I published a piece last week analysing the US housing market.
I wrote that with rising mortgage rates and an economy dragging its heels (to be polite), house prices were bound to fall. However, I hypothesised that the decline would be far from devastating, with prices unlikely to fall back down below pre-pandemic levels.
For homeowners, while the mortgage payments will hurt, house prices rose 44% during COVID, looking at the median house prices sale in the US. Against this context, even a hypothetical 25% cut to house prices for Q1 of 2023 would not even pull prices down to the level they were at in Q2 of 2020.
To be clear – I am not forecasting a 25% decline. The most extreme analyst predictions out there bottom out around this level, and that is over a time period of the next year or two, not one quarter. This is purely a demonstration of how far house prices have risen, and how zooming out can give perspective.
There are also many reasons to throw doubt on the most extreme downside predictions, however. The first is the most prominent – supply. In many major cities especially, demand still far outstrips supply. Do you know what they say about demand and supply?
Hence a blow to demand will definitely slow price growth, but it is hard to imagine a disaster crash in highly desirable areas for the simple reason that there are too many people for too few homes.
Many point towards 2008 as a symbol of how nasty things can get in the housing market. This is not a fair comparison, however. Firstly, banks are far better capitalised today than they were in 2008, while reserve requirements are also higher. The subprime mortgage collapse was an extreme case of madness descending upon the housing and banking sectors. This will not happen again.
The other major difference this time around – compared to 2008 and other periods of slowdown – is the continued resilience of the labour market. Unemployment will not reach the depths of 2008, with the IMF forecasting a 1% rise in unemployment next year. During the 2008 crash, this number was tripled.
Household debt – both in Europe and the US – is also lower today than it was during the crash. With interest rates rising, this has a key effect. Higher interest rates means more burdensome payments; indeed, these higher rates are the single biggest driver of the housing softness, as mortgage payments become more onerous.
Yet despite sovereign debt going totally bananas in recent years (and something I often cover in my analysis), at a household level there is less debt than in 2008. This means individuals aren’t as severely squeezed by rising rates as they otherwise would be, again helping to prevent house demand and prices from falling off a cliff.
Mortgage lending is a lot more regulated and conservative than it previously was. Governments and regulators moved to clean up the market in the wake of the 2008 crisis, and these actions will protect consumers.
And yet, despite all these large weaknesses in the housing market that the 2008 crisis exposed, prices still fell by only 13% from peak to trough in the most industrialised countries, as reported last week in the Financial Times. This is why, when reading reports such as a recent prediction by UK mortgage lender Nationwide that prices could fall by up to 30%, I am hesitant.
The housing market will obviously soften. Indeed, it already has. The 30-year mortgage is now north of 7% in the US, having been less than 3% only a year ago. Against this context, it is impossible to argue the housing market won’t get hit.
But when predictions of numbers such as 20% come out, I struggle to follow the logic. Factors like anaemic supply in big cities, a resilient labour market, tighter lending, less household debt and a healthier reserve situation for banks all combine to produce a very strong batch of evidence that the fall here will not on the scale of 2008. And even then, we didn’t see some of the numbers that these scenarios predict.
Another thing we haven’t even discussed here is the different nature of mortgages today with regard to interest-only payments and floating rates. There are substantially fewer interest-only mortgages on the market than was the case in 2008, while floating-rate mortgages (i.e. the ones most hurt by rising rates) have fallen drastically in almost every developed nation.
Strap in people. Like I have been saying for a while, I expect a really rough winter. But for house prices, I am not in panic mode yet. While I certainly expect to see a moderate pullback, I see too much evidence to suggest that the fall will come nowhere close to the Armageddon scenarios some studies are predicting, especially in the most desirable cities.
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