Sky-high house prices challenge first-home buyers

Despite economists' dire predictions that interest rate rises would cause the global real estate market to collapse, the market has proven surprisingly resilient.

Despite economists' dire predictions that interest rate rises would cause the global real estate market to collapse, the market has proven surprisingly resilient. In fact, house prices have increased for the third consecutive month in Australia while in the US, prices have rebounded 1.6% from their January lows and homebuilder shares have more than doubled the market average. Meanwhile, Europe's real estate market has remained much firmer than expected.

Financial analysts from JPMorgan Chase predict that the housing market's impact on GDP growth in the US will decrease going forward. Likewise, Goldman Sachs believes that the negative effects of the decline in the housing market on private consumption in Korea peaked earlier.

While interest rates have risen over 3 percentage points on average globally, bringing down the housing market, top economists reveal that the decline remains minimal with global house prices only down 3%. When adjusted for inflation, the fall increases to 8-10%, similar to adjustments seen in the late 19th century. However, house prices remain significantly higher than they were in 2019, despite many young millennials and Gen Zs hoping to take advantage of plunging home prices to purchase their first homes.

Compared to previous price drops, this decline had not affected other industries significantly, as banking systems have reduced loan risks significantly, and mortgage defaults by households are at a record low in Canada and the US. Three factors explain why the housing markets in the developed world remain buoyant – waves of immigration, financial health of households, and changing needs.

Firstly, immigration to richer countries is breaking records, pushing up demand for housing. Secondly, the financial situation of households is quite healthy, as the average debt-to-income ratio in richer countries is still lower than before the pandemic, and credit scores of borrowers have improved from around 700 to 800. Finally, the pandemic has changed many things, with households accumulating savings amounting to trillions of dollars, protecting them from rising interest rates and stabilizing house prices.

There are many reasons to believe that the worst times for the housing market are over. With consumer confidence on the rise and households sitting on mountains of savings, the shortage of housing means that there will always be someone willing to buy. The gradual deflation of the market instead of a sudden burst has left it surprisingly resilient, and the housing market will remain strong as long as the factors that have driven demand continue to remain in place.