Decoding the Future of House Prices: UK, US, Europe & Beyond

Why House Prices Are Crashing Across the World: Lessons to Learn

Mar 1 | 8 minutes read
The future of house prices

In recent times, we have seen house prices falling rapidly around the world. The trend is widespread - houses in Sydney, Stockholm, San Francisco, Auckland, Toronto, Seoul, and many other cities are experiencing record-breaking declines. In Germany, the fall in house prices is the most significant in two decades. France is predicted to experience a decline of 5% to 7% this year, while Spain is also starting to report price drops.


So, what is the reason behind this global mini-crash, and what can we learn from what is happening in other countries? The answer is quite simple - it all comes down to the cost of money. The long era of almost zero-interest rates, which made buying a home cheaper than ever before, is over for now.


In the UK, house prices have fallen by 4.2% or 3.2% since their peak in August last year, according to Halifax and Nationwide, respectively. However, this decline looks relatively mild compared to the falls in other countries. The Bank of England has raised its rates from 0.1% in late 2021 to 4% today, leading to a corresponding rise in mortgage rates. Meanwhile, in the US, the average long-term mortgage rates have risen above 6%, up from below 4% a year ago.


Although the decline in house prices may sound concerning, it is important to note that the falls follow an era of sharp increases in some cities and some property types. The values are often only coming back to where they were a couple of years ago, and almost no one is predicting a full-scale property crash.


Nevertheless, there are lessons we can learn from what is happening in other countries. For instance, in Sweden, where most households have variable-rate mortgages that increase with interest rate changes, the fall in house prices has been much more dramatic. On the other hand, in the UK, many borrowers are on fixed-rate deals that are protecting them from sharp increases in their monthly mortgage costs.


In conclusion, the recent decline in house prices globally has been caused by rising interest rates. Although the falls may seem alarming, they are more of a correction of previous increases rather than a crash. However, as demonstrated by Sweden, the impact of rising interest rates can be much more pronounced in countries with variable-rate mortgages. Therefore, it's essential to understand the economic factors and mortgage arrangements in each country to understand the impact of falling house prices.


Race for Space: Lessons from the Global Housing Market Slump

During the coronavirus pandemic, the "race for space" saw a surge in demand for larger individual houses as people worked from home, while apartments fell out of favor. However, over the past year, the price of houses has generally fallen more than apartments.


Some of the price falls are a result of the unwinding of this trend, but there are still exceptions. Dubai's luxury properties, for example, saw an incredible 89% rise in 2022, primarily driven by Russian oligarchs.


Sweden has experienced the biggest house price falls in Europe, with apartments down 11% and houses down 13.7% in the 12 months to December 2022. With most households on variable rates, rate increases have had an immediate impact. The floating mortgage rate in Sweden has increased from around 1% to 4.5% in just a few years, making it more sensitive to interest rate changes than many other countries.


As the global housing market experiences a slump, it is essential to understand the factors behind the fall and to learn from the lessons of other countries.


Global House Prices Tumble: Lessons from Sweden and Australia

Around the world, house prices are plummeting as the era of near-zero interest rates comes to an end. During the pandemic, a "race for space" led to an increase in demand for larger homes. But now, prices of houses have generally fallen more than apartments, as people return to work and commute from smaller, more affordable living spaces. Sweden has seen some of the largest falls, with apartments down 11% and houses down 13.7% in the 12 months to December 2022. Australia has also been hit hard, with prices falling for nine straight months and nationally down 7.2% in the year to January 2023. Despite this, there are still boom markets - luxury properties in Dubai rose by 89% in 2022. As the London-based consultancy Capital Economics warns, Swedish house prices could drop by a further 5% or so from here.


In Australia, house prices have fallen for nine straight months, with prices down 7.2% nationally in the year to January 2023. Sydney has led the way down, with prices falling 13.8% over the year. Many economists predict more falls in the first half of this year, with the Reserve Bank of Australia expected to raise interest rates again to combat inflation.


