A fall in house prices is coming. Rising unemployment could make it much worse

CNN Business

Last year, Auckland’s biggest property 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, manager of estate agency Barfoot & Thompson. “There were mind-boggling moments where the agents stood around the room and were blown away by the prices they were getting,” 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 eight minutes. (Most homes in New Zealand are sold at auction).

It was May 2021, when they were sold it attracted thousands of bidders who drove the prices higher and higher. Since then, Barfoot & Thompson’s clearance rate at auction has plummeted, according to Sykes, extending sales times and sending lower prices.

The time it takes to sell a property in New Zealand has increased by about 10 days on average since October 2021, according to the 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 suburb of Devonport opposite the central business district of Auckland, New Zealand.

New Zealand is on the receiving end of a global housing market crackdown that has serious ramifications for the global economy.

The pandemic boom, which sent prices in the stratosphere, it’s running out and home prices are 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 pushed rates to levels not seen in more than a decade, with knock-on effects on the cost of borrowing.

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

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

A key factor that determines how low prices are? unemployment A sharp rise in unemployment could lead to forced sales and foreclosures, “where steep discounts are common,” according to Slater.

But even if the price correction is mild, a slowdown in the housing market could have serious consequences because housing transactions, in turn, boost activity in other sectors of the economy.

“In an ideal world, you’ll get some foam off the top [of house prices] and everything is fine It’s not impossible, but housing downturns are more likely to have nastier consequences,” 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 around 7 % from February to August.

“The data lags probably mean that most markets are now experiencing a drop in prices,” Slater said. “We are now in the first period of a pretty clear decline and the only real question is how steep and how long it will last.”

U.S. home prices, which rose the most during the pandemic since the 1970s, are also falling. Economists at Goldman Sachs expect a fall of around 5%-10% from the peak reached in June to March 2024.

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

China’s new home prices fell at the fastest pace in more than seven years in October, official figures showed, reflecting a deep housing market slump that has gripped the country for months and is weighing heavily about their economy. Home sales have fallen 43% this year, according to the China Index Academy, a research firm.

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

Home sales in the UK were 32% below the level of a year earlier in September, according to official data. A closely watched survey showed inquiries from new buyers fell for a sixth consecutive month in October to the lowest level since 2008, excluding the first few months of 2020 when the market was largely closed due to the pandemic

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

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

“A skilled worker in the service sector can afford about a third less housing space than before the pandemic,” according to the UBS Global Housing Bubble Index.

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As well as putting off new buyers, the sharp rise in rates has surprised existing homeowners accustomed to more than a decade of very low borrowing costs.

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

In countries with a higher proportion of variable-rate mortgages, such as Sweden and Australia, the shock will be immediate and could increase the risk of forced sales driving prices down more quickly.

But even in places with a large proportion of fixed mortgages, such as New Zealand and the UK, 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 appear at first glance,” 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 bigger role in determining how low prices ultimately fall.

The model of past house price falls by Oxford Economics shows that employment is the decisive factor in determining the severity of a recession, because a rise in unemployment increases the number of forced sellers.

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

Employment levels in many advanced economies have recovered from the slump at the start of the pandemic. But there are early signs that labor markets are starting to cool as weak economic growth weighs on demand for workers.

After recovering strongly earlier this year, the number of hours worked was 1.5% below pre-pandemic levels in the third quarter, representing a shortfall of 40 million full-time jobs, according to International Labor Organization estimates.

“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 last quarter of 2022,” the ILO said in an October report.

The unemployment rate in the United States rose in October to 3.7%. In the UK, job vacancies have fallen to their lowest level in a year. The UK’s 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 decisive rise in unemployment is a very big danger for housing markets,” said Slater of Oxford Economics.

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

Most market watchers do not expect a repeat of the housing market crash of 2008. 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 hit confidence, causing homeowners to cut back on spending.

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

China’s real estate market accounts for around 28-30% of GDP due to 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, house prices fall more sharply than expected and price falls are met with a fall in residential investment and tighter lending by banks. Oxford Economics predicts global GDP will expand by just 0.3% in 2023, instead of the 1.5% it currently expects.

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

— Laura Contributed to this report.

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