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Independent global economic researchers Capital Economics say falls in nominal house prices have been 'modest' in most developed economies and 'almost non-existent' in some others


By David Hargreaves

Rising interest rates globally brought the 2020-22 house price boom to an end, "but it’s surprising they didn’t do more damage", according to independent global economics researcher Capital Economics (CE).

In a paper titled 'Have we reached the end of the housing correction?', CE senior property economist Andrew Wishart has had a deep dive into the house market performance in: the US, Canada, the UK, Norway, Sweden, Denmark, Germany, France, Spain, Italy, Australia, and...yes...New Zealand, which gets many honourable mentions.

Spoiler alert: Wishart pretty much concludes that we have reached the end of the housing correction, with perhaps a few exceptions. But he's forecasting price gains of 7% for New Zealand in both this year and next - and that's the highest forecast among the 12 countries covered in the research.


"Falls in nominal house prices have been modest in most developed economies and almost non-existent in some others," Wishart says.

"Of course, that’s partly due to high inflation, including significant increases in pay. But even in real terms, falls in house prices have been fairly small compared to the more dramatic falls in some countries during the Global Financial Crisis (GFC)," Wishart says.

"The average mortgage rate across the countries included in this analysis increased from 2% at the start of 2021 to over 5% last year. That rise in the cost of borrowing caused demand from buyers who need a mortgage to slump. House prices have fallen in most developed economies as a result, with the largest drops in New Zealand (15%), Canada (15%) and Germany (11%). But there are also exceptions. House prices didn’t fall at all in Spain, and only declined marginally in Italy," he says.

In general, nominal house price falls have been smaller than in the GFC, Wishart says.

"Whereas then house prices dropped by an average of 8% across our sample, the peak to trough fall in 2022-23 was 5%. And as that followed the widespread house price boom in 2020-2022, house prices are on average still 20% above their 2019 level and over 40% higher in the US.

"Even in Canada, New Zealand and Germany where prices have fallen the furthest from their peak, they are significantly higher than in 2019."


The most recent data suggest that house price falls have now bottomed out in most countries, Wishart says.

"In Q3 2023, the latest quarter for which we have data for all 12 markets, only five continued to see quarter-on-quarter house price falls in nominal terms compared to 11 in Q1."

However, the picture changes substantially when high inflation in recent years is taken into account. Inflation was close to zero in 2009, whereas it was running at around 7% in 2022 and reached double figures in some countries.

"So in real terms the average fall in house prices was very similar to that in 2007-8. On this basis, most of the rise in house prices since 2020 has been reversed.

"That said, there haven’t been as many cases of dramatic falls in real house prices of over a quarter. The only country that has seen a drop of that scale is New Zealand, where real values fell by 23%," Wishart says.

He says with the mortgage rates available on new loans averaging over 5% currently compared to 2% in 2019, mortgage affordability is much worse now than it was then across advanced economies. And in the US, Canada and Australia the cost of buying a home using a mortgage is extremely high by past standards.

"We calculated the cost of typical mortgage payments on a loan for house purchase as a share of average income in our selected economies. For this we used the average mortgage rate on new loans, which should capture the cost of the most popular mortgage product whether fixed or variable rate.


"Across our sample this cost is 30% higher than the average since 2005. In 2007-10 large falls in house prices and cuts to interest rates caused affordability to improve enough for demand to recover and house prices to stop falling, as shown by the steep fall in the blue line on Chart 7.

"The surprise this time is that house prices stopped falling in most places despite mortgage costs continuing to rise throughout 2023. The upshot is that mortgaged buyers are accepting far higher mortgage payments than usual in order to buy.

"Admittedly, there are some markets where affordability is less problematic. In Italy, France, and Spain, mortgage affordability is still around its historical average, and therefore less of a drag on demand. (See Chart 8.) But in Canada, the US, and Australia, the cost of mortgage payments is around 50% above the historical average.

"So, the end of house price declines cannot be explained by improvements in mortgage affordability. In fact, at the current level of mortgage rates, house prices in many countries look unsustainable."

In summing up the position, Wishart says worsening mortgage affordability has led to steep falls in demand and housing transactions in most advanced economies. The sensitivity of buyer demand to mortgage costs varies by country, depending partly on whether there is a large rental market that provides an alternative to buying. But on the whole, given how far demand has fallen, declines in prices have been small.

"Of the few markets that have this sort of data available, only New Zealand saw a period where supply significantly outstripped demand. This helps explain the 15% peak-to-trough drop in house prices there."

So what happens now?

"While we have a good handle on where demand is likely to be weakest on the basis of affordability, whether that will mean house prices fall depends on what happens to supply," Wishart says.

"The softest outcome, which seems to be the course most housing markets are taking, is that prices rise modestly in nominal terms, with the correction coming through a further drop in real house prices.


"We expect that to be the case in New Zealand, the US, Australia, and the UK despite these being the places where house price valuations are most stretched. More plentiful supply in Canada of late means house prices there are set to drop a bit further.

"Were supply conditions to become much less supportive, these markets would be first in line for a much worse outcome, in which prices fall significantly further. This situation would most likely play out if interest rates stay at their peak for much longer and unemployment rises significantly. That is plausible if inflation proves more stubborn than expected.

"However, as things stand it is more likely that house prices in Germany, Denmark and Sweden will perform worst in 2024, due to high mortgage costs and the presence of a large rental market. That said, assuming we are on the cusp of cuts to policy rates as we and most investors expect, the falls in prices should be limited."

This story was originally published on and has been republished here with permission.