Developed economies in much of the world continue to pass by house price corrections. At least that’s what an article published this week by researchers at Goldman Sachs.
The article titled “Why the global housing market continues to slide” argues that high mortgage rates will keep housing going markets in countries like New Zealand, Canada and the United States in correction mode for much of the year.
“Rising mortgage rates are weighing on real estate markets around the world, and sales and prices are likely to remain under pressure this year in most G10 economies,” wrote Goldman Sachs economists Joseph Briggs and Giovanni Pierdomenico. “After a surge in real estate activity during the pandemic, home sales strongly retreated in the second half of 2022, when central bank rate hikes caused mortgage rates to spike in most developed market economies. A contraction in housing starts, sales and prices has persisted this year and shows few signs of stopping.
However, this home price correction will not be even. House prices in countries like New Zealand and Canada have fallen 16.2% and 15.8%, respectively, since their 2022 peak. down only 2.7% from their peak in the summer of 2022.
Unlike borrowers from countries like Canada, US borrowers generally get fixed mortgage rates. This means they are more insulated from mortgage rate shocks and less likely to list their home due to sudden financial difficulties. This lack of supply, in theory, limits the decline in the United States
“The tightness of the housing market – as measured by the scarcity of homes available for sale – has a large influence on many markets and should limit the decline in house prices to some extent,” wrote the Goldman researchers.
By the time house prices bottom out, Briggs and Pierdomenico expect countries like New Zealand and Canada to be down 19%. While Goldman researchers predict that US home prices, which are currently down 2.7% from their 2022 high, will see a peak-to-trough decline of just 5%.
On the one hand, a 5% drop from peak to trough would mark the second largest postwar U.S. house price correction. On the other hand, it would be a drop in the ocean compared to the 26% drop from peak to trough between 2007 and 2012.
“The team anticipates relatively tame [U.S.] the price of houses there is falling, by around 5%, mainly due to its extremely low vacancy rate”, wrote the Goldman researchers.
Not to mention that if U.S. home prices do indeed fall 5% from the 2022 peak, national house prices in the country would still be up 34.1% from March 2020 levels.
There is a joker: economists say distress in the global banking sector could lead to tougher lending standards and negate the tailwinds created by future mortgage rate cuts.
“The recent financial turmoil has heightened uncertainty about the housing outlook, as continued pressures could cause smaller banks to tighten lending standardsdespite declining long-term yields,” Briggs and Pierdomenico wrote.
Goldman researchers expect weaker real estate activity, coupled with falling house prices, to act as an economic drag.
“Higher borrowing costs for homebuyers have taken a heavy toll on housing affordability and the full impact has likely yet to be felt… The timing of the impact is not uniform across around the world; differences in mortgage markets across countries can speed up or slow down the rate of growth Countries with higher shares of fixed rate mortgages, for example, tend to experience lagged impacts on rates », wrote the Goldman researchers.
Between the first quarter and the fourth quarter of 2022, Private Residential Fixed Investment in the United States (i.e. housing GDP) fell 12.3%. But weak housing sector did not trigger a recession.
“The global housing decline is unfolding as expected… The strong housing market reaction to rate hikes has helped slow overall growth below trend without causing a recession or triggering an increase in delinquencies in the most major economies, economists have written.
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