A global house-price slump is coming

It won’t blow up the financial system, but it will be scary

Over the past decade owning a house has meant easy money. Prices rose reliably for years and then went bizarrely ballistic in the pandemic. Yet today if your wealth is tied up in bricks and mortar it is time to get nervous. 

House prices are now falling in nine rich economies. The drops in America are small so far, but in the wildest markets they are already dramatic. In condo-crazed Canada homes cost 9% less than they did in February. 

As inflation and recession stalk the world a deepening correction is likely—even estate agents are gloomy. Although this will not detonate global banks as in 2007-09, it will intensify the downturn, leave a cohort of people with wrecked finances and start a political storm.

The cause of the crunch is soaring interest rates: in America prospective buyers have been watching, horrified, as the 30-year mortgage rate has hit 6.92%, over twice the level of a year ago and the highest since April 2002. The pandemic mini-bubble was fuelled by rate cuts, stimulus cash and a hunt for more suburban space. 

Now most of that is going into reverse. Take, for example, someone who a year ago could afford to put $1,800 a month towards a 30-year mortgage. Back then they could have borrowed $420,000. Today the payment is enough for a loan of $280,000: 33% less. 

From Stockholm to Sydney the buying power of borrowers is collapsing. That makes it harder for new buyers to afford homes, depressing demand, and can squeeze the finances of existing owners who, if they are unlucky, may be forced to sell.

The good news is that falling house prices will not cause an epic financial bust in America as they did 15 years ago. The country has fewer risky loans and better-capitalised banks which have not binged on dodgy subprime securities. Uncle Sam now underwrites or securitises two-thirds of new mortgages. 

The big losers will be taxpayers. Through state insurance schemes they bear the risk of defaults. As rates rise they are exposed to losses via the Federal Reserve, which owns one-quarter of mortgage-backed securities.

Some other places, such as South Korea and the Nordic countries, have seen scarier accelerations in borrowing, with household debt of around 100% of GDP. They could face destabilising losses at their banks or shadow financial firms: Sweden’s central-bank boss has likened this to “sitting on top of a volcano”.

Even without a synchronised global banking crash, though, the housing downturn will be grim. First, because gummed-up property markets are a drag on the jobs market. As rates rise and prices gradually adjust, the uncertainty makes people hesitant about moving. 

Sales of existing homes in America dropped by 20% in August year on year, and Zillow, a housing firm, reports 13% fewer new listings than the seasonal norm. In Canada sales volumes could drop by 40% this year. When people cannot move, it saps labour markets of dynamism, a big worry when companies are trying to adapt to worker shortages and the energy crisis. 

And when prices do plunge, homeowners can find their homes are worth less than their mortgages, making it even harder to up sticks—a problem that afflicted many economies after the global financial crisis.

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