Why the global housing market has further to slide

Published on22 MAR 2023

Higher mortgage rates are taking their toll on housing markets around the world, and sales and prices will likely remain under pressure this year in most G10 economies, according to Goldman Sachs Research.

After a surge in housing activity during the pandemic, home sales pulled back sharply in the second half of 2022, when rate hikes enacted by central banks caused mortgage rates to spike in most developed market economies. A contraction in housing starts, sales and prices has persisted this year and “shows little sign of stopping,” Goldman Sachs economists Joseph Briggs and Giovanni Pierdomenic wrote in a report. Recent financial turmoil has increased uncertainty for the housing outlook as ongoing pressures could cause smaller banks to tighten lending standards, despite declines in long-term yields.

Higher borrowing costs for homebuyers have weighed heavily on housing affordability and the full impact likely hasn’t been felt yet. The GS Research team estimates that each 100-basis-point rise in mortgage rates leads to a 6% decline in residential fixed investment after three or four quarters and a 2.5% drop in house prices after 10 quarters. The timing of the impact isn’t uniform across the world; differences in mortgage markets across countries can speed or slow the impact. Countries with higher shares of fixed-rate mortgages, for example, tend to experience delayed rate impacts.

Since mortgage rates have only recently peaked in most countries and could be headed higher still, the global housing market may not have yet found its bottom, according to GS Research.

“Our broader interest rate forecasts suggest mortgage rates are likely to remain higher for longer, implying that the investment growth drag from higher mortgage rates in most G10 economies will likely continue through at least end-2023,” the authors write.

Of course, interest rates aren’t the sole determinant affecting the global housing outlook — the report estimates that mortgage rate increases account for less than half of the forecast variance in most countries. Housing market tightness — as measured by the scant supply of homes available for sale — is having a large influence in many markets and should limit the downside of house prices to some extent. Our economists also believe that continued growth in developed markets should provide additional support.

Incorporating these factors and others, the GS Research team’s G10 housing model predicts meaningful peak-to-trough home price declines in developed markets where housing affordability plunged following the pandemic, including New Zealand (-19%), Canada (-19%), Sweden (-17%) and Australia (-15%). Developed markets that will likely see flat or moderate declines include Italy (-2% peak to trough), France (-4%) and Switzerland (-6%), reflecting a slower increase in mortgage rates and “less stretched” affordability.

And the U.S.? The team anticipates “relatively tame” home price declines there, on the order of 5%, owing mainly to its extremely low vacancy rate.

All that said, the housing declines around the globe are going “according to plan,” the authors write. “The strong housing market response to rate hikes has helped slow overall growth below trend without causing a recession or triggering a rise in delinquencies in most major economies,” Briggs and Pierdomenico conclude. “We anticipate that this pattern will continue.”

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