Last year, Auckland’s largest real estate firm failed to sell properties fast enough to meet demand in New Zealand’s largest city.
Homes were “flying out the door,” said Grant Sykes, manager at real estate firm Barfoot & Thompson. “There were mind-blowing moments where agents stopped by the room and were amazed at the prices they hit,” he told CNN Business.
In one example, a property sold for 1 million in New Zealand dollars ($610,000) above the asking price in an eight-minute auction. (Most houses in New Zealand are sold at auction.)
It was May 2021, when the sales it attracted thousands of bidders who drove prices higher and higher. Since then, Barfoot & Thompson’s clearance rate has plummeted, according to Sykes, extending sales times and driving prices down.
The time it takes to sell a property in New Zealand has increased by about 10 days on average since October 2021, according to the Real Estate Institute of New Zealand. Sales have plummeted nearly 35% and average home prices have dropped 7.5% over the past year.
New Zealand is at the acute end of a global property market squeeze that has serious consequences for the world economy.
The boom of the pandemic, which caused prices to skyrocket into the stratosphere, it is running out and home prices are now falling from Canada to China, setting the stage for the largest housing market slowdown since the global financial crisis.
Rising interest rates are driving dramatic change. Central banks on the warpath against inflation have driven rates to levels not seen in more than a decade, with knock-on effects on the cost of borrowing.
US mortgage rates exceeded 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 would-be buyers away from the market.
“Overall, this is the most worrisome housing market outlook since 2007-2008, with markets hovering between modest declines and much steeper 15%-20% declines,” said Adam Slater, chief economist at Oxford Economics, a consultancy firm.
One key factor that determines how low prices go? Unemployment. A large rise in unemployment could lead to forced sales and foreclosures, “where steep discounts are common,” according to Slater.
But even if the price correction is small, a slowdown in the housing market could have serious consequences because real estate transactions in turn stimulate activity in other sectors of the economy.
“In an ideal world, you’ll get some foam [of house prices] and everything is fine. It’s not impossible, but real estate crises are more likely to have worse 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 about 7% from February to August.
“The data delays likely mean that most markets are now seeing prices fall,” Slater said. “We are now in the first period of a clear recession and the only real question is how steep and how long it will be.”
US home prices, which have risen the most since the 1970s during the pandemic, are also falling. Goldman Sachs economists expect a decline of about 5% to 10% from the peak reached in June through March 2024.
In a “pessimistic” scenario, US prices could fall as much as 20%, Dallas Fed economist Enrique Martinez-Garcia wrote recently in a blog post.
Prices for new homes in China fell at the fastest pace in more than seven years in October, according to official data, reflecting a housing market slump that has gripped the country for months and is weighing heavily on its economy. Home sales are down 43% this year, according to the China Index Academy, a research firm.
Sales are also falling elsewhere as banks take a more cautious approach to lending and would-be homebuyers delay purchases in the face of much higher borrowing costs and a deteriorating economic outlook.
Home sales in Britain were 32% below a year earlier in September, according to official data. A closely monitored survey showed requests for new buyers fell for the sixth consecutive month in October to their lowest level since 2008, excluding the first few months of 2020 when the market was largely shut down 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 tracked by UBS have nearly doubled on average since last year, making home purchases far less affordable.
“A skilled worker in the service sector can afford about a third less living space than before the pandemic,” according to the UBS Global Real Estate Bubble Index.
In addition to putting off new buyers, the steep rate hike has shocked existing homeowners accustomed to more than a decade of ultra-low financing costs.
In Britain, more than 4 million mortgages have been granted to first-time buyers since 2009, when rates were close to zero. “There are a lot of people out there who don’t appreciate what it’s like when their monthly outgoings go up,” said Tom Bill, UK residential search manager at brokerage Knight Frank.
In countries with a higher share of adjustable-rate mortgages, such as Sweden and Australia, the shock will be immediate and could increase the risk of fire-selling that will drive prices down faster.
But even in places where a large percentage of mortgages are pegged, such as New Zealand and the UK, the average maturity of these mortgages is quite short.
“This means that much more debt will be subject to (often significantly) higher rates over the next year or so than it might first 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 bigger role in driving the price crash.
Modeling of previous house price slumps by Oxford Economics shows that employment is the deciding factor in determining the severity of a recession, because a spike in unemployment increases the number of forced sellers.
“History shows that if labor markets can stay strong, then the chances of a more favorable correction are greater,” according to Innes McFee, chief global economist at Oxford Economics.
Employment levels in many advanced economies have recovered from declines at the onset of the pandemic. But there are early signs that labor markets are starting to cool as weak economic growth hits demand for workers.
After the strong recovery at the beginning of the year, in the third quarter the number of hours worked was 1.5% below pre-pandemic levels, equivalent to a shortfall of 40 million full-time jobs, according to estimates by the International Labor Organization.
“The outlook for global labor markets has deteriorated in recent months and current trends indicate that 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 United States rose to 3.7% in October. 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 a peak of 1.7 million – an unemployment rate of 4.9% – in the third quarter of 2024.
“A decisive rise in unemployment is a very big danger 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 housing supply in some countries remains tight.
But even a modest drop in home prices will strain confidence, forcing homeowners to cut back on spending.
A slowdown in activity will also affect many other parts of the economy due to the housing market’s ties to developers, 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 linkages. In the United States, according to the National Association of Home Builders, the broader contribution of housing to GDP generally averages 15-18%.
In the worst-case scenario — one in which home prices fall more sharply than expected and falling prices collide with a collapse in residential investment and a reduction in bank lending — Oxford Economics expects world GDP to expand by just 0.3% in 2023, rather than the 1.5% currently expected.
“A further negative factor, compared to [global financial crisis], is that China’s real estate market is also in a recession,” according to Slater. “So rather than offsetting the impact on world output of a global real estate downturn, as was the case after the GFC, China’s real estate sector is contributing to the crisis.”
— Laura Contributed to this report.