Housing is playing an unusually important role in the world economy right now. In China the housing crisis promises to keep Chinese growth slow for a long time. In the UK and Europe prices and housing starts are falling adding to the economic pressure. But in the US house prices have reached new highs recently despite the run up in mortgage rates. And arguably that makes a US recession less likely.
We explored these issues in a recent webinar (link here). I am picking up the US theme in this blog. Just over a year ago we forecast that house prices would peak in 2022 and that there was a risk of a big correction. We have indeed seen significant declines in prices in Canada, Australia and Germany. And, if house prices are measured in real terms, big declines. 2022 was clearly a long-run cyclical peak.
But the US saw only a small fall in nominal prices in 2022 and then a rebound to new highs. Real prices are off slightly but it is hardly noticeable. Meanwhile, housing starts dipped in 2022 from around 1.7mn annually to 1.4mn by the end of the year and this subtracted about 1% from GDP that year. But starts have appeared to stabilize in recent months.
All this makes a US recession less likely. A fall in home-building is usually a key mover in recessions, helping to swing the economy down. But it has already happened. Meanwhile high home prices make consumer balance sheets feel strong, encouraging spending.
That said, maybe it is too soon to sound the all-clear. House price down-cycles usually unfold over 3-5 years. Moreover, 30-year mortgage rates have climbed another 1.5% in recent months, from an average of 6.44% in H1 2023 to 7.96% today. This may very well be enough, if sustained, to choke off the housing recovery for now.
On the other hand, available supply of housing remains very low. People are not selling up and moving because they would likely lose their low mortgage rate if they did. And the new home inventory/sales ratio has come down this year so home-builders don’t look too vulnerable. But surely new buyers will be put off by the high mortgage rate? Maybe. But builders are offering special low rates as incentives so the effect may not be huge.
Overall, I doubt housing is going to play a huge role in the expected US slowdown over the next year. (We expect a slowdown but not a recession). Elsewhere though, falling prices in Europe are damaging economic growth while China’s housing crisis has a lot further to run. More on these in future blogs.