DrAyana Mousli He spent months searching for a home in Windsor, Canada’s southernmost point. It was the height of the COVID-19 outbreak and prices were rising across the country. Ms. Mosley, a 27-year-old employee of the local police service, viewed nearly 100 homes and made 60 or so bids – often with hundreds of thousands of Canadian dollars over asking price – before finally closing on a property last September. A decade ago, her parents bought a house for half the money. “It’s four times bigger than mine,” she sighs.
Ms. Mosley may have bought at the wrong time. Over the past two decades, Canada’s real estate market has shot up a lot brighter. Now things calm down: prices have fallen for three consecutive months. The same is true for other buttery markets. In New Zealand, where valuations at the end of 2021 have risen 45% since the start of the pandemic, the price of a home has also fallen for three consecutive months. In Sweden, prices fell about 4% in June, the largest monthly decline since the global financial crisis in 2007-2009. Two out of five homes in Australia are worth less than they were three months ago.
Even in places where prices are still rising, high borrowing costs dampen buyer enthusiasm. With monthly payments for a typical new mortgage in America now three-quarters higher than they were three years ago, loan applications are down more than a quarter from their January peak. The share of first-time buyers reached a 13-year low. Some butter is also blown in Britain. Mortgage approvals in April fell to pre-pandemic levels. In May, home sales fell by a tenth from the previous year.
If the global housing boom finally starts to run out, how far will prices fall? Analysts at Capital Economics, a consulting firm, expected modest declines of 5-10% in America and Britain. In these countries, homeowners are less likely to be forced to sell due to higher mortgage costs because fixed rate loans are common. In Australia and Sweden, analysts believe prices could fall by 15%. With higher levels of household debt, and thus greater exposure to higher interest rates, Canada and New Zealand are more vulnerable – rates in these countries can fall by 20%.
There are two factors that should prevent housing prices from entering a death spiral. One is the shortage of homes in most rich countries. Depending on estimates, America is short of 3.8 million or 5.8 million homes. England needs an estimated 345,000 new homes annually, and is building half that number; Canada needs an additional 3.5 million by 2030 at the current pace of construction. The other factor is tight labor markets. Low unemployment rates in many rich countries mean that people are less likely to default on their debts. Combined with stronger household finance, this should prevent a recession on the scale of the financial crisis in all but the most volatile markets.
But the pain will spread unevenly. Epidemiological hotspots are particularly vulnerable. During lockdowns, the search for large parks or green spaces has sent housing markets into a frenzy. The Parisians fled to the French countryside. The Turkish population left Istanbul for the tourist resorts. Londoners wanting to take advantage of remote work have flocked to leafy neighborhoods like Richmond and Dulwich, or fled the city altogether in search of cheaper homes.
Cracks are starting to appear in these markets. There are fewer bidding wars in American mountain cities and sunbelt states that attract well-paid Californians and New Yorkers. More than half of homes for sale in Salt Lake City, Utah, were slashed in June. In Boise, Idaho, three-fifths of them did. The question now is how the lower prices will go.
The Royal Bank of Canada believes that sales in its home country will fall from their peak in 2021 by more than 40%, even worse than the financial crisis when they fell by 38%. Things might not be so dramatic elsewhere. But for owners who are used to prices heading in only one direction, any drop would come as a shock. ■