The Global Housing Market is Starting to Wobble as Central Banks Hike Rates

The pandemic-induced housing boom appears to be cooling off.

From Toronto to Auckland, a slowdown in the housing market (the most interest-rate sensitive segment of the economy) is underway as interest rates in developed economies are set to climb rapidly, according to Goldman Sachs Research.

Mortgage rates spiked sharply since last summer in the U.K., Canada, New Zealand and U.S.; and given the likelihood of further rate hikes, borrowing costs for housing are likely to rise even further. 

The housing picture in many of these countries shows a stark change underway, with already substantial declines in sales across developed economies. Home sales are down by 40% from their pandemic peak in the U.S., and by half in the U.K. Those declines in home sales are meaningful for prices in the near future because a 10 percentage point slowdown in house sales growth tends to be followed by a 2 percentage point slowdown in house price growth in around 6 months, Goldman Sachs Research estimates.

And while house prices are still rising in the likes of the U.S., Germany and the U.K., they are already declining across Australia, Canada, Sweden and New Zealand. In the latter, home prices are now 8% down from their peak during the pandemic. In Canada, house prices have fallen the most in areas that had the most growth early in the pandemic.

Goldman Sachs Research estimates that house prices will see a peak-to-trough decline of 12% in Canada, 9% in France and 3% in the U.S. over the next couple of years. The slowdown will be sharpest in Canada due to weak recent momentum, low affordability and rapid policy hikes by the Bank of Canada. 

But housing affordability hasn’t just been an issue in Canada. Goldman Sachs’ Housing Affordability Index, which captures the financial burden of taking a mortgage loan to buy a house, indicates affordability is low across most markets. Although it is especially low in Canada and New Zealand, the index has plunged by the most in the U.S. over the last year.

While the housing market has some headwinds, it’s also notable that the supply of housing is especially tight in many geographies, including the U.S., Canada, the U.K. and New Zealand. From a longer-run demand perspective, the working-age population has grown quickly in recent years in Canada and steadily in the U.S., Sweden and France (though it has shrunk over the past year in Germany and Italy).

Taken together, there are strong signs that the surge in housing sales and prices during the pandemic has come to an end. Goldman Sachs Research expects growth in advanced economies to slow in coming quarters and the recent housing trends only reinforce that expectation. And while a tight housing market may be enough to avoid a slump, the rapid deterioration in affordability and large drops in home sales suggest that a housing downturn is a real risk.