Housing booms are over as prices fall

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Housing booms across many advanced economies are coming to a halt due to rising mortgage rates and weak economic growth prospects, according to Moody’s analysis.

“Slowing home sales and a moderation of house price appreciation, if not outright corrections, are now likely in most markets where house prices appreciated rapidly in 2021 and earlier this year.

“Although we do not envision disorderly downturns similar to those during the global financial crisis, housing activity will slow, with prices normalising toward levels more consistent with economic fundamentals,” Moody’s said.

It argues the speed and degree of adjustments will depend on macroeconomic and housing-specific factors such as mortgage market structures, housing supply conditions and demand drivers such as demographics.

“The cooling of housing markets will improve affordability, which has worsened significantly over the last two years. It will also reduce financial stability risks.”

And housing markets across countries have differing sensitivities to rising mortgage rates.

“House price corrections may be significant in some markets, while other markets may experience sustained zero-to-low nominal price growth that erodes real house values over time.

“Next year, we expect house prices to fall by larger amounts in the UK, the US and Germany, with more minimal declines or gains in Portugal, Ireland, Italy, and France.

Moody’s said housing markets with more variable-rate or short-term fixed-rate borrowing are at higher risk of a correction.

“In markets such as the UK, where there is a preponderance of mortgages that reset as interest rates rise, current homeowners will face particular challenges from rising housing costs over the next one to three years.

“In some markets, rising mortgage rates will not only curtail demand, but they will also increase supply as some current homeowners will look to sell properties they can no longer afford.”

While home affordability will improve, it will remain stretched for the next two to three years, according to analysis.

“In a number of countries, housing affordability is worse than just before the global financial crisis.

“Even in markets with declining house prices, higher borrowing costs and tighter financial conditions will limit affordability.”