A global real estate correction has begun and Canada is expected to lead the way. That was the message of Goldman Sachs (GS) Research’s latest client note on the rate hike. Excessively low rates stimulated record home sales and a multi-decade high for inflation. Now that rates are rising to cool this inflation, it is removing the stimulus from home buyers. This is expected to result in a fall in house prices in most advanced economies. However, it is seen that Canada is making the sharpest falls due to its extreme price rise.
From Toronto to Auckland, real estate markets are slowing
Advanced economies left interest rates too low for too long and are now trying to make up for lost time. The rapid rise in interest rates is holding back the inflation they created, but also the global economy. This will have a big impact on interest sensitive areas like real estate, first to see the impact. “The pandemic-induced housing boom appears to be cooling,” GS notes.
“From Toronto to Auckland, there is a slowdown in the housing market, as interest rates in developed economies will rise rapidly.”
Rising mortgage rates in the US, Canada, the UK and New Zealand have already started to cool home sales. The United States has experienced a 40% drop, according to the financial firm’s research team. Higher rates are expected and this is expected to further hamper housing.
A global real estate crash is “a real risk,” according to Canada to lead the recession
Falling home sales tend to cause falling house prices, but not all places have received the note. Housing prices continue to rise in the US, Germany and the UK. Researchers expect prices to start falling in the not-too-distant future. A study by the bank found a 10% or more drop in home sales in the United States, which led to a drop in prices six months later. If home sales fall much faster than stocks, this problem may be even worse.
They also mention that house prices have already started to fall in Canada, Australia, New Zealand and Sweden. “In Canada, house prices have fallen more in the areas that had the most growth in the early days of the pandemic,” the bank points out to investors.
They expect a modest drop in at least peak house prices over the next two years. Canada is expected to see the biggest drop with a 12% drop in real house prices. France continues to fall by 9%, and the US by only 3%. These are domestic prices, so it is seen that inflated markets are making bigger falls. “The slowdown will be strongest in Canada due to weak recent momentum, low affordability and rapid rises in Bank of Canada policies,” the bank said.
Global economic growth is expected to slow in the coming quarters, and home sales will bolster the outlook. “And while a tight housing market may be enough to prevent a downturn, the rapid deterioration in accessibility and large falls in home sales suggest a downturn in housing is a real risk.” .
Canada has the worst housing affordability in advanced economies
Lack of affordability is what will prevent buyers from getting caught up in it until housing prices go down. The GS Housing Affordability Index (HAI) analyzes the mortgage service capacity of households. We can see a brief increase in affordability at the onset of the pandemic, as rates were initially reduced. Then, affordability erodes rapidly as the market adjusts to absorb the increase in lending capacity. This is a problem mentioned by the Bank of Canada, warning that low rates do not improve affordability.
Shortly after rates rose, affordability eroded even more, a typical but temporary phenomenon. Just as low rates worked to stimulate demand and raise prices, higher rates do the opposite. By curbing demand, prices can cool to more reasonable levels, but it takes a few months to adjust. Again, the U.S. has yet to see it, but it is expected to do so in the coming months. GS is not the only one that sees corrected inflated house prices after the normalization of tariffs. The Bank for International Settlements (BIS) recently warned that low rates produced real estate bubbles in advanced economies. While they argue that it is a global phenomenon, they say it is due to recurring monetary policy mistakes that are repeated in multiple advanced economies. They suggest that higher rates can be painful, but not addressing this issue can make it worse. If the trend is not right, the BIS warns that the consequences will go beyond the real estate market.