Developed economies across much of the world are still passing through home price corrections. At least that’s according to an article published this week by researchers at Goldman Sachs.
The article titled “Why the global housing market has further to slide,” argues that spiked mortgage rates will keep housing markets in countries like New Zealand, Canada, and the United States in correction-mode through much of the year.
“Higher mortgage rates are taking their toll on housing markets around the world, and sales and prices will likely remain under pressure this year in most G10 economies,” wrote Goldman Sachs economists. “After a surge in housing activity during the pandemic, home sales pulled back sharply in the second half of 2022, when rate hikes enacted by central banks caused mortgage rates to spike in most developed market economies. A contraction in housing starts, sales and prices has persisted this year and shows little sign of stopping.”
However, this home price correction won’t be even. Home prices in countries like New Zealand and Canada have fallen 16.2% and 15.8%, respectively, since their 2022 peak. While national home prices in the U.S. are down just 2.7% from their summer 2022 peak.
Unlike borrowers in countries like Canada, U.S. borrowers usually get fixed mortgage rates. That means they’re more insulated from mortgage rate shocks and less likely to list their homes because of sudden financial distress. That lack of supply, in theory, limits the downside in the U.S.
“Housing market tightness—as measured by the scant supply of homes available for sale—is having a large influence in many markets and should limit the downside of house prices to some extent,” wrote Goldman researchers.
By the time home prices bottom out, Goldman Sachs economists expect countries like New Zealand and Canada to be down 19%. While Goldman researchers predict U.S. home prices—which are currently down 2.7% from their 2022 peak—will see a peak-to-trough decline of just 5%.
On one hand, a 5% peak-to-trough decline would mark the second biggest U.S. home price correction of the Post-WWII era. On the other, that would be a drop in the bucket compared to the 26% peak-to-trough decline between 2007 and 2012.
"The team anticipates relatively tame [U.S.] home price declines there, on the order of 5%, owing mainly to its extremely low vacancy rate," wrote Goldman researchers.
Not to mention, if U.S. home prices do indeed fall 5% from the 2022 peak, national home prices in the country would still be up 34.1% from March 2020 levels.
There is one wild card: The economists say distress in the global banking sector could lead to tighter lending standards and cancel out tailwinds created by future declines in mortgage rates.
"Recent financial turmoil has increased uncertainty for the housing outlook as ongoing pressures could cause smaller banks to tighten lending standards, despite declines in long-term yields," wrote Goldman Sachs economists.
Goldman researchers expect weakened housing activity, coupled with declining home prices, to be an economic drag.
"Higher borrowing costs for homebuyers have weighed heavily on housing affordability and the full impact likely hasn’t been felt yet... The timing of the impact isn’t uniform across the world; differences in mortgage markets across countries can speed or slow the impact. Countries with higher shares of fixed-rate mortgages, for example, tend to experience delayed rate impacts," wrote Goldman researchers.
Between the first quarter and fourth quarter of 2022, U.S. private residential fixed investment (i.e. housing GDP) fell 12.3%. But weakness in the housing sector hasn't triggered a recession.
"The housing declines around the globe are going according to plan... The strong housing market response to rate hikes has helped slow overall growth below trend without causing a recession or triggering a rise in delinquencies in most major economies," the economists wrote.
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