For the first time in more than a decade, residential real estate across the developed world appears vulnerable to falling prices. That is what happens when central banks go into interest rate hike mode after an unprecedented rise in house prices.
But unlike last time—the 2008 real estate bust—The United States will not be at the epicenter of this real estate decline. At least that’s according to Goldman Sachs.
This month, Goldman Sachs researchers published “The Housing Recession: A Bigger Problem Up North and Up North.” Through the end of 2023, the document predicts a collapse-like decline in house prices in New Zealand (–21%), Australia (–18%) and Canada (–13%). For comparison, the US housing bubble caused home prices to fall 27% between the 2006 high and the 2012 low.
Goldman Sachs clearly has Australia, Canada and New Zealand in the housing crisis (or near) camp, however it is less bearish on other G10 countries. Through the end of 2023, Goldman Sachs researchers predict house prices will fall 6% in France and remain flat in the UK. Meanwhile, they say US home prices will actually rise 1.8% in 2023.
Why is Goldman Sachs so much more bearish on countries like Australia and New Zealand than it is on the US? It boils down to separate fundamentals. While US home prices are historically buoyant, home prices in countries like Canada are simply off the charts. Only in 2021, Canadian home prices skyrocketed 27% weather US home prices up a more modest 18.9%.
“Across the G10, home sales are falling rapidly and home price growth is slowing, with absolute price declines in places that saw the largest increases during the pandemic,” the Goldman Sachs researchers write.
That said, the researchers note that some regional US housing markets are very likely to experience declines in home prices in the future. What markets? Goldman Sachs did not say. However, the list probably includes Sparkling markets like Boise and Phoenix.
A separate analysis by Moody’s Analytics predicts that US home prices will remain flat or fall as much as 5% from peak to trough. In the the nation’s 187 significantly “overvalued” regional real estate markets, including Boise and Charlotte, Moody’s predicts home price declines of 5% to 10%. But that does not mean a recession. If a recession hits, Moody’s believes that US home prices would fall 5-10% and significantly overvalued regional markets would experience 15-20% declines.
But the fact that groups like Goldman Sachs and Moody’s Analytics don’t forecast a US housing bust doesn’t mean that the housing bust won’t weaken the US economy overall. In fact, the housing-driven economic contractions are already here.
Last week, researchers from Goldman Sachs projected that activity in the US real estate market will end in 2022 and 2023 overall. The firm expects sharp falls this year in the US. new home sales (down 22%), US Existing Home Sales (down 17%) and the US. housing GDP (a drop of 8.9%). Goldman Sachs projects further declines next year in US new home sales (another 8% drop), US existing home sales (another 14% drop) and housing GDP (another drop of 9.2%).
The economic contractions caused by housing correction in progress it could be even more serious in countries like New Zealand, Australia and Canada.
Based on this negative outlook for house prices and the importance of residential investment and real estate wealth, we find that the housing downturn poses greater downside risks to GDP in New Zealand, Australia and Canada. the Goldman Sachs researchers write. In New Zealand, says the investment bank, the housing recession is likely to push the country’s overall economy into recession.
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