, with their numbers falling to lows not seen since the Great Recession.
If the data tell us that prices are falling, then how far will they fall? That depends on where you look and how loans are structured. Some industry experts predict 5-10% falls in the United States and Britain. Part of that has to do with the fact that fixed-rate loans are dominant in these regions. Therefore, homeowners are unlikely to be forced to sell by rising mortgage costs like they would if their mortgages were variable-rate loans tied to rising interest rates. For Australia and Sweden, experts predict prices could fall by as much as 15%. And for Canada and New Zealand, which are vulnerable because of higher levels of household debt compared to the other countries listed, prices could plummet by as much as 20%.
What these experts hope is that these housing markets can avoid a death spiral. There are two reasons they believe this will not happen. The first is that most of the aforementioned rich countries have significant housing shortages. For example, analysts say that America needs between 3.8 and 5.8 million more homes to be at equilibrium. England would need about 345,000 new homes a year, but it is building less than 200,000. Canada is also running at a negative pace. The second reason that a death spiral seems avoidable is that unemployment is low in these countries, and the labour markets are extremely competitive. If people have jobs, they are far less likely to get behind on their mortgage payments. The housing shortage cannot change quickly, but labour markets can turn much faster. Therefore, if there are shifts in the labour market, this could lead to a swift and brutal housing slump across many wealthy nations.