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


in London
CNN Business

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

Houses were “flying out the door,” said Grant Sykes, manager at estate agent Barfoot & Thompson. “There were some chin-dropping moments when the agents were standing around the room and getting hammered by the prices they got,” he told CNN Business.

In one example, a site with 1 million sales in New Zealand dollars ($610,000) over the asking price in an auction that lasted all of eight minutes. (Most homes in New Zealand are sold at auction.)

That was in May 2021, when it went on sale it attracted thousands of buyers who made high prices. Since then, Barfoot & Thompson’s output rate has decreased, according to Sykes, to increase sales times and lower shipping costs.

The time taken to sell a property in New Zealand has increased by around 10 days on average from October 2021, according to the Real Estate Institute of New Zealand. Sales are down nearly 35% and median home prices are down 7.5% over the past year.

Houses in the low-lying area of ​​Devonport over the central district of Auckland, New Zealand.

New Zealand is at the sharp end of the global housing market which has negative effects on the global economy.

The rise of the pandemic, which sent prices down in the stratosphere, it’s running out of steam and house prices are now falling from Canada to China, setting the stage for the broadest housing market decline since the global financial crisis.

Rising interest rates cause big changes. Central banks on the warpath against inflation have taken rates to levels not seen in more than a decade, with negative effects on the cost of borrowing.

US mortgage rates rose 7% last month for the first time since 2002, up from just over 3% a year ago, before easing slightly in November as inflation eased. In the European Union and the United Kingdom, mortgage rates have more than doubled since last year, driving potential buyers into the market.

“Overall, this is the most troubling housing market since 2007-2008, with the market poised between expectations of a modest decline of 15% to 20%,” said Adam Slater, chief economist at Oxford Economics, a consultancy. .

Another key factor that determines how low prices are? Unemployment. Rapid increases in unemployment can lead to forced sales and foreclosures, “where discounts are common,” according to Slater.

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But even if the price correction is mild, a downturn in the housing market can have far-reaching consequences because housing transactions boost activity in other sectors of the economy.

“In a perfect world, you’d get bubbles blown to the top [of house prices] and everything is fine. “It’s unlikely, but it’s possible that the housing downturn will have negative consequences,” Slater told CNN Business.

House prices have fallen in more than half of the 18 major economies tracked by Oxford Economics, including the United Kingdom, Germany, Sweden, Australia and Canada, where prices fell by around 7% from February to August.

“The missing data means that most markets are now seeing lower prices,” Slater said. “We’re in the first phase of a clear downturn right now and the only real question is how steep and how long it will last.”

Home prices in the United States – which rose during the pandemic and were the worst since the 1970s – also fell. Economists at Goldman Sachs expect a decline of about 5%-10% from the peak reached in June to March 2024.

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

China’s new home prices fell at their fastest pace in seven years in October, according to official figures, reflecting a slowdown in property sales that has gripped the country for months and weighed on its economy. Home sales fell 43% this year, according to China Index Academy, a research company.

Sales are also slowing elsewhere, as banks take a more cautious approach to lending and buying to homebuyers due to high borrowing costs and a deteriorating economic outlook.

House sales in Britain were 32% below last year’s level in September, according to official figures. The closely watched survey showed that new buyer inquiries fell for the sixth month in a row in October to the lowest level since 2008, apart from the early months of 2020 when the market was largely closed due to the pandemic.

In the United States, sales of existing homes fell more than 28% year-over-year in October, the ninth consecutive monthly decline, according to the National Association of Realtors.

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

“Skilled service sector workers can afford one-third less real estate than before the pandemic,” according to the UBS Global Real Estate Bubble Index.

A 'for sale' estate agent's board is displayed on a house at the end of a row of tenement houses in northern England on November 2, 2022.

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

In Britain, more than 4 million mortgages have been issued to first-time buyers since 2009, when rates were close to zero. “There’s a lot of people out there who don’t appreciate what it’s like when their monthly output goes up,” said Tom Bill, head of UK residential research at broker Knight Frank.

In countries with a large share of variable credit, such as Sweden and Australia, the shock will be immediate and may increase the risk of forced sales driving prices down rapidly.

But even in places where a large proportion of loans are made, such as New Zealand and the United Kingdom, the average maturity of these loans is very short.

“This means that more debt will be at (often much) higher rates for the next year or so than it seems,” Slater said in a statement last month.

While interest rates have been a factor in the housing market’s decline, the job market will play a large role in determining how low prices ultimately go.

An example of housing price declines in the past by Oxford Economics shows that employment is the most important factor in determining the severity of a downturn, because rising unemployment increases the number of sellers.

“History shows that if labor markets can remain strong, then the chances of a negative correction are high,” according to Innes McFee, global economist at Oxford Economics.

Employment levels in many advanced economies have rebounded since falling at the start of the pandemic. But there are early signs that labor markets are starting to cool as weak economic growth hits demand for workers.

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

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

The unemployment rate in the United States rose in October to 3.7%. In the United Kingdom, 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 a peak of 1.7 million — an unemployment rate of 4.9% — in the third quarter of 2024.

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

A pedestrian walks past unfinished buildings at the West Bund Park residential project in Shanghai, China, on Jan. 14, 2022.

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

But even a small fall in house prices will dampen confidence, causing homeowners to cut back on spending.

The slowdown in activity will face pain in many other areas of the economy due to the connection of the housing market to builders, lawyers, banks, moving companies and furniture stores, to name a few.

China’s property market makes up about 28-30% of GDP because of this connection. In the United States, the overall contribution of housing to GDP is generally between 15-18%, according to the National Association of Home Builders.

In the worst-case scenario – where house prices fall more than expected and the fall in prices is met by a slowdown in residential investment and tighter lending by banks – Oxford Economics predicts that global GDP will grow by just 0.3% in 2023, rather than the 1.5% it expects now.

“Another bad addition, compared to [global financial crisis], is that the Chinese housing market is also in a bad state,” according to Slater. “So instead of offsetting the impact of the global housing slump, as was the case after the GFC, China’s housing sector is contributing to the housing slump.”

– Laura Contributed to this report.

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