A house price slump is coming. Rising unemployment could make it much worse


London
CNN Business

Last year, Auckland’s biggest real estate company couldn’t sell properties fast enough to keep up with demand in New Zealand’s biggest city.

Grant Sykes, manager of Barfoot & Thompson estate agency, said houses were “flying out the door”. “There were times when agents stood around the room and were amazed at the prices that were achieved,” he told CNN Business.

In one example, a property was sold for NZ$1 million dollars ($610,000) above the asking price in the eight-minute auction. (Most houses in New Zealand are sold at auction.)

This was when it went on sale in May 2021 attracted thousands of bidders who drove up the price. Since then, Barfoot & Thompson’s clearance rate has, according to Sykes, extended sales times and lowered prices.

According to the Real Estate Institute of New Zealand, the average time it takes to sell a property in New Zealand has increased by around 10 days from October 2021. Last year, sales fell nearly 35% and median home prices fell 7.5%.

Houses near Devonport opposite the central business district of Auckland, New Zealand.

New Zealand is at the sharp end of a global housing market squeeze with dire consequences for the global economy.

A pandemic boom sent prices soaring into the stratosphere, it’s running out of steam and home prices are now plunging from Canada to China, setting the stage for the largest housing market slowdown since the global financial crisis.

A rise in interest rates will cause a dramatic change. In a bid to fight inflation, central banks have raised rates to levels not seen in more than a decade, affecting the cost of borrowing.

U.S. mortgage rates topped 7% last month for the first time since 2002, up from just over 3% a year earlier, and retreated slightly in November as inflation eased. Mortgage rates in the European Union and the United Kingdom have more than doubled since last year, driving would-be buyers out of the market.

“Overall, this is the most worrying outlook for the housing market in 2007-2008, with markets hovering between the prospect of a modest decline and a much steeper 15-20%,” said Adam Slater, chief economist at consultancy Oxford Economics. .

One of the main factors that determine how low prices go? Unemployment. According to Slater, a spike in unemployment could lead to forced sales and foreclosures, with “a lot of discounts being common.”

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But even if the correction in prices is mild, a slowdown in the housing market could have serious consequences, as housing transactions in turn boost activity in other sectors of the economy.

“In an ideal world, you’d have some foam coming off the top [of house prices] and everything is fine. It’s not impossible, but a housing bust could have serious consequences,” Slater told CNN Business.

House prices are already falling in more than half of the 18 advanced economies tracked by Oxford Economics, including the UK, Germany, Sweden, Australia and Canada, where prices fell by around 7% between February and August.

“The delay in the data probably means that most of the markets are now underpricing,” Slater said. “We are now in the early stages of a real recession, and the only real question is how steep and how long it will last.”

Home prices in the United States, which rose to their highest level since the 1970s during the pandemic, are also falling. Economists at Goldman Sachs expect a decline of about 5-10% by March 2024 from the peak reached in June.

In a “pessimistic” scenario, US prices could fall by 20%, Dallas Fed economist Enrique Martinez-Garcia wrote in a recent blog post.

Prices of new homes in China fell at their fastest pace in seven years in October, according to official data, reflecting a slump in the property market that has gripped the country for months and weighed heavily on its economy. Home sales are down 43% this year, according to research firm China Index Academy.

Sales are also falling elsewhere as banks become more cautious about lending and homebuyers delay purchases amid much higher borrowing costs and a worsening economic outlook.

UK house sales were 32% lower than last year in September, according to official figures. Inquiries from new buyers fell for a sixth straight month in October to their lowest level since 2008, a closely watched survey showed, except for the first few months of 2020 when the market was largely shut down by the pandemic.

According to the National Association of Realtors, sales of existing homes in the United States fell more than 28% in October from a year earlier, the ninth consecutive monthly decline.

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Mortgage rates in the 25 largest cities worldwide tracked by UBS have nearly doubled on average since last year, making home buying much more affordable.

“A skilled worker in the service sector can afford about a third less housing space than before the pandemic,” according to the UBS Global Estate Bubble Index.

An estate agent's 'for sale' board is pictured on November 2, 2022 at an end-of-terrace house in northern England.

As well as putting off new buyers, the sharp rise in rates has surprised existing homeowners who have been accustomed to low borrowing costs for more than a decade.

More than 4 million mortgages have been granted to first-time buyers in the UK since 2009, when rates were close to zero. “There are a lot of people who don’t appreciate what it will look like when their monthly expenses go up,” said Tom Bill, head of UK housing research at broker Knight Frank.

In countries with a large share of variable-rate mortgages, such as Sweden and Australia, the shock would be immediate and could increase the risk of a forced sale that would push prices down more quickly.

But even in places where a large proportion of mortgages are fixed, such as New Zealand and the UK, the average maturity of these mortgages is very short.

“This means that debt will be subject to (often significantly) higher rates for the next year or so,” Slater wrote in a report last month.

While interest rates are the catalyst for the housing market slowdown, the job market plays a big role in determining how low prices fall.

Modeling of past house price falls by Oxford Economics shows that unemployment is a key factor in determining the extent of the downturn, as rising unemployment increases the number of forced sellers.

Innes McPhee, chief global economist at Oxford Economics, said: “History shows that if labor markets can remain strong, there is a good chance of a better correction.”

Employment levels in many advanced economies have recovered since the pandemic began. But there are early signs that labor markets are cooling as weak economic growth weighs on demand for workers.

After a strong recovery earlier in the year, the International Labor Organization estimates that hours worked in the third quarter were 1.5% below pre-pandemic levels, amounting to a shortfall of 40 million full-time jobs.

“The outlook for global labor markets has worsened in recent months and, on current trends, job vacancies will decline and global employment growth will deteriorate significantly in the last quarter of 2022,” the ILO said in an October report.

The unemployment rate in the US rose to 3.7% in October. UK job vacancies fell to their lowest level in a year. The UK’s Office for Budget Responsibility expects unemployment to rise by 505,000 to 1.7 million in the third quarter of 2024 – an unemployment rate of 4.9%.

“A decisive rise in unemployment is a very big risk for the housing market,” said Slater of Oxford Economics.

A pedestrian walks past unfinished high-rise buildings in the West Bund Park housing project on January 14, 2022 in Shanghai, China.

Most market watchers do not expect a repeat of the 2008 housing market crash. Banks and households are in better financial shape, while housing supply is still tight in some countries.

But even a small drop in home prices can undermine confidence and cut spending for homeowners.

The slowdown in activity will also hit many other parts of the economy, as the housing market ties into builders, lawyers, banks, moving companies and furniture stores, to name a few.

Thanks to these connections, China’s real estate market accounts for about 28-30% of GDP. According to the National Association of Home Builders in the United States, housing accounts for 15-18% of the gross domestic product.

In the worst-case scenario – house prices fall more sharply than expected and lower prices are caused by a fall in housing investment and a tightening of bank lending – According to Oxford Economics, global GDP will grow by only 0.3% in 2023, not the 1.5% currently expected.

“Compared to the additional negative factor [global financial crisis], it’s China’s housing market that’s also in decline,” says Slater. “Thus, rather than offsetting the impact of the global housing downturn on global output as was the case after the GFC, China’s housing sector is contributing to the downturn.”

— Laura She contributed to this report.

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