global housing slump
August 17, 2023

Is it a mirage or a tangible reality? Or in other words, is the global housing slump nearing its end? This has been a question that has been looming over many economies for longer than they would have liked. Thanks to the pandemic that seemed to have left no stone unturned, the outlook for most major housing markets had looked extremely bleak following the year 2020. House prices spiked at a staggering and quite scary pace where in some instances it rose more than 50%. However, it appears that despite the setbacks the housing market (although not in all countries alike) is cooling down. Slowly, but surely. 

First things first, what exactly is a housing market crash? 

A crash course on ‘housing market crash’

This refers to a significant and sudden decline in the value of real estate properties which then leads to a severe downturn in the housing market. A housing market crash will witness a sharp drop in property prices, a decrease in the demand for homes, and the supply of available houses exceeding the number of potential buyers. And then comes the housing bubble burst. The aforementioned chain of reactions will end in property prices overinflating as a result of speculative buying and unsustainable lending practices. 

The consequences of a housing market crash leave no party unaffected. Both homeowners and the overall economy will suffer. Homeowners will experience a decrease in the value of their properties. This means that they will be paying an outstanding mortgage balance that is higher than what their home is currently worth. This is also termed negative equity. 

For the broader economy, a housing market crash can contribute to a downturn in consumer spending, a sluggish pace in construction activity, decreased lending and investment in the real estate sector. This will inevitably lead to job losses, a stagnated economic growth and could even result in broader recession. So the big picture, to put it simply, is stormy with a chance of an economic tsunami. 

How does the weather in the housing market look like now?

Recent trends in the housing market indicate that even amidst grey clouds and rains, the sun seems to be shining on it. For instance, if we consider the U.S. and its trajectory, right after the pandemic the country saw an all-time low in mortgage rates and an all-time high in home prices. After such record-breaking numbers, towards the tail end of 2022, the housing market got some breathing space where it started seeing a turnaround. 

While the U.S. was well on its way to a housing market crash, home values started to increase steadily for four months in a row, starting from May 2023. As The Economist states, their indexes indicate that the housing values have increased by 1.6% from where it was in January. Profit margins had revved up to 47.7% in the second quarter,  from 43.9% in the first quarter. Furthermore, the national median home price was pushed up by 10% quarterly to US$350,000, making the nationwide profit margin and the median home price look much better in comparison to the previous quarters. 

Even with a positive comeback as such, according to Bankrate, in comparison to the numbers in May 2022, it is still down by 0.5%. Some numbers that were mentioned by Shrey Dua in  InvestorPlace hinted that “[W]ith mortgage rates still trending around 7%, relatively strong home sales have been the major stopgap to a wider real estate recession”. Therefore, it is evident that concerns are still at large.

In Australia, house prices have been experiencing growth since late February-early March 2023 A strong indicator of how well the country is doing is auction clearance rates. Even despite each state functioning at different values, the bidding for most properties is wild. One that would have you raising your eyebrows is a recent auction that happened in Double Bay, a suburb on Sydney’s harbour. A double-bedroom bungalow which opened bidding at A$4m dropped its gavel at A$6m. The numbers speak for themselves. Additionally, as of the latest statistics, the national capital city quarterly median house price has increased by 0.7% over July in comparison to June- rising to $1,055,252. 

global housing slump IMG 1

However, it is not all unicorns and rainbows. New Zealand has seen one of the most troubled housing markets over the last 18 months or so. Both homeowners and investors have experienced significant financial losses, amounting to billions of dollars. This was a result of the sharp decline in property prices that had surged in an unthinkable manner during the pandemic. Exacerbating the situation, mortgage rates have also increased causing a negative economic impact on individuals and investors alike. It is not news that the pandemic took a swing at the housing markets in several countries. Amidst those, New Zealand stands out as one of the most affected, experiencing an especially volatile fluctuation. Recently (June 2023), the country even slipped into a recession. Home sales have fallen where houses sit on the market for an average of 47 days and some remain there for months.

If we continue speed-reading the situation worldwide, this would more or less be the picture. While some seem to have averted the crash, some seem to still be struggling. However, the consensus is that on average, most economies appear to be doing fairly better than how they used to during the pandemic, or immediately after it. Even though that is a low bar, countries seem to have built a surprising housing resilience. When juxtaposed with previous housing slumps, there is no indication that the decreasing or increasing house prices are leading to financial contagion. Banks don’t seem to be up in arms about sudden increases in bad mortgages. This could very well be because housing markets have adopted a more cautious approach where they are exposing themselves to fewer high risk-loans and avoiding overindulgence in risky subprime securities. 

As Shakespeare famously said “All the world’s a stage and  we all have our entrances and exits”. Housing slumps sure seem to have very grand entrances, but they do not seem to have their exits. Although the fear of falling back on a crash has not completely left the scene, the current market is not necessarily treading on eggshells. Because a housing market crash occurs when the value of homes decreases significantly. Making it difficult for homeowners to afford their mortgages. So they try to sell the houses, but at a value that will leave them with a colossal loss. This does not seem to be the situation right now, at least not as far as numbers indicate. So when people say the housing slump is nearing its end, in other words, it means that the housing slump has calmed down, is not flirting with recession, and is certainly not throttling economies. 

(Sandunlekha Ekanayake)

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