The housing market in New Zealand has experienced the biggest global price falls, with the median house price down 13.3% over the year to January 2023. In Auckland, the country's biggest city, values have fallen 21.7%, and transactions have fallen by 27%, according to the Reinz index. The downturn is expected to continue, with most housing economists forecasting a peak-to-trough decline of around 22%.


In Australia, the housing market has experienced nine straight months of price falls, with nationally prices down 7.2% in the year to January 2023, falling every month since April, according to CoreLogic HVI. Sydney has led the way down among the big cities, with prices falling 13.8% over the year, and houses in Byron Bay falling 25%. Shane Oliver at AMP Capital forecasts a total national price decline of 20%, with many existing homeowners facing a sharp increase in monthly mortgage costs when their fixed rates end soon, to be replaced with new rates heading towards 6%.


Germany experienced an abrupt end to a decade-long housing boom, with prices rising 2.1% nationally in 2022 but falling 1.8% in the last three months of the year. The six-month fall of 2.5% was the biggest in two decades. The chief executive of the Association of German Pfandbrief Banks (VDP), Jens Tolckmitt, expects further drops in the coming quarters but anticipates them to remain moderate on the whole. The VDP also predicts that even if prices were to fall by 15% over a longer period, they would be at the same level as at the beginning of 2020. The many crises of 2022, including the pandemic and global economic uncertainties, are said to be leaving their mark on the German property market.


However, signs of a slowdown have emerged in recent months. The Consejo General del Notariado, the national council of Spanish notaries, reported that in December 2022, the number of new mortgages issued dropped by 22.5%. Additionally, the rate of price rises came to a near halt in December, indicating that the market may be slowing down after a year of strong growth. Despite this, prices were up 7.2% in 2022, making Spain one of the fastest-rising markets in Europe.


As the global economy continues to recover from the impact of the COVID-19 pandemic, the housing markets around the world are showing varying trends. While some countries are seeing a slowdown in the housing market, others are experiencing significant growth. In Australia, despite a recent drop in prices, housing prices still remain high due to strong demand from buyers. In New Zealand, prices have fallen sharply due to the recent wild weather and economists forecast a further decline. Germany's property market is showing signs of cooling off after a decade of growth, but experts predict that the decline will be moderate. France's housing market is experiencing a slowdown, with Paris apartment prices down, but there is still growth on a national level. In Spain, the market has slowed down after a period of rapid growth. Overall, the global housing market is diverse and complex, with each country experiencing its own unique set of challenges and opportunities.


The US housing market is experiencing a gentle decline nationally, but San Francisco is facing a more significant crash. While house prices across the country rose by 7.7% in the year to November 2022, the last available data release, they have since declined by 3.6% nationally and by 5% in the 20 biggest cities. In San Francisco, the average single family home has fallen in price by almost $250,000 - 15% - to an average of $1.38m, according to the California Association of Realtors (CAR). This correction was inevitable after the Federal Reserve raised its base rate, causing mortgage costs to increase rapidly, with the benchmark 30-year fixed-rate mortgage rising from 3.9% to 6.3% over the past year.


While UK house prices have been declining for the past few months, the extent and speed of the fall remain uncertain. According to Nationwide, prices have fallen for four consecutive months, while Halifax reports stable prices in January, but a decline in the previous four months. The annual rate of price growth has also slowed significantly, with Nationwide reporting a collapse from 14.3% in March 2022 to 1.1% in January 2023. The Halifax has previously predicted an 8% fall in prices for 2023, which would only reverse some of the gains made during the pandemic and bring prices back to April 2021 levels. Despite the recent declines, UK house prices remain significantly higher than pre-pandemic levels.


In summary, house prices have been falling globally due to the end of the era of near-zero interest rates. While this may sound concerning, it is more of a correction of previous increases rather than a crash. Sweden and Australia have seen some of the largest falls, while luxury properties in Dubai have boomed. It is important to understand the economic factors and mortgage arrangements in each country to understand the impact of falling house prices.

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