For the first time in more than a decade, residential real estate in the developed world appears vulnerable to falling prices. This is what happens when central banks go into interest rate hike mode after an unprecedented spike in house prices.
But unlike the last time, the housing crisis of 2008, the United States will not be at the epicenter of this housing downturn. At least, that’s according to Goldman Sachs.
This month, Goldman Sachs researchers published “The Real Estate Slowdown: Bigger Business Up North and Up North.” Until the end of 2023, the document predicts a sharp drop in house prices in New Zealand (–21%), Australia (–18%) and Canada (–13%). By comparison, the US housing bubble saw house prices drop 27% from the 2006 high to the 2012 low.
Goldman Sachs clearly has Australia, Canada and New Zealand in the real estate crash camp (or almost), but it is less pessimistic about the other G10 countries. Until the end of 2023, Goldman Sachs researchers predict that house prices will fall by 6% in France and remain unchanged in the United Kingdom. Meanwhile, they say US home prices will actually rise 1.8% in 2023.
Why is Goldman Sachs so much more bearish on countries like Australia and New Zealand than on the United States? It comes down to detached fundamentals. While home prices in the United States are historically bubbly, home prices in countries like Canada are simply off the charts. In 2021 alone, Canadian home prices climbed 27%, while US home prices climbed a more modest 18.9%.
“Across the G10, home sales are falling rapidly and home price growth is slowing, with outright price declines in places that have seen the largest increases during the pandemic,” write the Goldman Sachs researchers. .
That said, the researchers note that some regional U.S. real estate markets will most likely see lower house prices in the future. Which markets? Goldman Sachs said nothing. However, the list likely includes sparkling markets like Boise and Phoenix.
A separate analysis from Moody’s Analytics predicts that home prices in the United States will remain flat or fall by up to 5% from peak to trough. In the country’s 187 significantly “overvalued” regional real estate markets, including Boise and Charlotte, Moody’s predicts home prices will drop 5% to 10%. But that does not imply a recession. If a recession hits, Moody’s thinks U.S. home prices would drop 5-10% and grossly overvalued regional markets would experience declines of 15-20%.
But just because groups like Goldman Sachs and Moody’s Analytics aren’t predicting a US housing crash doesn’t mean the housing downturn won’t weaken the US economy as a whole. In fact, the economic contractions caused by housing are already here.
Last week, researchers at Goldman Sachs predicted that activity in the US housing market would end in 2022 and 2023 across the board. The company expects a sharp drop this year in US new home sales (a 22% drop), US existing home sales (a 17% drop) and US housing GDP. United States (a decrease of 8.9%). Goldman Sachs predicts further decline next year in US new home sales (another 8% drop), US existing home sales (another 14% drop) and housing GDP in the United States (another drop of 9.2%).
The economic contractions caused by the current housing correction could be even more severe in countries like New Zealand, Australia and Canada.
“Based on this negative outlook for house prices and the importance of residential investment and housing wealth, we find that the housing slowdown poses greater downside risks to GDP in New Zealand, Australia and Canada,” write the Goldman Sachs researchers. In New Zealand, according to the investment bank, the slowdown in real estate is likely to push the entire economy of the country into a recession.
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