Vulnerable housing and real estate markets

The tightening of global monetary conditions is driving a softening of house prices, which in some key markets are expected to decline in 2023 and 2024.

House prices experienced sharp increases in most developed economies during the last decade as record-low interest rates supported demand for property. Borrowers' affordability, and therefore demand for housing, is being negatively impacted by higher borrowing costs. The degree of impact varies by market.

United States

The U.S. housing market appeared to be bottoming in February. Homebuyers priced out of the market by last year's surge in mortgage rates and home prices started returning as the 30-year fixed-rate mortgage slid 85 basis points between October and February.

Then came a series of discouraging updates on inflation, which drove long-term yields up. Mortgage rates have shot up to 6.60%; they may keep on rising as the US Federal Reserve stiffens its policy stance. The single-family home sales rate had its largest 12-month drop on record (data start in 1968). The 12-month plunge in the total sales rate to 4.00 million is also unprecedented (data begin in 1999).

In our forecast, total home sales — new and existing — fall from 5.72 million in 2022 to 4.72 million in 2023 and 4.53 million in 2024. Housing prices were growing at double-digit rates early last year; then, they turned on a dime. We forecast a 4.0% decline in nominal house prices from a peak in the third quarter of 2022 through mid-2024. Real prices eventually decline a rounded-up 12%.

Eurozone and UK

Activity has remained fairly resilient in most eurozone housing markets in the face of tightening financial conditions and cooling demand. However, cracks are starting to appear.

In the third quarter of 2022, house price growth cooled to 6.8% year on year, with Italy and Finland recording the largest quarterly drops. S&P Global Market Intelligence projects further downsides ahead as monetary tightening in the region feeds through to consumers with a delay, given a shift away from variable toward fixed-rate mortgages.

We expect the European Central Bank to continue tightening monetary policy during the second quarter of 2023. Fiscal support and pandemic savings will help to limit defaults, and low housing supply in the largest eurozone economies also provides a support to prices. Nevertheless, we estimate that a peak-to-trough decline in eurozone house prices around the 10% mark is very likely.

Outside the eurozone, S&P Global Market Intelligence predicts that UK house prices will fall by a cumulative 9% between the fourth quarter of 2022 and mid-2024, driven by significantly higher mortgage rates as well as an evolving economic downturn.

Mainland China

Mainland China's housing market has sustained a sharp downturn since mid-2021 owing in part to deleveraging policy.

The central government rolled out deleveraging policies in August 2020 targeting property developers and their debt-fueled excess expansion. This impaired many developers' finances and business activities, including their ability to complete construction of pre-sold housing projects.

With the reopening of the economy in December 2022 and the government's policy shift to support economic recovery, including the property sector, mainland China's housing market has shown signs of mending. Construction activities and new home prices have rebounded in early 2023. The government has eased housing demand policies since late 2021, including lowering mortgage interest rates.

As the economy normalizes, the government's more expansive housing market easing policies that support both demand and supply will likely be more effective.

Other APAC markets

In South Korea, residential property prices fell by 4.7% in 2022, after strong price gains of 9.9% in 2021. The residential property sector downturn reflects the impact of rising interest rates, as the Bank of Korea tightened monetary policy seven times in 2022 with a further hike in January 2023. A key macroeconomic risk to the South Korean economy over the medium- to long-term outlook continues to be from the high level of household debt as a share of disposable income.

Such a high household debt ratio creates macroeconomic vulnerability to significant monetary policy tightening in a high inflation scenario, with Bank of Korea rate hikes since 2021 having increased financial pressures on highly leveraged households. In March 2023, the South Korean government announced a sharp reduction in official reference housing prices in order to reduce property taxes on owners, providing support to the residential property market.

In Australia, rising interest rates due to monetary policy tightening by the Reserve Bank of Australia have put increasing pressure on the residential property sector. The seasonally adjusted estimate for the number of dwellings approved in Australia fell 8.4% year over year in January 2023, with residential property prices in early 2023 down significantly compared with a year earlier in cities including Sydney, Melbourne, and Brisbane. Some Australian building companies have collapsed in the past year because of the combined impact of rising construction costs, shortages of skilled workers, and higher debt financing costs.

In contrast, in India residential property prices rose by an estimated 7% in 2022, even after moderate monetary policy tightening by the Reserve Bank of India. Residential property price rises were boosted by post-pandemic pent-up demand as well as rising construction costs. Residential property markets in New Delhi, Bangalore, and Pune were among the leaders in terms of price gains in 2022.

Sub-Saharan Africa

A housing bubble is unlikely in the sub-Saharan Africa region. Low incomes and high costs of formal housing in the sub-Saharan Africa region have led to the dominance of less-expensive housing options, such as informal settlements in urban areas.

Backlogs for formal housing remain high, with access to land, credit, and services (electricity, water, and sewerage) a significant constraint on the formal housing market. Although economies like South Africa and Nigeria enjoyed a housing market boom in 2020-21 as access to debt financing became more affordable, weak (property) home ownership rates lower the risk of contagion due to any housing market correction in the sub-Saharan Africa region.

High interest rates, lower levels of disposable income, and conservative lending practices by commercial banks will nonetheless be a drag on the sub-Saharan Africa formal housing market during 2023.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.