Is the global housing crisis over?

IAustralia House prices have risen over the past three months. In the United States, the widely watched home price index rose 1.6% from its January low, with homebuilder stocks up twice as much as the broader stock market. The Eurozone real estate market looks solid. “[M]Most of the resistance from the housing GDP Future growth should be modest,” the analyst wrote. JPMBank Organ Chase said in a recent report on America: “[W]I believe the peak of the negative impact on consumer spending from the recent housing market slump has probably passed,” another bank Goldman Sachs geek wrote of South Korea.

Economists had predicted a crash in house prices. In March 2022, when the Federal Reserve began raising interest rates to fight inflation, the average price of a home in rich countries was 41% higher than it was five years ago. Prices recovered from the 2007-2009 financial crisis, but then surged during the COVID-19 pandemic (see graph). Since then, central bank rates have risen by more than 3 percentage points on average globally, boosting mortgage prices and slowing the economy.

Global housing prices have certainly come out of the boiling point. That’s 3% below recent peaks and 8-10% below inflation-adjusted. This is consistent with his average revision since the late nineteenth century. But this episode is different, as it followed a boom during the pandemic that saw prices rise at their fastest rate in history. As a result, real house prices are still well above 2019 levels. Many millennials and Gen Zers who dreamed of buying a home for the first time after the crash will no doubt be disappointed.

In a typical period of a global housing recession, some countries continue to struggle. After the financial crisis, Irish house prices fell in half. US house prices fell 20%. This time the underperformers are getting good grades. Home prices in San Francisco are one-tenth of their peak as tech companies move to Florida and Texas. But prices have stopped falling and the average home still costs over $1.1 million.

In Australia, house prices crashed in 2020-21, dropping 7%. But as a recent auction suggested, the market is recovering. A two-bedroom bungalow in Double Bay, a gray suburb of Sydney Harbour, recently opened for A$4 million ($2.7 million). The auctioneer declares that this is a “great opportunity to add a lot of value”. Translation: Needs some work. Still, the wealthy mob that pours out the gates is undaunted, and the bidding is frenzied. The gavel eventually dropped to over A$6 million.

In contrast to previous housing stagnation, there is no indication that the fall in house prices has caused financial spillovers. Banks don’t seem concerned about the surge in bad mortgages. They have few risky loans and are not bingeing on risky subprime securities. Mortgage delinquencies are rising in New Zealand, but remain below pre-pandemic levels. In the United States, delinquency rates on single-family home loans recently reached post-financial-crisis lows. In Canada, mortgage delinquency rates are nearing record lows.

Nor does the real estate problem appear to be slowing the economy as a whole. The slump in housing investment is dragging down economic growth, but the impact is small. In past housing bankruptcies, the number of builders plummeted long before the rest of the labor market weakened. But even today there is a hot demand for them. In South Korea, construction employment fell slightly from pandemic-era highs, but now appears to be rising again. In the United States, it is in line with the long-term average, rising by 2.5% per year. Construction site vacancies in New Zealand are well above historical levels.

The astonishing housing resilience of the affluent world is explained by three factors: migration, households and preferences. Consider immigration first. This is breaking records across the world of wealth. In Australia, net immigration has doubled from pre-pandemic levels, while in Canada it has doubled to a record high. Demand from new entrants is supporting the market. Research shows that for every 100,000 net immigrants to Australia, housing prices rise by 1%. In London, the first port of call for many new arrivals to the UK, rents for new rentals rose 16% last year.

A second factor, the health of households, is also at play. The wealthy drove the housing boom as post-financial-crisis mortgage regulations crowd out buyers with low credit ratings. In the US in 2007, the median mortgage credit score was about 700 (fair), and in 2021 it’s closer to 800 (pretty good). Wealthy households can easily absorb higher mortgage payments. But many borrowers will be locking in past low interest rates. Global mortgage share from 2011 to 2021 EU Floating rates dropped from near 40% to less than 15%. Despite rising interest rates, the average ratio of debt service to income for the wealthy as a whole remains below pre-pandemic standards. As a result, fewer households have had to downsize or sell than during previous recessions.

The pandemic itself has played a role. Over 2020 and 2021, many households have cut back on spending, accumulating huge amounts of “excess savings” worth trillions of dollars. These savings allowed the family to mitigate rising charges. Analysis by Goldman Sachs suggests a positive correlation across countries between excess savings and house price resilience. Canadians amassed huge savings during the pandemic. Contrary to expectations, house prices have stabilized recently. The Swedes have amassed a small war chest, but the housing market has slumped significantly.

The third factor has to do with people’s preferences. A study released by the Bank of England found that half of the rise in UK house prices during the pandemic could be explained by changes in people’s desires, which may include a desire for a home over a home office or apartment. It has been suggested that In many countries, including Australia, the average household size is shrinking, suggesting that people are less enthusiastic about house-sharing. Also, during periods of high inflation, many may want to invest in physical assets such as real estate and infrastructure that are more likely to retain their value in real currency. All of this could mean that demand for housing remains higher than it was pre-pandemic, limiting the potential for price declines.

Is it just a delay in housing bankruptcy? perhaps. Past declines in house prices, including the late 19th century, have been harsh rather than spectacular. Central bankers may also be looking to raise interest rates or keep them high until the rising currency cost starts to become really serious. Making homeowners feel poor is one way to get them to cut spending, which will help keep inflation under control.

But there is reason to believe the worst is over. After hitting a record low last year, consumer confidence across the wealthy world is rising again. On average, households still have ample surplus savings. A structural housing shortage means that there will almost always be people who want to buy, even if others can’t. And there are few signs that people are losing the hobby of working out in their home office or attic. The housing boom may have ended with a whimper, not abruptly. Is the global housing crisis over?

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