Soft outlook for global real estate market
Like the U.S., many economies overseas struggled last year with high interest rates and inflation. Some countries like Sweden had a recession; others, like the UK and Japan, experienced a “technical recession,” which economists define as two consecutive quarters of negative economic growth.
According to California Association of Realtors deputy chief economist Oscar Wei, affordability constraints caused by a housing shortage and geopolitical risks are major factors affecting economic growth in many countries.
“Due to the housing shortage, global home price growth accelerated in the third quarter of 2023, increasing at an average of 3.5%. Thirtyfive of the 56 markets experienced an annual price growth, while 21 had a price drop in the same quarter,” Wei told Realtors at a meeting of the Silicon Valley Association of Realtors Global Business Council.
According to Wei, China’s home prices last year declined 2.7% year-over-year and housing starts fell by more than 60% relative to pre-pandemic levels. He explained that the Chinese market had been booming for a year, which encouraged developers to borrow money to develop more property.
“The Chinese government got uncomfortable and nervous lenders began to cut developers off. This triggered a wave of defaults by developers,” said Wei.
Buyers of Chinese property also got concerned about developers’ lack of sufficient funding to complete projects.
They anticipated prices declines, so home sales declined. Although property activity slowed,
Wei said home prices have only fallen modestly because of rules that allow lenders to delay recognizing developers’ bad loans. Some cities limited price declines.
There have since been policy adjustments and China’s housing market bounced back in midfebruary. However, given the government’s goal to “de-risk” the housing sector, home prices there are projected to drop 5-7% in 2024 and 3-5% in 2025. The International Monetary Fund projects housing investment will drop
45% on average and will remain subdued afterwards.
“China does have an impact on the global economy,” stressed Wei. “The global impact of a China slowdown will lead to a softer global economic outlook. From the global economy level, anything that happens in China affects most of the world, especially the U.S. trade with China.”
One potential impact is Chinese investors in the U.S. may be forced to sell commercial properties to cover their losses in China, he said.
Along with China, economists predict that France and Japan also will likely see price declines in 2024 and 2025. UK home prices could be sluggish in
2024 before picking back up in 2025.
Geopolitical risks remain elevated. According to a Conference Board survey of CEOS, when asked about the main U.S. challenge affecting their business this year, half of them (51%) cited “political uncertainty ahead of 2024 elections” as the greatest challenge. Asked about global challenges for their business in 2024, “the spread of existing wars” (46%) was seen as the greatest global challenge for businesses this year.
“The risk index will continue to affect the global economy,” said Wei.
Since the overall housing market remains soft, U.S. home sales from foreign buyers have dipped by double digits from last year. On a high note, Wei said California remains a top destination for foreign buyers, second only to Florida. A decline in mortgage interest rates would certainly boost the number of buyers and sellers, both foreign and domestic, but for now the Fed has stalled a rate cut decision.
“It’s good to be aware of global forces affecting our real estate market. The Certified International Property Specialist courses offered by our association provide Realtors training in international business issues, including currency conversion, cultural awareness, legal and tax requirements, and specifics about the real estate markets in Europe, the Americas, and Asia,” said Jimmy Kang, SILVAR board director and Global Business Council chair.