Is the global property market bubble about to burst?

Last year was tough on stock markets as share prices crashed in the US and beyond, yet the sell-off didn’t spread to the property market . Now, all eyes are focused on where property prices go next . If they do crash, this could inflict more damage than last year’s share price meltdown , making people feel a lot poorer. It could be about to happen, so hold tight. There are plenty of reasons why house prices could go into meltdown. A dozen years of near-zero interest rates have pushed prices to record highs, while stretching affordability to the max. Buyers could afford those dizzying prices when money was cheap, but that’s no longer the case, as the US Federal Reserve and other central banks continue to increase interest rates in a battle against inflation that is far from won. The energy shock, cost-of-living crisis and ballooning debts are piling on the pressure. If the world slips into recession, that won’t help either. In some countries the crash is already here. Swedish house prices fell for nine consecutive months last year and Nordea bank predicts a total peak-to-trough drop of as much as 20 per cent. Some say it could be more. The slide is one of the fastest in the world and brings back uncomfortable memories of the 1990s property crash that spilled into financial markets and forced the Swedish government to take over banks that were on the brink of default, says Eva Sun-Wai, fund manager at M&G Investments. Sweden is sending out a “major warning sign” to the rest of the world, she says. “Other economies are battling many of the same global factors affecting Sweden, namely soaring energy bills, falling real wages and a worsening economic outlook.” One reason Sweden was the first to fall was because most homeowners have variable-rate mortgages, and saw their monthly payments increase sharply. The UK looks ripe for a housing bust, given the country’s many economic troubles and overpriced housing stock following years of boom, but has been saved by the high number of fixed-rate mortgages. However, fixes don’t last for ever and when they mature, owners could face a payment shock. Lloyds estimates that UK house prices will fall 7 per cent this year. Japanese bank Nomura predicts a 20 per cent crash. UK house prices actually rose by 1.9 per cent in the year to January, according to lender Halifax, but are now down 4.2 per cent from their August peak, says Kim Kinnaird, director of Halifax Mortgages. “That trend is likely to continue as higher borrowing costs lead to reduced demand from buyers.” In Australia, prices fell 7.2 per cent in the year to January, the biggest and fastest decline since 1980, according to CoreLogic HVI. New Zealand prices fell 13.3 per cent, Reinz Index calculates. Yet in Europe, declines have so far been small. In the US, home prices increased 4 per cent in 2022, according to the National Association of Realtors, although in San Francisco, home of many struggling US tech companies, prices fell 21 per cent (but still average a hefty $1.38 million). Global prime residential markets experienced a year of two halves in 2022, says Paul Tastevin, director and head of world research at property agent Savills. ____________ “Capital values rose by an average of 3.2 per cent across the 30 cities we monitor in 2022, with the second half of the year contributing only 0.7 per cent as the deteriorating economic situation and higher interest rate environment took effect.” There were bright spots, though, with prices in Miami and Dubai rising 25.4 per cent and 12.4 per cent, respectively, over the year. “These markets are still relatively competitively priced by global standards, the low cost of living, tax regime and warmer climates attracting international and domestic buyers,” Mr Tastevin says. Prices in global centres Singapore and New York rose more than 6 per cent as they attracted inflows of high-net-worth individuals setting up businesses, he adds. Some cities felt the global economic turbulence more than others, as rising interest rates hit Sydney particularly hard. “Hong Kong’s lingering pandemic-related restrictions continued to hamper its prime residential markets and prices fell by 8.5 per cent. However, it remains the most expensive market in the world,” Mr Tastevin says. Savills expect prime residential prices to also grow this year but only by 0.5 per cent. Less glamorous markets may not do as well. “The rarefied nature of prime residential, coupled with a general lack of stock in many cities, will prevent a sharper slowdown in city hotspots,” he adds. Prices will retreat but it will be far from uniform, says Kate Everett-Allen, head of global residential research at Knight Frank. Its figures showed that Dubai cemented its position as a second home destination for the wealthy, boosted by numerous visa initiatives, with prices up an impressive 44.2 per cent last year. Prices of sun and ski resorts rose due to hybrid working. For example, in Aspen, Colorado, prices rose 27.6 per cent. Riyadh (25 per cent), Tokyo (22.8 per cent) and Miami (21.6 per cent) also posted impressive growth figures. At the other end of the scale, prices in Wellington crashed 23.7 per cent, while another New Zealand city, Auckland, fell 19 per cent. Frankfurt (10.6 per cent), Buenos Aires (9.8 per cent), Stockholm (7.7 per cent) and Vancouver (7.4 per cent) also ended 2022 well down. Ms Everett-Allen says high-net-worth individuals still see property as the safest asset class, which will protect prime prices, but mainstream markets could struggle. “Where prices go now will depend on local factors, from economic activity and unemployment levels, to existing supply and the proportion of leveraged households in each market.” She says the million-dollar question is the future direction of interest rates. “If inflation has peaked, interest-rate cuts may be on the horizon in the second half of 2023, bolstering sentiment.” Optimism on that front is now sliding as inflation proves sticky. In the US, it fell less than expected in January to 6.4 per cent, while it was higher in the eurozone at 8.5 per cent and 10.1 per cent in the UK. Heigo Protten, real estate expert at GlobalPropertyGuide.com, says if the US Federal Reserve continues to push up interest rates, higher borrowing costs could force property prices down. He is concerned. “We do not see a so-called soft landing happening this year.” Mr Protten expects US interest rates to stay relatively high with a profound effect on the world economy and a possible “severe negative scenario”. “Global markets will see a cool down in prices and overall demand definitely in the first six months of the year and, depending on the actions of central banks, prices might drop throughout the year.” “The winners will be the countries offering good infrastructure and a healthy business and tax climate.” In a downturn, the stock market is always the first to crash. Traders can dump stock in seconds, while house-price transactions are measured in months. That time lag is over. Will house prices crash? We are about to find out.

Is the global property market bubble about to burst?

Higher borrowing costs and record-high prices have led to reduced demand from homebuyers