Why Home Prices are Poised to Fall

From New Zealand to the U.S., housing prices are likely to decline in many big countries, according to Goldman Sachs Research.

Housing is already cooling in the U.S., according to July data that was reported last week. As interest rates climb steadily higher, Goldman Sachs Research’s G-10 home price model suggests home prices will decline by around 5% to 10% from the peak in the U.S., 15% in Canada and a little less than 5% in the U.K. (based on nominal data that doesn’t account for inflation; the drop is expected to be even larger in inflation-adjusted terms).

Housing is a risk to economic growth in all G-10 countries, economists Daan Struyven and Yulia Zhestkova wrote in a report. The model’s forecasts are slightly more negative than in September because actual and forecasted interest rates have increased, their estimates for economic growth in North American have fallen and home prices have missed expectations.

While the drop in home prices may seem large, those declines are expected to only partly offset the jump in housing prices that happened after February 2020 (for example, U.S. house prices soared 42% and those in Canada jumped 52%, without inflation adjustment). But there are reasons to think the declines could be substantial: The housing market has already fallen 7% in Canada and Sweden in just six months, for example, and by 11% in New Zealand in eight months.

Economists at Goldman Sachs Research say there are risks that housing markets could decline more than their model suggests. That’s in part because the outlook across the G-10 has deteriorated sharply, based on signals from home price momentum and housing affordability. There’s also evidence that prices in Canada and New Zealand tend to revert to their longer-term averages (mean reversion).

A slowdown in the housing market could be cushioned by a relative lack of available homes in the U.S., Canada and U.K., and by strong household finances. Our economists think it’s unlikely there will be a large wave of forced selling in the U.S. because a recession would probably be mild, the housing market is tight, mortgage quality is solid and a large proportion of the mortgages have a fixed rate.

Britain may be less insulated from a spike in rates, according to Goldman Sachs Research. While the share of floating-rate mortgages is much smaller than a decade ago, the interest rate for nearly all U.K. mortgages reset within five years of origination, and around 40% of them are expected to have rate increases by July 2023, according to a Bank of England estimate. Mortgage debt is a larger share of gross domestic product in the U.K. than in Germany and the U.S.

Rising mortgage rates could also cut into consumer spending in Norway, Australia and New Zealand, as those countries have substantial mortgage debt and an elevated share of mortgages that reset within a year.

Housing slowdowns caused by rising mortgage rates tend to weigh on GDP through lower residential investment and weaker consumption (as wealth effects from home equity diminish and as borrowers’ cashflows decline as interest rates climb). With that in mind, housing is a bigger risk to the economies in New Zealand, Australia and Canada than in U.S., but it’s a concern for many developed countries.

“Our analysis suggests that housing poses downside risk to GDP across all G-10 economies,” Struyven and Zhestkova wrote.