The global economy, already contending with a host of issues ranging from raging inflation to the Ukraine war, is facing yet another uncertainty: the unraveling of a pandemic-induced housing boom. Red-hot markets are turning cold from Toronto to Auckland. Amid rapid deterioration in affordability, home sales are faltering, and prices are dropping sharply.
Home sales have fallen from their pandemic peaks by around 45% in New Zealand, 40% in Canada and Britain, 30% in the U.S. and 25% in Australia. House values are moving in a similar direction, declining about 10% from the pandemic peak in New Zealand, 6% in Canada and about 5% in Australia. Though still elevated, price growth in the U.S. has decelerated for four months in a row. Europe hasn’t been immune. Home price growth has slowed sharply in Germany, with the U.K. also showing signs of cooling.
House prices got a substantial lift from ultra-accommodative pandemic policies. Generous economic stimuli and sector specific measures, such as the stamp duty holiday in the U.K., helped buyers amass down payments. Home loans became more affordable as monetary policy depressed the costs of servicing mortgages. The search for larger spaces to accommodate working from home has been another force driving demand. Inflating construction costs and scarce inventories hindered building, contributing further to the rise in home values.
However, mortgage rates have spiked sharply since the start of the year in major markets. Given the enduring battle against inflation, rates are going to rise further. Borrowing costs for households have surged, and will continue to do so.