Rising Interests Are The Pin That Burst the Global Housing Bubble

Advanced economies left interest rates too low for too long, and are now trying to make up for lost time slowing the inflation they created, but also the global economy. This will have a big impact on interest-sensitive areas like real estate, which will be the first to experience the impact, notes GS.

GS notes that home sales have already begun  to cool with the U.S. seeing a whopping 40% drop and, with higher rates in the pipeline, that’s expected to slow housing even further.

Falling home sales tend to result in falling home prices, but not all places have received the memo. Home prices are still rising in the U.S., Germany, and the U.K. but researchers expect prices to start falling there in the not-so-distant future…

They mentioned that home prices have already begun to fall in Canada, Australia, New Zealand, and Sweden with house prices falling the most in areas that had the most growth early in the pandemic.

They expect a modest peak-to-trough drop for home prices over the next couple of years. Canada is forecast to see the biggest drop due to weak recent momentum, low affordability and rapid policy hikes by the Bank of Canada, with real home prices falling 12%. France follows with a 9% drop, and the U.S. just 3%. These are national prices, so inflated markets are seen making bigger declines.

Global economic growth is forecast to slow over the next few quarters, with home sales reinforcing the outlook and, while a tight housing market may be enough to avoid a slump, the rapid deterioration in affordability and large drops in home sales suggest that a housing downturn is a real risk.

A lack of affordability is what’s going to prevent buyers from jumping in until home prices decline according to the GS Housing Affordability Index (HAI) which looks at household mortgage credit servicing capacity…