From New Zealand to the US, house prices are likely to decline in many large countries, according to Goldman Sachs Research.
Housing is already cooling in the US, according to July data reported last week. As interest rates rise steadily, Goldman Sachs Research’s G-10 House Price Model suggests house prices will decline 5% to 10% from the US peak, 15% in Canada and just under 5% in the UK (based on nominal data that do not take inflation into account; the drop is expected to be even larger in inflation-adjusted terms).
Housing is a risk to economic growth in all G-10 countries, economists Daan Struyven and Yulia Zhestkova wrote in a report. The model’s forecasts are slightly more negative than in September because actual and forecast interest rates have risen, its estimates of economic growth in North America have fallen, and home prices have missed expectations.
While the drop in home prices may seem large, those declines are expected to only partially offset the rise in home prices that occurred after February 2020 (for example, US home prices are expected to be low). The US soared 42% and those in Canada increased 52%, without adjusting for inflation). But there are reasons to think the declines could be substantial: the housing market has already fallen 7% in Canada and Sweden in just six months, for example, and 11% in New Zealand in eight months.
Economists at Goldman Sachs Research say there are risks housing markets could fall more than their model suggests. That’s in part because the outlook across the G10 has deteriorated sharply, based on signs of momentum in house prices and housing affordability. There is also evidence that prices in Canada and New Zealand tend to return to their longer-term averages (mean reversion).
A slowdown in the housing market could be cushioned by a relative lack of available homes in the US, Canada and the UK, and strong household finances. Our economists believe there is unlikely to be a major sell-off in the US because a recession would likely be mild, the housing market is tight, mortgage quality is strong, and a large proportion of mortgages have a fixed rate.
Britain may be less insulated from a rate hike, according to Goldman Sachs Research. While the proportion of floating-rate mortgages is much lower than it was a decade ago, the interest rate on almost all UK mortgages resets within five years of origination, with around 40% of they will have rate increases by July 2023, according to a Bank of England estimate. Mortgage debt accounts for a larger share of gross domestic product in the UK than in Germany and the US.
Rising mortgage rates could also reduce consumer spending in Norway, Australia and New Zealand, as those countries have substantial mortgage debt and a high proportion of mortgages that reset within a year.
Housing slowdowns caused by rising mortgage rates tend to weigh on GDP through lower residential investment and weaker consumption (as the wealth effects of home equity and cash flows decline). borrowers’ cash decreases as interest rates rise). With that in mind, housing is a bigger risk to the New Zealand, Australian and Canadian economies than the US, but it is a concern for many developed countries.
“Our analysis suggests that housing represents a downside risk to GDP across all G10 economies,” Struyven and Zhestkova wrote.