House prices are coming down. Rising unemployment could exacerbate the situation

CNN Business

Last year, Auckland’s largest real estate company was unable to sell property quickly enough to meet demand in New Zealand’s largest city.

Homes were “flying out the door,” said Grant Sykes, manager of real estate agency Barfoot & Thompson. “There were moments when the agents stood in the room and were overwhelmed by the prices reached,” he told CNN Business.

In one example, a property sold for $1 million in New Zealand. dollars ($610,000) above the asking price in an auction that lasted the full eight minutes. (Most houses in New Zealand are sold at auctions.)

It was in May 2021 when sales attracted thousands of bidders who raised prices even higher. Since then, according to Sykes, Barfoot & Thompson’s auction sales have plummeted, resulting in longer lead times and lower prices.

According to the agency, the time it takes to sell property in New Zealand has increased by an average of about 10 days since October 2021. Real Estate Institute of New Zealand. Sales are down nearly 35% and median home prices are down 7.5% over the past year.

Houses in the suburbs of Devonport opposite the central business district of Auckland, New Zealand.

New Zealand is at the bottom of the global housing market compress this has dire consequences for the global economy.

Pandemic boomwho sent prices into the stratosphere, fizzles out, and house prices are now the fall from Canada to China, paving the way for the broadest housing market slowdown after the global financial crisis.

Rising interest rates lead to dramatic changes. Central banks on warpath against inflation raised rates to levels not seen in more than a decade, which had a ripple effect on the cost of borrowing.

US mortgage rates exceeded 7% last month for the first time since 2002, up from just over 3% a year ago, to pulling back a little in November, when inflation eased. In the European Union and the United Kingdom, mortgage rates have more than doubled since last year, pushing potential buyers out of the market.

“Overall, this is the most worrisome outlook for the housing market since 2007-2008, with markets fluctuating between the prospect of a modest decline and a much sharper 15% to 20% drop,” said Adam Slater, chief economist at consultancy Oxford Economics. .

One of the key factors determining how low prices will be? Unemployment. Soaring unemployment could lead to forced sales and foreclosures “where big discounts are common,” Slater said.

But even if the price correction is modest, a slowdown in the housing market could have serious consequences, as housing deals, in turn, stimulate activity in other sectors of the economy.

“In an ideal world, you will be blown off some foam. [of house prices] and everything is fine. It’s not impossible, but it’s more likely that the housing downturn will backfire,” Slater told CNN Business.

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

“The data delays likely mean that most markets are now seeing price drops,” Slater said. “We are now at the start of a fairly clear downturn and the only real question is how steep and how long will it be.”

US house prices, which have risen the most since the 1970s during the pandemic, are also falling. Economists at Goldman Sachs expect a decline of about 5-10% from the peak reached in June through March 2024.

In a “pessimistic” scenario, US prices could fall by 20%, writes Dallas Fed economist Enrique Martinez-Garcia. Blog Post recently.

China’s new home prices fell at the fastest rate in more than seven years in October, according to official data, reflecting a deepening real estate downturn that has gripped the country for months and is weighing heavily on its economy. Home sales have fallen 43% this year, according to research firm China Index Academy.

Sales are down elsewhere as banks are more cautious about lending and first-time homebuyers are postponing purchases in the face of much higher borrowing costs and a worsening economic outlook.

UK home sales in September were 32% lower than last year, according to official figures. A thorough survey showed that new buyer inquiries fell to their lowest level since 2008 for the sixth straight month in October, except for the first months of 2020, when the market was largely closed due to the pandemic.

In the United States, existing home sales fell more than 28% year-on-year in October, the ninth straight monthly decline, according to the National Association of Realtors.

Mortgage rates in the 25 major cities around the world tracked by UBS have almost doubled on average compared to last year, making home buying far less affordable.

“A skilled service worker can afford about a third less housing than before the pandemic,” UBS said in a statement. Global Real Estate Bubble Index.

A real estate agent's

In addition to scaring off new buyers, the steep rate hike shocked existing homeowners, who have been accustomed to ultra-low borrowing costs for more than a decade.

In Britain, since 2009, when rates were close to zero, more than 4 million mortgages have been issued to first buyers. “There are a lot of people who don’t understand what it’s like when their monthly expenses go up,” said Tom Bill, head of UK housing research at brokerage Knight Frank.

In countries with a larger share of floating rate mortgages, such as Sweden and Australia, the shock will be immediate and could increase the risk of forced sales, leading to faster price declines.

But even in countries where most mortgages are fixed, such as New Zealand and the United Kingdom, the average maturity of these 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 might at first appear,” Slater wrote in a report last month.

While interest rates have been the catalyst for the housing market slowdown, the labor market will play a larger role in determining how low prices end up falling.

Modeling of past house price crashes by Oxford Economics shows that employment is a critical factor in the severity of the downturn, as a surge in unemployment increases the number of forced sellers.

“History shows that if labor markets can remain strong, then the chances of a softer correction are higher,” said Innes McPhee, chief global economist at Oxford Economics.

Employment rates in many advanced economies have rebounded after falling at the start of the pandemic. But there are early signs that labor markets are starting to cool as weak economic growth weighs on labor demand.

After a sharp recovery earlier in the year, the International Labor Organization estimated that hours worked were 1.5% below pre-pandemic levels in the third quarter, leaving a gap of 40 million full-time jobs.

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

The US unemployment rate rose to 3.7% in October. In the United Kingdom, the number of vacancies fell to the lowest level in a year. The UK Fiscal Accountability Office expects unemployment to rise by 505,000 people to a peak of 1.7 million people – an unemployment rate of 4.9% – in the third quarter of 2024.

“A decisive rise in unemployment is a very big danger to housing markets,” said Slater of Oxford Economics.

A pedestrian walks past unfinished apartment buildings at the West Bund Park residential complex in Shanghai, China.  14, 2022.

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

But even a modest drop in home prices will undermine confidence, forcing homeowners to cut costs.

The slowdown will also hit many other sectors of the economy due to housing market ties to builders, lawyers, banks, transport companies and furniture stores, to name but a few.

China’s real estate market accounts for about 28-30% of GDP due to these links. In the United States, housing’s broader contribution to GDP typically averages 15-18%, according to the National Home Builders Association.

In the worst-case scenario — one in which house prices fall more sharply than expected and the price decline is accompanied by a decline in housing investment and tighter lending by banks — Oxford Economics predicts that global GDP will grow by just 0.3% in 2023, not the 1.5% currently expected.

“An additional negative factor, compared with [global financial crisis]is that the Chinese housing market is also in decline,” Slater said. “So instead of offsetting the impact of the global housing downturn, as it did after the global financial crisis, the Chinese housing sector is contributing to the downturn.”

— Laura He contributed to this report.