Housing prices in most countries peaked from late 2021 to 2022 and are reversing sharply lower with the end of an ultra-low interest rate regime, which had driven prices steadily higher over the past decade. Price gains were particularly strong in major developed countries during the pandemic on the back of demand surge — many either bought or upgraded to larger houses as they worked from home, enabled by ample liquidity, higher savings and record-low mortgage rates. Even taking into account recent declines, prices are still mostly above pre-pandemic levels (see Chart 1).
Housing prices are falling around the world — a casualty of steep interest rate hikes over the past one year. We do not think it will trigger another global financial crisis (GFC), as it did in 2007/08. For starters, there has been a noticeable slowdown in housing construction after the GFC and, in many countries including the US, there is a supply shortage. Demand has outpaced supply, which should keep a floor to how far prices will drop, though falling affordability remains a key issue. That said, it is a risk that bears close monitoring, as we believe the worst for the property sector is still to come. A steeper-than-expected property price collapse could raise default risks and, in the worst case, trigger a systemic liquidity crunch.
