Global House Prices Are Poised To Tumble

Global House Prices Are Poised To Tumble

over 2 years ago3 mins

  • Cheap money is supporting the housing price boom so far, but banks in Europe might become less eager to lend, which could drag down growth in house prices – so maybe you want to hold off on your real estate investments in Europe for now.

Cheap money is supporting the housing price boom so far, but banks in Europe might become less eager to lend, which could drag down growth in house prices – so maybe you want to hold off on your real estate investments in Europe for now.

What’s going on here?

All else equal, home prices normally fall during economic downturns. 2020, however, has been pretty frickin’ far from normal and 2021 hasn't been exactly typical either. So perhaps it’s no surprise that while the world dipped into its deepest recession in decades, home prices in the planet’s richest countries not only grew but actually accelerated last year and have continued rising this year – even more so in Europe than in the US.

Home price growth in OECD
Source: OECD, Financial Times

What does this mean?

There are a few factors at play here. Most significant are the record-low borrowing costs allowing people to splurge on pricey properties; also important, however, are the widespread housing shortages resulting from years of inadequate homebuilding. And then there’s the influx of cash into the real estate sector from investors searching for sufficiently “safe” alternatives to super-low-yielding government bonds.

The big question for mere movers and investors alike is, of course, whether this surge in home prices is set to continue. While some regions are more likely to be in imminent “bubble” territory than others, it’s worth remembering that prices will revert to long-term growth trends at some point. This leaves us with the oh-so-simple matter of figuring out when exactly this might come to pass…

Home price growth US
Source: US Federal Housing Finance Agency

Why should I care?

The big risks to home prices are as follows:

An increase in interest rates

Rising rates would hike mortgage repayments, making homes more expensive for owners – and in some cases unaffordable. But with central banks around the globe expected to keep rates at record lows for the foreseeable future, such a scenario seems unlikely for now.

An(other) economic downturn

Hard times lead to job losses, affecting people’s ability to make rent, let alone repayments. It’s only thanks to government stimulus checks and loan holidays that we haven’t seen much impact here in 2020 – but such measures will have to end someday. A huge wave of debt defaults could in turn cause banks to rein in their future mortgage lending.

This second risk is particularly pertinent for European banks, already at a disadvantage to US contemporaries since the last financial crisis. Some banks in Europe currently have repayment holidays on 20% of their loans – and the European Central Bank thinks lenders there could end up taking a $1.7 trillion hit from bad loans, well worse than even the 2012 debt crisis.

In a potentially worrying sign for Europe’s housing market, banks there are already starting to show a decreased appetite for lending. More European banks reported an increase in the proportion of housing loan requests rejected last quarter – and they’re now predicting tougher mortgage terms ahead. If banks’ willingness to lend decreases further, home price growth could slow accordingly.

Change in housing loan rejections of European banks
Source: OECD

Homes tend to tie up 50% of their owners’ overall wealth – so if that’s you, you’ll understandably be interested in where prices are headed. Stay tuned to Finimize for updates in the coming months. For prospective investors, meanwhile, there are lots of ways to get exposure to the market. Check out the links to some of our most relevant Packs below– but if you’re looking at European real estate, this analyst would hold off for now.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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