- House prices have been declining in most major OECD countries since late 2022 as central banks tighten interest rates, raising the costs of mortgage financing.
- Countries with a high percentage of variable-rate mortgages and significant price increases, such as Canada, Australia and New Zealand, are most exposed to house price declines. Within Europe, the Netherlands, Luxembourg and Norway are particularly vulnerable.
- As interest rates stabilise in the second half of 2023, we expect mortgage rates to stabilise, while elevated construction costs due to high labour and materials costs will put a floor under house prices.
- We therefore expect house prices to stabilise at a low level in 2024, before gradually rebounding from 2025 onwards.
House prices in most advanced economies have been falling since late 2022 after increasing dramatically in value in the aftermath of the covid‑19 pandemic. Record-low interest rates and a change in housing preferences amid greater home working led to the sharp rise in house prices. Since then, slowing growth amid accelerating inflation has dampened demand for housing, while interest-rate rises by almost all major OECD central banks in 2022 have sent mortgage rates soaring and severely curtailed market transactions in most advanced economies. We expect that monetary tightening will continue until mid-2023, with a risk of further tightening later in the year if inflation remains elevated. High interest rates increase the cost of mortgage finance, decreasing demand for property and driving down prices. This has happened most rapidly in countries with a high proportion of variable-rate mortgages, such as Sweden (85% of the total), where interest-rate rises have immediately increased the interest repayment burden for a large chunk of mortgage-holders.
Anglophone countries will see the biggest falls, but the economic impact will be greater in Europe
The impact of the housing market downturn will depend on the size of the price decline, the level of household debt and the importance of the housing sector to the consumer economy. We expect Canada and New Zealand to see the biggest price declines, with the Netherlands and Australia not far behind. This assessment is based on how much house prices increased in the aftermath of the pandemic and the size of the interest-rate rise, which increased leverage for households on variable-rate mortgages. Countries with a higher proportion of variable-rate loans are generally seeing larger, faster decline in house prices as household affordability comes under pressure immediately through higher mortgage costs, even prompting forced sales in some cases.
The housing market decline’s impact on the consumer sector will weigh most heavily on the economy in countries where households are most highly leveraged. These include Norway, Sweden, Denmark, the Netherlands and Switzerland, as household debt is over 200% of GDP in all of these countries. Markets where most homes are bought with a mortgage, such as the Netherlands, will also see significant feed-through from falling prices to the real economy as households see a negative wealth effect. Countries that will be less affected include those in southern and eastern Europe (where most homes are owned outright as compared to ownership with a mortgage) and in German-speaking central Europe (where the rental sector is significantly larger than the owner-occupied sector).
In aggregate, we believe that Canada, Australia, the Netherlands and New Zealand will have been the most affected by the global monetary tightening cycle, which began in early 2022. The largest housing market in the OECD, the US, has seen rapid interest-rate tightening and a significant rise in house prices since the pandemic; however, the 30-year standard duration of most mortgages, and the relatively low level of mortgage debt compared with peer countries, will limit the macroeconomic impact by comparison.
New construction is experiencing a chill
The decline in house prices is also affecting the construction sector. The combination of strengthening economic growth, low interest rates and rising asset prices led to an increase in homebuilding across many OECD economies in the late 2010s. After a brief cessation during the initial stages of the pandemic, this trend accelerated in 2020 and 2021, exacerbated by changing consumer preferences for more space. This in turn led to global shortages of building materials and supply-chain congestion for various home appliances. More recently, the combination of still-high input costs (for both commodities and labour), stagnant or falling house sale prices, and higher borrowing costs have led to a slowdown in the sector in most markets.
We expect construction activity to slow year on year in 2023 in the context of the broader economic slowdown and higher interest rates, which have dampened demand for housing. This will have a macroeconomic impact in countries in which construction is a significant portion of the economy. On average, construction makes up 5.6% of the EU economy, although this ranges from 7.6% in Cyprus and 7.2% in Germany and Finland to 1.3% in Greece. This compares with 4.3% in the US.
When can we expect prices to stabilise?
We expect house prices to continue to fall over most of 2023 and stabilise by 2024, lagging the stabilisation in interest rates that we currently forecast for the middle of this year. As the outlook for interest rates becomes less uncertain and market risk premiums begin to narrow, mortgage lenders will be able to lower lending rates somewhat. However, the ongoing risk of sustained high inflation and further interest-rate rises will limit the room for lower rates in the short to medium term. Sustained low demand and negative real wage growth will also slow any rebound.
House price growth will remain subdued in 2024 as interest rates remain high. We do not expect monetary easing to begin in the US or EU until at least mid-2024. However, the construction industry is also likely to remain depressed for several years, as high reliance on leverage and exposure to volatile commodity prices make the industry vulnerable to boom and bust cycles. Financing and materials cost conditions will therefore have to remain benign for several years before we see a sustained uptick in construction activity, without government subsidies. Supply-side restrictions such as planning laws will also continue to constrain construction in many markets.
Countries are likely to see their housing markets stabilise at different times, depending on several factors: the extent of monetary tightening, the amount of household wealth tied up in the housing stock, and the share and maturity structure of fixed-rate mortgages. As a result, countries like the US are likely to see a longer, slower slump than countries such as the Nordic states. By the mid-2020s, the combination of normalising monetary policy and constrained supply growth due to a slump in construction will provide upward pressure on demand. This should result in house prices picking up again.
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