Global House Price Falls - Where Are Prices Falling?

5th June 2023

Economist Tejvan Pettinger takes look at house prices worldwide.

In the past 12 months house prices have fallen 16% in Sweden but have risen 4% in the US Yet both housing markets share similarities of overvalued prices and higher interest rates.

After a surge in prices during Covid, housing markets around the world have endured a bumpy ride. The biggest drops have occurred in countries like New Zealand, Canada and Sweden. Yet, whilst some have already fallen, other housing markets are on edge.

This shows the global levels of house price to incomes, and why countries like Portugal and Netherlands are particularly vulnerable to house price falls. The US is an interesting case because it has record unaffordability and higher interest rates - yet so far prices have remained stubbornly high.

The biggest crash so far is Sweden with 16% declines since the 2022 peak. The price collapse is a result of Sweden's dysfunctional property market. In the boom years, a shortage of rental properties, and ultra-cheap credit caused house prices to rise 250% in 20 years. In the same time frame, the total value of mortgages rose 460% - pushing household debt to over 200% of GDP. Given high debt levels, even a relatively small rise in Swedish interest rates to 3.5% has caused prices to fall rapidly. And It is a warning of how a housing bubble can quickly pop. Danske Bank predicts a 25% fall - peak to trough for Swedish house prices.

New Zealand and Australia are both housing markets that saw record rises during the past decade. A shortage of new housing stock combined with ultra-low interest rates and a rising population meant houses price were squeezed higher. In 2020, the Economist noted New Zealand and Australian house prices were 40% overvalued, but then house prices rose even further during Covid. At the peak of the boom New Zealand house prices were 10 times median income. But, then in 2022 the unexpected high inflation and belated rise in interest rates caused a sharp decline in affordability. New Zealand was like the canary in the goldmine - a symbol of global unaffordability. New Zealand house prices are now 13% lower than in April 2020, yet the paradox is that prices still remain unaffordable for many.

It is a classic example of the problem of housing markets in the Anglosphere. Very expensive prices contribute to a cost of living crisis. But, even recent rises in interest rates have done little to reverse affordability levels.

It is a similar story in the United States which has seen a record rise in house price-to-income ratios in the past decade. Between 2020 and Oct 2022, US prices rose 38%. It was due to ultra-low interest rates, rising wealth, the covid induced dash for space and rising prices encouraging more investors to buy up property. But, these factors which underpinned rising prices have now changed. The unaffordability combined with higher interest rates gives a familiar recipe for a house price crash. But, despite many warning signs, the United States housing market has been more resilient with prices stagnating rather than falling. The hope is that falling inflation means the US may not need to raise interest rates much further.

Warnings of House Price Falls
Nevertheless despite the ongoing shortage, some experts still predict a fall in prices of up to 15% - especially in big cities which saw the biggest rise in the past few years. One of the key issues is that over time, more will have to remortgage to higher costs. But, even a 15% fall, wouldn't even bring prices down to pre-covid levels.

The UK is somewhat like the US with very similar issues, very poor affordability and rising mortgage costs. So far demand has held up - partly due to very high rents. But, recent inflation data has frequently been much worse than forecast, the result is that the UK is now facing the prospect of higher rates than expected even last month. There is lots of bad news to come for the UK housing market.

For much more with charts go HERE