What to Make of Falling Home Prices

Housing markets in several major economies have had a rough year, and headlines have noticed—with some worrying about potential spillover effects. However, we don’t think falling prices spell trouble for the global economy or stocks. Let us run through a global look at the data—and explain why we don’t see this as a big concern from a macroeconomic point of view.

Starting in the US, existing home sales fell -0.7% m/m in January—its 12^th straight monthly contraction—to an annualized pace of 4 million, the weakest since October 2010.^[i] Homes have also been sitting on the market for longer—33 days on average in January 2023 compared to 19 days a year earlier. This comes despite inventory that, while up 15.3% y/y in January, was still historically low at 980,000 homes for sale.^[ii] Price rises have slowed on a year-over-year basis, and they are likely falling as of late, with the base effect keeping the overall rate up.

The trend is similar overseas. In the UK, house sales fell -3.0% m/m in January, the worst start to a year since 2015.^[iii] Homes there are also spending more time on the market, with one in seven going six months before being sold, the highest proportion since February 2015.^[iv] Canadian January home sales slipped -3.0% m/m, and prices were down an 11^th straight month, according to the Canadian Real Estate Association.^[v] In Australia, new home sales fell by -4.6% m/m in December, and property data firm CoreLogic found that, in volume terms, unit sales rose in just 2 of 25 regional markets in the 12 months to last November.^[vi] On the Continent, Sweden has been one of the hardest-hit housing markets globally, with prices down -16% from last year’s peak—and the Riksbank anticipates the tough times will continue.^[vii]

Real estate is very sensitive to interest rate changes, so as central banks have hiked rates over the past year, mortgage rates have climbed, too. (Exhibit 1) That has cooled demand, and prices have fallen correspondingly.

Exhibit 1: Central Bank Hikes, Rising Mortgage Rates

Source: FactSet, US Federal Reserve, Bank of England, Bank of Canada, Reserve Bank of Australia and the Riksbank, as of 2/23/2023. The Bank of England began hiking December 2021; the Fed and Bank of Canada in March 2022; and the Reserve Bank of Australia and Riksbank in May 2022. Mortgage rates are end of month and refer to the 30-year fixed rate mortgage (US); weighted average interest rate, standard variable mortgage (UK); 1-year conventional mortgage rate (Canada); 3-year fixed housing loan (Australia); and 5-year mortgage rate (Sweden), December 2021 – January 2023.

While rising interest rates have contributed to real estate’s struggles, domestic issues have a large impact on the housing market, too—important to keep in mind when considering supply and demand drivers. For example, the pandemic drove housing booms in certain regions: See New South Wales and Queensland in Australia, as some left cities for a lifestyle change (similar to America’s Sunbelt rush). But as COVID restrictions relaxed and life returned to normal, housing demand in these areas has tapered off—as have prices.

Longer-running, local nuances have also played a role in dampening prices. For example, there is a higher prevalence of variable-rate loans in Sweden, Canada and the UK, leaving households more vulnerable to interest-rate changes, and higher rates can weigh on demand. In Sweden in particular, rising rates mean higher payments for many households since most mortgage rates are fixed for two years or less—and around 40% reset in three months or less.^[viii] In the UK, “buy-to-let” investors (someone who takes out a mortgage to buy a property specifically to rent it out), have faced higher taxes and new regulatory burdens, prompting many to sell—contributing to higher housing supply and pushing prices down.^[ix] 

That said, for all the weakness in the data—and though residential real estate gets a lot of attention—its contribution to broader economic output in developed nations isn’t huge. Consider construction (which housing is but a part of). On a gross value added basis, construction comprises just 4.1% of US total output and 6.0% in the UK.^[x] So despite recent data weakness—e.g., the UK’s construction purchasing managers’ index (PMI) registered 48.4 in January, indicating contraction—the broader economic effect is likely limited.^[xi] Another way to see this: In the US, residential investment contracted at double-digit annualized clips over the past three quarters: -17.8%, -27.1% and -25.9%, respectively. Q4’s plunge detracted -1.24 percentage points from headline GDP.^[xii] Yet US GDP has grown over that stretch, including last quarter’s 2.7% annualized growth.^[xiii]

In our view, the housing market isn’t a swing factor in developed, services-dominant economies, so its struggles aren’t likely to derail growth. From a stock market perspective, the real estate sector, comprised mostly of REITs, doesn’t have a huge footprint, either: just 2.7% of the MSCI World.^[xiv] We don’t dismiss those impacted by housing’s recent soft patch. But when considering the economic factors that matter most to global markets, keep residential real estate’s impact in perspective—especially since regional and local developments play an outsized role on supply and demand.