A global real estate correction has kicked off and Canada is expected to lead lower. That was the message from Goldman Sachs (GS) Research’s latest client note on rising rates. Excessively low rates stimulated record home sales and a multi-decade high for inflation. Now that rates are rising to cool that inflation, it’s removing home buyer stimulus. This is expected to produce home price declines across most advanced economies. However, Canada is seen making the sharpest drops due to its extreme price boom.
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. Fast-rising rates is slowing 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 off,” notes GS.
“From Toronto to Auckland, a slowdown in the housing market is underway as interest rates in developed economies are set to climb rapidly.”
Rising mortgage rates in the US, Canada, the UK, and New Zealand have begun to cool home sales already. The US has seen a whopping 40% drop, according to the financial firm’s research team. Higher rates are in the pipeline and that’s expected to slow housing even further.
A Global Real Estate Downturn Is “A Real Risk,” Canada To Lead Downturn
Falling home sales tend to result in falling home prices, but not all places have received the memo. Home prices are still rising in the US, Germany, and the UK. The researchers expect prices to start falling in the not-so-distant future. A study conducted by the bank found a 10% drop or more for US home sales, resulting in falling prices 6-months later. If home sales fall much faster than inventory, this problem can be even worse.
They also mention home prices have already begun to fall in Canada, Australia, New Zealand, and Sweden. “In Canada, house prices have fallen the most in areas that had the most growth early in the pandemic,” notes the bank to investors.
They expect a modest peak-to-trough drop for home prices over the next couple of years. Canada is forecast to see the biggest drop with real home prices falling 12%. France follows with a 9% drop, and the US just 3%. These are national prices, so inflated markets are seen making bigger declines. “The slowdown will be sharpest in Canada due to weak recent momentum, low affordability and rapid policy hikes by the Bank of Canada,” said the bank.
Global economic growth is forecast to slow over the next few quarters, with home sales reinforcing the outlook. “And while a tight housing market may be enough to avoid a slump, the rapid deterioration in affordability and large drops in home sales suggest that a housing downturn is a real risk.”
Canada Has The Worst Housing Affordability of Advanced Economies
A lack of affordability is what’s going to prevent buyers from jumping in until home prices decline. The GS Housing Affordability Index (HAI) looks at household mortgage credit servicing capacity. We can see a brief surge in affordability at the start of the pandemic, as rates were initially cut. Affordability then erodes rapidly as the market adjusts to absorb the increased credit capacity. This is a problem the Bank of Canada mentioned, warning low rates don’t improve affordability.
Affordability Near Historical Lows In Canada and New Zealand
Shortly after rates rose, affordability eroded even further — a typical but temporary phenomenon. Just as low rates worked to stimulate demand and raise prices, higher rates do the opposite. By slowing demand, prices can cool to more reasonable levels, but it takes a few months to adjust. Once again, the US hasn’t seen this yet but is expected to in the coming months.
GS isn’t the only one that sees inflated home prices correcting after rate normalization. The Bank of International Settlements (BIS) recently warned low rates produced housing bubbles in advanced economies. While they argue it is a global phenomenon, they say it’s due to monetary policy errors repeated across multiple advanced economies. They suggest higher rates can be painful, but not tackling this problem can make it worse. If the trend isn’t correct, the BIS warns the fallout will be beyond the housing market.