Last year, Auckland’s largest real estate company was unable to sell properties fast enough to meet demand in New Zealand’s largest city.
Homes were “flying out the door,” said Grant Sykes, a principal at the Barfoot & Thompson real estate agency. “There were chin-breaking moments when agents would stand across the room and be amazed at the prices being fetched,” he told CNN Business.
In one example, a property was sold for NZD 1 million dollars ($610,000) above the asking price in an eight-minute auction. (Most homes in New Zealand are sold at auction.)
That was in May 2021, when sales were Attract thousands of bidders who raise prices more than ever before. Since then, Barfoot & Thompson’s auction clearance rate has dropped, according to Sykes, lengthening sale times and driving prices lower.
The time it takes to sell a property in New Zealand has increased by about 10 days on average since October 2021, according to Real Estate Institute of New Zealand. Sales are down nearly 35% and average home prices have fallen 7.5% over the past year.
New Zealand is at the sharp end of the global housing market squeeze This has grim ramifications for the global economy.
epidemic bubblethat sent prices In the stratosphere, momentum is running out and house prices are now drop From Canada to China, paving the way for the widest Housing market slowdown Since the global financial crisis.
Rising interest rates drive the dramatic change. Central banks a A war against inflation Rates have taken to levels not seen in over a decade, with ripple effects on the cost of borrowing.
Mortgage rates in the United States topped 7% last month for the first time since 2002, up from 3% a year ago backing down slightly in November as inflation eased. In the European Union and the United Kingdom, mortgage rates have more than doubled since last year, chasing potential buyers out of the market.
Adam Slater, chief economist at consultancy Oxford Economics, said:
One of the main factors that determine how low prices are? The unemployment. A sharp increase in unemployment could force sales and foreclosures, “where steep discounts are common,” according to Slater.
But even if the correction in prices is moderate, a housing market slowdown could have serious consequences because housing transactions, in turn, boost activity in other sectors of the economy.
“In a perfect world, you’d get a little bit of foam on top [of house prices] And everything is fine. “It’s not impossible, but the housing decline is likely to have dire consequences,” Slater told CNN Business.
House prices are already falling in more than half of the 18 advanced economies that Oxford Economics tracks, including the UK, Germany, Sweden, Australia and Canada, where prices fell about 7% from February to August.
“Maybe the data lag means most markets are now seeing a drop in prices,” Slater said. “We’re in an early period of a clear downturn now and the only real question is how steep it will be and for how long.”
And home prices in the United States — which rose during the pandemic by the most since the 1970s — are also falling. Economists at Goldman Sachs expect a decline of about 5%-10% from the peak reached in June through March 2024.
In a “pessimistic” scenario, prices in the US could fall by as much as 20%, Dallas Fed economist Enrique Martinez Garcia wrote in blog post newly.
China’s new home prices fell at the fastest pace in more than seven years in October, according to official figures, reflecting a deep slump in the country’s real estate market for months and weighing heavily on its economy. Home sales have fallen 43% this year, according to research firm China Index Academy.
Sales are falling elsewhere, too, as banks take a more cautious approach to lending and ambitious homebuyers put off purchases in the face of higher borrowing costs and a worsening economic outlook.
Home sales in Britain fell 32% from a year earlier in September, according to official figures. A closely watched survey showed that new buyer inquiries fell for the sixth consecutive month in October to the lowest level since 2008, except for the early months of 2020 when the market was largely closed due to the pandemic.
In the United States, existing home sales fell more than 28% year over year in October, the ninth consecutive monthly decline, according to the National Association of Realtors.
Mortgage rates in the 25 major cities around the world that UBS tracks have nearly doubled on average since last year, making home buying much less expensive.
“A skilled service sector worker can afford nearly a third less housing space than before the pandemic,” according to UBS. Global Real Estate Bubble Index.
In addition to putting off new buyers, the sharp price increase has shocked existing homeowners who have been accustomed to more than a decade of ultra-low borrowing costs.
In Britain, more than 4 million mortgages have been issued to first-time buyers since 2009, when rates were close to zero. “There are a lot of people who don’t appreciate what it will be like when their monthly expenses go up,” said Tom Bell, UK head of residential research at brokerage Knight Frank.
In countries with a larger share of variable rate mortgages, such as Sweden and Australia, the shock will be immediate and could increase the risk of a forced sale causing rates to fall faster.
But even in places where a large proportion of mortgages are fixed, such as New Zealand and the United Kingdom, the average maturity for these mortgages is very short.
“This means that more debt will be subject to (often significantly) higher rates over the next year or so than might initially appear,” Slater wrote in a report last month.
While interest rates have been the catalyst for the housing market slowdown, the labor market will play a larger role in determining how low prices ultimately fall.
Modeling of the previous house price collapse by Oxford Economics shows that employment is the critical factor in determining the severity of the downturn, because a sudden rise in unemployment raises the number of forced sellers.
“History shows that if labor markets can remain strong, the chances of a more moderate correction are higher,” says Innes McPhee, chief global economist at Oxford Economics.
Employment levels have rebounded in many advanced economies since falling at the start of the pandemic. But there are early signs that labor markets are beginning to cool down as demand for workers hits weak economic growth.
After a strong recovery at the start of the year, hours worked were 1.5% below pre-pandemic levels in the third quarter, representing a shortfall of 40 million full-time jobs, the International Labor Organization estimates.
“The outlook for global labor markets has worsened in recent months, job vacancies will decline on current trends and global employment growth will deteriorate significantly in the last quarter of 2022,” the ILO said in a report released in October.
The unemployment rate in the United States in October rose to 3.7%. In the 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 – an unemployment rate of 4.9% – in the third quarter of 2024.
“The decisive increase in unemployment poses a very significant risk to housing markets,” said Slater of Oxford Economics.
Most market observers do not expect a repeat of the 2008 housing market crash. Banks and households are in better financial shape, and the housing supply in some countries remains limited.
But even a small drop in home prices will undermine confidence, causing homeowners to cut back on spending.
A slowdown in activity will also deal a blow to many other parts of the economy due to the housing market’s ties to builders, lawyers, banks, moving companies, and furniture stores, to name a few.
China’s real estate market accounts for about 28-30% of GDP due to these links. In the United States, the broader housing contribution to GDP is generally 15-18%, according to the National Association of Home Builders.
In the worst case scenario – a scenario in which house prices fall more sharply than expected and the decline in prices is offset by a decline in residential investment and tightening lending by banks – Oxford Economics expects global GDP to expand by just 0.3% in 2023, instead of the 1.5% it currently expects.
An additional negative factor, compared to [global financial crisis]is that the Chinese housing market is also in a contraction,” according to Slater. “So instead of offsetting the impact on global output of the global housing downturn, as was the case after the GFC, the Chinese housing sector is contributing to the recession.”
– Laura contributed to this report.