House prices in countries like Canada, Australia and the United States are on the verge of falling, writes the chief economist of Capital Economics. But not all countries can expect price cuts of the same magnitude.
Rising rates aren’t just weighing on the housing market in the United States, according to a note released Tuesday by Capital Economics chief economist Neil Shearing. Low interest rates have led to an “extraordinary and extraordinarily global” rise in property prices, writes the economist.
Now that rates are on the rise again, “there are growing signs that this rise in borrowing costs – and the anticipation of further increases to come – is already fueling steep declines in housing markets in the advanced economies,” Shearing writes.
U.S. home prices rose faster than usual for much of the pandemic as interest rates fell to historic lows. National home prices in April were 20.6% higher than the same month a year ago, according to the most recent data available for the S&P CoreLogic Case-Shiller National Index.
He expects downturns to reduce gross domestic product in the United States, United Kingdom, Canada, Australia and New Zealand between 0.5% and 2% over the next two years. This could cause Canada and New Zealand to keep interest rates lower than expected, he notes, but the same cannot be said for the United States and the United Kingdom. over the next year,” he wrote.
A real estate slowdown is not immediately synonymous with lower prices, writes the economist. The report refers to four stages of a housing decline, including a first stage when housing market sentiment falls, a second stage in which buyer traffic gauges fall, a third stage defined by the decline measures of housing market activity and a fourth in which prices fall. .
According to Shearing, countries like the United States, United Kingdom, Canada, Australia, New Zealand and Sweden are in the third stage. “The fact that indicators for the first three stages of the recession have turned around so quickly suggests that we should expect to see price declines in all of these markets soon.”
The economist does not expect all countries listed to experience the same price declines. Shearing anticipates the biggest falls in Canada and New Zealand, where prices could fall by 20%. Prices in Australia are expected to fall by 15% and by 10-15% in Sweden. The smallest declines will occur in the UK, which is expected to be between around 5% and 10%, and the US, which is expected to fall by around 5%, according to the economist.
Capital Economics recently said the United States is likely to avoid a housing price crash as rates rise due to the country’s preference for fixed-rate loans, tight credit conditions and a weak housing market. relatively solid work.
Nor does Shearing expect the housing market to decline on the same scale as in the 2000s. “At the time, a house price bubble was inflated by a rapid expansion in debt mortgage facilitated by lax regulation and soft lending standards,” he wrote. “When the bubble burst, owners found themselves with negative equity and the forced sale created a self-reinforcing downward spiral.”
Landlords and banks are in a different situation today, he notes. Household debt represents a smaller share of income than it was between 2000 and 2007, while banks can better withstand a downturn in the housing market due to post-crisis regulations, the report said.
Still, the analyst notes that a slowdown could create problems in development, construction and the non-banking financial sector. “Slowdowns have a way of uncovering vulnerabilities in areas that are hard to anticipate,” he writes.
Write to Shaina Mishkin at [email protected]