Despite a handful of bank failures, the world economy has so far proved resilient to the stress of tighter monetary policy. But house-price optimism is probably unwarranted
the long boom that followed the global financial crisis of 2007-09, it seemed as if house prices would never stop rising. Sales surged as a cocktail of ultra-low interest rates and supply shortages boosted competition for properties. Things are very different today. In countries across the rich world, from America to New Zealand, sales have cratered over the past year, as central banks have embarked on the sharpest monetary-policy tightening cycle in four decades.
When assessing how far prices have left to fall, the rich world can be divided into three camps. Start with the early adjusters, which include Australia, Canada, New Zealand and Sweden. In many of these countries, central bankers were quick to respond to inflation. They saw house prices soar in the pandemic, as buyers gorged on cheap credit, taking out mortgages mostly on variable-rate terms.
Next are the bullet-dodgers. The most prominent member of this camp is America, where homeowners are largely insulated from aggressive tightening by fixed-rate mortgages, which often last for two or three decades. After the subprime-lending crisis starting in 2007, regulators pushed borrowers in the direction of such loans, which are less likely to experience mass defaults and thus blow up the financial system.
Then there are the slow movers, which have not yet been hit hard, but which are unlikely to escape the pain. Although house prices in Britain have already fallen by 5%, worse may be to come: Capital Economics, a consultancy, forecasts a 12% peak-to-trough drop. The country’s homebuilders are sounding the alarm. Many are holding off on developing new homes; some are dangling cash to incentivise buyers.
Since slumping prices across the rich world have been driven in large part by higher interest rates, they are unlikely to make housing more affordable. Those who want to get on the property ladder face eye-watering monthly payments.
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