A house price slump is coming. Rising unemployment could make it much worse


London
CNN Business

Last year, Auckland’s biggest real estate company couldn’t sell properties fast enough to meet demand in New Zealand’s biggest city.

Houses were “flying out the door,” said Grant Sykes, a manager at real estate agency Barfoot & Thompson. He told CNN Business, “There were moments when agents stood around the room and were taken aback by the prices that were achieved.

In one example, a property sold for 1 million New Zealand dollars ($610,000) above the asking price in an auction lasting all of eight minutes. (Most homes in New Zealand are sold at auction.)

This was in May 2021, when sales Attracted thousands of bidders that drove prices ever higher. Since then, Barfoot & Thompson’s clearance rate has plummeted, according to Sykes, extending sales times and sending prices lower.

The time it takes to sell a property in New Zealand has increased by around 10 days on average since October 2021, according to the Real Estate Institute of New Zealand. Sales have plunged nearly 35% and average house prices are down 7.5% in the past year.

Houses in the suburb of Devonport across the central business district of Auckland, New Zealand.

New Zealand is at the sharp end of a global housing market squeeze that has dire ramifications for the world economy.

The pandemic boom, which sent prices In the stratosphere, is running out of steam and house prices are now falling from Canada to China, setting the stage for the broadest housing market slowdown since the global financial crisis.

Rising interest rates are driving the dramatic change. Central banks on a warpath against inflation have taken rates to levels not seen for more than a decade, with ripple effects on the cost of borrowing.

Mortgage rates topped 7% last month for the first time since 2002, up from just over 3% a year ago, before pulling back slightly in November as inflation eased. In the European Union and United Kingdom, mortgage rates have more than doubled since last year, chasing buyers from the market.

“Overall, this is the most varied housing market outlook since 2007-2008, with markets ranging between the prospect of modest declines and much steeper ones of 15%-20%,” said Adam Slater, a chief economist at Oxford Economics. A consultancy. .

One key factor determining how low prices go? Unemployment. A sharp increase in unemployment could lead to forced sales and foreclosures, “where steep discounts are common,” according to Slater.

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But even if the correction in prices is mild, a slowdown of the housing market can have severe consequences because housing transactions increase the activity in other sectors of the economy.

“In an ideal world, you’d get a bit of foam blown off the top [of house prices] And everything is fine. It’s not impossible, but it’s more likely that the housing downturn will come with mysterious consequences,” Slater told CNN Business.

House prices are already falling in more than half of the 18 advanced economies that Oxford Economics tracks, including the United Kingdom, Germany, Sweden, Australia and Canada, where prices fell by around 7% from February to August.

“Data lags probably mean that most markets are now seeing falling prices,” said Slater. “We are in the early stages of quite a clear downturn now and the only real question is how steep and how long it will be.”

House prices in the United States – which rose during the pandemic by the most since the 1970s – are also falling. Economists at Goldman Sachs expect a decline of around 5%-10% from the peak reached in June by March 2024.

In a “pessimistic” scenario, US it. Prices could plunge as much as 20%, Dallas Fed economist Enrique Martinez-Garcia wrote in a blog post recently.

Prices for new homes in China fell at the fastest pace in more than seven years in October, according to official figures, reflecting a deepening property market slump that has gripped the country for months and is weighing heavily on its economy. Home sales fell by 43% this year, according to China Index Academy, a research firm.

Sales are also slipping elsewhere, as banks take a more cautious approach to lending and aspiring homebuyers delay purchases in the face of much higher borrowing costs and a deteriorating economic outlook.

House sales in Britain were 32% below the previous year’s level in September, according to official figures. A closely watched survey showed that new buyer inquiries fell for the sixth consecutive month in October to the lowest level since 2008, excluding the early months of 2020 when the market is largely shut down because of the pandemic.

In the United States, sales of existing homes fell by more than 28% year-over-year in October, the ninth consecutive monthly decline, according to the National Association of Realtors.

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Mortgage rates in 25 major cities around the world tracked by UBS have almost doubled on average since last year, making house purchases much less affordable.

“A skilled service sector worker can afford roughly one-third less housing space than before the pandemic,” according to the UBS Global Real Estate Bubble Index.

An estate agent's sign is pictured on a house at the end of a row of terraced homes in northern England on November 2, 2022.

As well as putting off new buyers, the sharp increase in rates has shocked existing owners who have been accustomed to more than a decade of ultra-low council costs.

In Britain, more than 4,000,000 mortgages have been issued to first-time buyers since 2009, when rates were close to zero. Tom Bill, head of UK residential research at broker Knight Frank, said: “There are a lot of people who don’t appreciate how it is when their monthly outgoings rise.

In countries with a greater share of variable-rate mortgages, such as Sweden and Australia, the shock will be immediate and could increase the risk of forced sales that bring prices down faster.

But even in places where a large proportion of mortgages are fixed, such as New Zealand and the United Kingdom, the average maturity of the mortgages is quite short.

“This means that much more debt will be subject to (often significantly) higher rates over the next year or so than may be the case,” Slater wrote in a report last month.

While interest rates have been the catalyst for the slowdown of the housing market, the jobs market will play a greater role in determining how low prices ultimately plunge.

Modeling of past house price crashes by Oxford Economics shows that employment is the decisive factor in determining the severity of a downturn, as a spike in unemployment raises the number of forced sellers.

“History shows that if labor markets can remain strong, the chances of a more benign correction are higher,” according to Innes McFee, chief global economist at Oxford Economics.

Employment levels in many advanced economies have recovered since falling at the start of the pandemic. However, there are early signs that labor markets are starting to cool as weak economic growth affects demand for workers.

After recovering strongly at the beginning of the year, the number of working hours was 1.5% below pre-pandemic levels in the third quarter, amounting to a deficit of 40 million full-time jobs, according to estimates from the International Labor Organization.

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“The outlook for global labor markets has worsened in recent months and on current trends job vacancies will decline and global employment growth will deteriorate significantly in the final quarter of 2022,” the ILO said in an October report.

The unemployment rate in the United States ticked up in October to 3.7%. In the United Kingdom, job vacancies fell to the lowest level in a year. The UK Office for Budget Responsibility expects unemployment to rise by 505,000 to a peak of 1.7 million – an unemployment rate of 4.9% – in the third quarter of 2024.

“A significant increase in unemployment is a very big danger for housing markets,” said Slater of Oxford Economics.

A pedestrian walks past unfinished apartment buildings in the West Bund Park residential project in Shanghai, China, on January 14, 2022.

Most market watchers do not expect a repeat of the 2008 housing market crash. Banks and households are in better financial shape, and housing supply in some countries remains tight.

But even a modest fall in house prices will knock confidence, causing homeowners to cut back on spending.

A slowdown in activity will also deal a blow to many other parts of the economy because of the housing market’s links to builders, lawyers, banks, moving companies and furniture stores, to name a few.

China’s property market accounts for about 28-30% of GDP because of these linkages. In the United States, the broader contribution of housing to GDP generally averages 15-18%, according to the National Association of Home Builders.

In a worst-case scenario – one in which house prices fall more sharply than anticipated and price declines are met with a decline in residential investment and tighter lending by banks – Oxford Economics forecasts that world GDP will expand by just 0.3% in 2023, rather than the 1.5% it currently expects.

“An additional negative factor, compared to the [global financial crisis]is that the Chinese housing market is also in a downturn, “according to Slater. “So rather than offsetting the impact on world production of ​​a global housing downturn, as was the case after the GFC, the Chinese housing sector is contributing to the decline.”

– Laura He contributed to this report.

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