Global house prices are falling – the UK is not alone.
Central banks worldwide are raising interest rates to cool off the global inflationary pressures. The US mortgage rates have topped 7 per cent for the first time since 2002. While in the UK and Europe, interest rates have more than doubled since last year. This result is very apparent in the falling house prices, as we will highlight. Adam Slater of Oxford Economics says this is the most worrying housing market outlook since 2007-2008.
House prices in more than half of the 18 advanced economies Oxford Economics tracks, including the UK, Germany, Sweden, Australia, and Canada, have dropped house prices. In the UK, Rightmove, Nationwide and Halifax have all reported a fall in house prices compared with November and December last year. However, year-on-year (YOY) growth remains positive.
According to Oxford Economics, the severity of the downturn in house prices will be determined by unemployment, as joblessness increases and the proportion of forced sellers increases. While the unemployment rate remains at a 50-year low, the Bank of England (BOE) predicts that the unemployment rate will almost double to 6.4 per cent by the end of 2025. If, as indicated by the BOE, the unemployment rate was to reach the levels predicted, then the UK could see a decline in house prices of around 13 per cent over the next two years. Some markets could see a drop of between 15 and 20 per cent, predicts Adam Slater of Oxford Economics.
Vulnerable countries:
According to the Daily Telegraph's Melissa Lawford, one of the countries most immune to the rises in interest rates could be Italy, as only 10 per cent of households have a mortgage, and many people inherit their homes.
Some markets saw a massive increase in house prices since the start of the pandemic and are in line for steeper falls. Canada house prices rose by 56 per cent between the end of 2019 and the summer of this year; Dutch prices rose by 39 per cent, leaving plenty of room for a price correction. In Britain, house prices rose by 22 per cent in the same period. Oxford Economics predicts a house price correction of around 13 per cent over the next two years.
According to the Economist, countries like Australia, Sweden, and Canada, which largely shrugged off the global financial crisis, are heading for a reckoning. Households have no recent memory of the house price crash, which has helped debt levels soar, hitting 202 per cent share of disposable income in Australia and 203 per cent in Sweden. Australian central bank forecasts that house prices will fall by 20 per cent, which will be the most significant decline in four decades.
Are the banks better prepared?
The BOE thinks that British lenders would be able to cope with an improbable 33 per cent fall in house prices and a rise in unemployment from 3.5 per cent to 12 per cent. However, a global housing slump will do economic harm as falling house prices will prompt banks to tighten lending standards, which hurts businesses. Simon Nixon of The Times says, "Thankfully, the banks look better prepared for a property slump than in 2007-2009".
Lower house prices make homeowners feel poorer, which hurts consumer confidence. It also impacts home building which is a significant part of the economy. In the UK, many homeowners have short-term fixed or variable mortgages. The market sensitivity to interest rate rises could force the BOE to stop raising interest rates before inflation is entirely crushed.
House prices globally are likely to fall, and countries like Australia, Sweden, and Canada are the countries which will be impacted the most due to higher levels of growth over the last few years and high levels of household debt when compared with disposable income. The UK seems better prepared and will be more of a price correction than a crash.