A slump in house prices is coming. Rising unemployment could make things worse

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Last year, Auckland’s biggest real estate company couldn’t sell properties fast enough to meet demand in New Zealand’s biggest city.

Houses are “flying out the door,” says Grant Sykes, manager at real estate agency Barfoot & Thompson. “There are jaw-dropping moments when agents stand around the room and gobsmacked at the price being achieved,” he told CNN Business.

In one instance, the property was sold for 1 million New Zealand dollars ($ 610,000) above the asking price in the auction that lasted all of eight minutes. (Most houses in New Zealand are sold at auction.)

That’s in May 2021, when the sale goes on attracted thousands of bidders who drove the price ever higher. Since then, Barfoot & Thompson’s clearance rate has dropped, according to Sykes, extending sales time and sending prices lower.

The time it takes to sell a property in New Zealand has increased by around 10 days on average since October 2021, according to Housing Institute of New Zealand. Sales have dropped nearly 35% and the median home price is down 7.5% over the past year.

House in the suburb of Devonport across from the central business district of Auckland, New Zealand.

New Zealand is at the sharp end of the global housing market blackmail which has grim ramifications for the world economy.

pandemics boomthe sent price into the stratosphere, has run out of steam with current house prices falling from Canada to China, setting the stage for the widest housing market slowdown since the global financial crisis.

Rising interest rates caused dramatic changes. The central bank in a fight against inflation has taken rates to levels not seen for more than a decade, with ripple effects on the cost of borrowing.

US mortgage rates top 7% last month for the first time since 2002, up from just over 3% a year ago, previously pull back slightly in November as inflation eases. In the European Union and the UK, mortgage rates have more than doubled since last year, chasing potential buyers from the market.

“Overall, this housing market outlook is the most worrying since 2007-2008, with the market poised between the prospect of modest declines and steeper of 15%-20%,” said Adam Slater, a lead economist at Oxford Economics, a consultancy.

A key factor determines how low the return price? Unemployment. A sharp rise in unemployment could lead to forced sales and foreclosures, “where steep discounts are common,” Slater said.

But even if the price correction is mild, a slowdown in the housing market can have severe consequences because housing transactions in turn boost activity in other sectors of the economy.

“In an ideal world, you would get a little foam blown off the top [of house prices] and everything is fine. It’s not impossible, but it’s more likely that the housing downturn has more severe consequences,” Slater told CNN Business.

House prices have fallen in more than half of the 18 advanced economies tracked by Oxford Economics, including the UK, Germany, Sweden, Australia and Canada, where prices fell by around 7% from February to August.

“Data lags may mean that most markets are now seeing a fall in prices,” said Slater. “We are in an early period in a clear decline now and the only real question is how steep and how long it will be.”

Home prices in the United States – which rose during the pandemic the most since the 1970s – also fell. Economists at Goldman Sachs expect a decline of around 5%-10% from the peak reached in June to March 2024.

In a “pessimistic” scenario, US prices could plunge as much as 20%, Dallas Fed economist Enrique Martinez-Garcia wrote in a blog post recently.

Prices for new homes in China fell at the fastest pace in over seven years in October, according to official figures, reflecting a deepening property market slump that gripped the country for months and weighed heavily on its economy. Home sales have fallen by 43% this year, according to China Index Academy, a research firm.

Sales are also slipping elsewhere, as banks take a more cautious approach to lending and homebuyers want to delay purchases in the face of higher borrowing costs and a deteriorating economic outlook.

Home sales in the UK were 32% below the previous year’s level in September, according to official figures. A closely watched survey showed that new buyer inquiries fell for the sixth month in a row in October to the lowest level since 2008, excluding the early months of 2020 when the market was largely closed due to the pandemic.

In the United States, existing home sales fell by more than 28% year-over-year in October, the ninth consecutive monthly decline, according to the National Association of Realtors.

Mortgage rates in 25 major cities around the world tracked by UBS have almost doubled on average since last year, making home purchases much less affordable.

“Skilled service sector workers can afford about a third less housing space than before the pandemic,” according to UBS. Global Housing Bubble Index.

An estate agent's 'for sale' board is pictured on a house at the end of a row of terraced houses in northern England on November 2, 2022.

As well as putting off new buyers, the sharp increase in rates has shocked homeowners who have been accustomed to more than a decade of ultra-low loan costs.

In the UK, more than 4 million mortgages have been issued to first-time buyers since 2009, when rates were close to zero. “There are a lot of people out there who don’t appreciate what it’s like when their monthly outgoings go up,” said Tom Bill, head of UK residential research at broker Knight Frank.

In countries with a larger share of variable rate mortgages, such as Sweden and Australia, the shock will be immediate and could increase the risk of forced sales causing prices to fall faster.

But even in places where a large proportion of mortgages are fixed, such as New Zealand and Great Britain, the average maturity of these mortgages is quite short.

“This means more debt will be subject to (often significantly) higher rates over the next year or so than initially thought,” Slater wrote in a report last month.

While interest rates have been the catalyst for the housing market slowdown, the jobs market will play a big role in determining how low prices will ultimately plunge.

Modeling house prices past the crash by Oxford Economics shows that employment is a decisive factor in determining the severity of a downturn, because a spike in unemployment raises the number of forced sellers.

“History shows that if the labor market can remain strong, then the likelihood of a better correction is higher,” said Innes McFee, chief global economist at Oxford Economics.

Employment levels in many advanced economies have recovered since falling at the start of the pandemic. But there are early signs that the labor market is starting to cool as weak economic growth dampens demand for workers.

After a strong recovery at the beginning of the year, the number of working hours was 1.5% below pre-pandemic levels in the third quarter, amounting to a deficit of 40 million full-time jobs, according to estimates by the International Labor Organization.

“The outlook for the global labor market has worsened in recent months and the current trend is for job vacancies to decline and global employment growth to decline significantly in the final quarter of 2022,” the ILO said in an October report.

The unemployment rate in the United States ticked up in October to 3.7%. In the UK, job vacancies have fallen to their lowest level in a year. The UK Office for Budget Responsibility expects unemployment to rise by 505,000 to a peak of 1.7 million – an unemployment rate of 4.9% – in the third quarter of 2024.

“A decisive increase in unemployment is a very big danger for the housing market,” said Slater of Oxford Economics.

A pedestrian walks past an unfinished apartment building in the West Bund Park residential project in Shanghai, China, on January 14, 2022.

Most market watchers are not expecting a repeat of the 2008 housing market crash. Banks and households are in better financial shape, and housing supply in some countries remains tight.

But even a modest fall in house prices will knock confidence, causing homeowners to cut back on spending.

A slowdown in activity will also deal a blow to many other parts of the economy due to the link of our housing market to the past, lawyers, banks, moving companies and furniture stores, to name a few.

China’s property market is about 28-30% of GDP because of this relationship. In the United States, housing’s contribution to GDP generally averages 15-18%, according to the National Association of Home Builders.

In the worst-case scenario – one where house prices fall more sharply than anticipated and the drop in prices is met with a slump in residential investment and tighter lending by banks – Oxford Economics predicts that world GDP will expand by only 0.3% in 2023, instead of the 1.5% that is currently expected.

“An additional negative factor, compared to [global financial crisis], the Chinese housing market is also in a downturn,” according to Slater. “So instead of offsetting the impact on world output from the global housing downturn, as was the case after the GFC, China’s housing sector contributed to the slump.”

– Laura She contributed to this report.

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