Housing market slump a new threat to the economy
Homebuyers in many parts of the world are being squeezed by global monetary tightening, increasing the probability that the economy will slow down.
The collapse of a gigantic housing boom creates a new threat to a global economy already struggling with rising inflation, unstable financial markets and a brutal war in Ukraine.
People who were previously pushing themselves to buy property are now hitting their limitations as central banks around the world quickly raise interest rates to keep inflation in check. The consequences may be seen in countries including Canada, the United States and New Zealand, where markets for residential real estate that were once hot have abruptly gone cold. According to a Bloomberg Economics report, the price-to-rent and home price-to-income ratios in 19 OECD countries are greater now than they were prior to the 2008 financial crisis, which is a sign that prices have diverged from fundamentals. To slow down the fastest inflation in decades, many policy makers prioritise controlling inflated property prices. However, a slowdown in housing might have a knock-on impact that would worsen an economic downturn as markets live in fear of the threat of a worldwide recession. Household wealth would be reduced, confidence would be weakened as consumers face higher repayment obligations on assets that are depreciating in value, and potential future development could be restricted. Given that development and sale of real estate are significant global drivers of economic activity, the implications are dire. According to Bloomberg Economics, the housing markets in New Zealand, the Czech Republic, Australia and Canada are among the world’s most unstable and are particularly sensitive to price declines. In the euro zone, Portugal is particularly vulnerable, while Austria, Germany and the Netherlands are also showing signs of turbulence. An analysis by S&P Global Ratings suggests that South Korea’s housing market may also be in danger. The growth rate of household debt, the rapidity of increases in home prices, and risks from household credit relative to nominal GDP were all noted in that study. In other parts of Europe, Sweden has seen a sharp increase in property demand, raising concerns in a nation where household debt is already at 200% of income. According to Goldman Sachs economist Jan Hatzius, a significant cooling in housing markets is a major factor in the probability that developed economies would slow.
Moreover, Goldman economists have warned that a hard landing is a significant risk, particu-larly in New Zealand, Canada and Australia. This is because of the very dramatic decline in affordability and the significant decreases in home sales. Other warnings are being issued by central banks. As interest rates climb and more borrowers find themselves struggling to pay the bills, the Bank of Canada stated this month in its annual review of the financial system that high levels of home debt are particularly concerning.
The Reserve Bank of New Zealand, meanwhile, warned in its semi-annual Financial Stability Report hat a “sharp” decline in house prices is possible, which could significantly reduce wealth and cause a contraction in consumer spending. The report also stated that the overall threat to the financial system is limited.
Real estate markets are “facing a major test as borrowing costs climb”, according to Niraj Shah of Bloomberg Economics in London. “Central bankers could plant the seeds of the next catastrophe if they operate too aggressively.”
China is also facing the worst decline in house sales. An official index that tracks apartment and house sales has posted year-on-year declines for 11 months straight — the longest on record since China created a private property market in the 1990s. With demand for services and commodities generated by housing construction and sales accounting for about 20% of China’s gross domestic product, that represents a big drag on growth this year.