Last year, Auckland’s biggest property company couldn’t sell its properties fast enough to keep up with demand in New Zealand’s biggest city.
The houses were “flying out the door”, said Grant Sykes, director of the Barfoot & Thompson estate agency. “There have been jaw-dropping moments when agents stand in the room and are amazed at the prices achieved,” he told CNN Business.
In one example, a property sold for NZ 1 million dollars ($610,000) above the asking price in an auction that lasted eight minutes. (Most houses in New Zealand are sold at auction.)
It was in May 2021, when sales attracted thousands of bidders who pushed the prices ever higher. Since then, Barfoot & Thompson’s auction clearance rate has plummeted, Sykes says, extending sales times and driving prices down.
The time to sell 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 fallen nearly 35% and median home prices have fallen 7.5% over the past year.
New Zealand is at the forefront of a global housing market squeeze that has grim ramifications for the global economy.
The pandemic boom, which sent prices into the stratosphere, is running out of steam and house prices are now plummeting from Canada to China, setting the stage for the largest housing market downturn since the global financial crisis.
The rise in interest rates is at the origin of this radical change. Central banks at war with inflation have raised rates to levels not seen in more than a decade, with ripple effects on the cost of borrowing.
US mortgage rates topped 7% last month for the first time since 2002, from just over 3% a year ago, before falling slightly in November as inflation waned. In the European Union and the United Kingdom, mortgage rates have more than doubled since last year, driving potential buyers out of the market.
“Overall, this is the most worrisome outlook for the housing market since 2007-08, with markets balancing between the prospect of modest declines and much steeper declines of 15% to 20%,” he said. said Adam Slater, senior economist at Oxford Economics, a consultancy. .
A key factor determining how high prices go? Unemployment. A sharp rise in unemployment could lead to forced sales and foreclosures, “where deep discounts are common,” according to Slater.
But even if the price correction is moderate, a slowdown in the real estate market could have serious consequences as real estate transactions in turn stimulate activity in other sectors of the economy.
“In an ideal world, you’ll have some foam blowing off the top [of house prices] and all is fine. It’s not impossible, but real estate downturns are more likely to have more adverse 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 have fallen by around 7% from February to August.
“The data lags likely mean that most markets are now seeing prices decline,” Slater said. “We’re at the start of a pretty clear downturn now and the only real question is how bad and how long will it last.”
House prices in the United States – which have risen the most during the pandemic since the 1970s – are also falling. Goldman Sachs economists expect a decline of around 5-10% from the peak reached in June through March 2024.
In a “pessimistic” scenario, US prices could plunge 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 housing market slump that has been deepening for months and is weighing heavily on its economy. Home sales have fallen 43% this year, according to China Index Academy, a research firm.
Sales are falling elsewhere, too, as banks take a more cautious approach to lending and aspiring buyers delay purchases in the face of much higher borrowing costs and a deteriorating economic outlook.
Home sales in Britain were 32% below year-earlier levels in September, official figures showed. A closely watched survey showed new buyer inquiries fell for the 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 of the pandemic.
In the United States, sales of existing homes fell more than 28% year over year in October, the ninth consecutive 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 real estate purchases 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 Real Estate Bubble Index.
As well as putting off new buyers, the sharp rise in rates shocked existing homeowners accustomed to more than a decade of ultra-low borrowing costs.
In Britain, more than 4 million mortgages have been granted to first-time buyers since 2009, when rates were close to zero. “There are a lot of people who don’t appreciate what it’s like when their monthly expenses go up,” said Tom Bill, head of UK residential research at brokerage Knight Frank.
In countries where the share of variable rate mortgages is higher, such as Sweden and Australia, the shock will be immediate and could increase the risk of forced sales which drive prices down more quickly.
But even in places where a large proportion of mortgages are fixed, such as New Zealand and the United Kingdom, the average duration of these mortgages is quite short.
“This means a lot more debt will be subject to (often significantly) higher rates over the next year or so than first appears,” Slater wrote in a report last month.
While interest rates have been the catalyst for the slowdown in the housing market, the job market will play a bigger role in determining the fall in prices.
Modeling of past property price crashes by Oxford Economics shows that employment is the deciding factor in determining the severity of a downturn, as a spike in unemployment increases the number of forced sellers.
“History shows that if labor markets can stay strong, the chances of a milder correction are higher,” said Innes McFee, chief global economist at Oxford Economics.
Employment levels in many advanced economies have recovered since plummeting at the start of the pandemic. But there are early signs that labor markets are beginning to cool as weak economic growth hits demand for workers.
After recovering strongly at the start of the year, the number of hours worked was 1.5% below pre-pandemic levels in the third quarter, a deficit of 40 million full-time jobs, according to International Labor Organization estimates.
“The outlook for global labor markets has deteriorated 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 report said. ILO in an October report.
The unemployment rate in the United States rose in October to 3.7%. In the UK, job vacancies fell to their lowest level in a year. The UK’s Office for Budget Responsibility expects unemployment to rise by 505,000 to a high of 1.7 million – an unemployment rate of 4.9% – in the third quarter of 2024.
“A sharp rise in unemployment is a very big danger to housing markets,” said Slater of Oxford Economics.
Most market watchers do not expect a repeat of the housing crash of 2008. Banks and households are in better financial health and housing supply in some countries remains tight.
But even a modest decline in house prices will undermine confidence, forcing homeowners to cut spending.
A slowdown in activity will also hurt many other sectors of the economy due to the housing market’s ties to builders, lawyers, banks, moving companies and furniture stores, for to name a few.
The Chinese real estate market accounts for around 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 Association of Home Builders.
In the worst-case scenario — a scenario in which house prices fall more sharply than expected and price declines are accompanied by a collapse in residential investment and a crunch in bank lending — Oxford Economics predicts that global GDP will grow by just 0.3% in 2023, down from the 1.5% it currently forecasts.
“An additional negative factor, compared to the [global financial crisis], is that the Chinese housing market is also down,” according to Slater. “So rather than offsetting the impact on global output of a global housing slowdown, as was the case after the GFC, China’s housing sector is contributing to the crisis.”
— Laura Contributed to this report.