The maelstrom of COVID 19 was the heyday of home sales but the end of central banks’ fiscal stimulus packages and the rapid weakening of the economic outlook have resulted in a fast turnaround of the market. Rising interest rates, consumers’ purchasing power crumbling away and the increased probability of a recession are a combo that slows down home sales in many economies. Price increases have slowed down clearly in hot home sales hubs like Sweden (-8% since last spring), and the Swedish Central Bank expects prices to decrease further next year.
Rising interest rates are quickly hitting demand among those considering buying housing, and interest rates also plague homeowners in economies like Finland, where variable interest rates account for a large share of loans and 12-month Euribor is the most common lending rate. In Australia, Spain and the UK, variable rate loans are also relatively popular. In contrast, in the US, the interest rate risk is clearly lower, as interest rates are largely fixed 30-year rates.
The housing market has an impact on the economy through various channels
The importance of the housing market for the economy is indirectly visible through a number of channels. According to NAHB (National Association of Homebuilders), the housing market accounts for 15-18% of GDP in the US in two ways: 1) construction investments (some 3-5% of GDP) include, e.g., building construction and 2) housing consumption (12-13% of GDP) includes rents and income from housing (estimate of how much the rent for owner-occupied housing would be). Although the change in housing prices does not directly affect economic growth, it is indirectly visible in the economy through these two channels (falling prices are a negative signal for construction investment and lower the income from housing).
In addition, the change in prices is reflected in economic growth as a wealth effect. The increase in asset prices boosted consumption clearly in the US last year. At that time Bloomberg reported that the wealth effect, i.e. the rise in asset prices and its impact on consumer demand, was growing to its strongest in decades. Ownership is particularly worthwhile when stock exchange indicies and housing prices rise, but when they make a downturn, the wealth effect also turns negative, which is a signal to reduce consumption, and we are now seeing this type of turn. In times of negative real wages and high inflation, consumers' purses are tested in many respects. However, we are not yet in the same situation as in the financial crisis, because even though the rise in housing prices has slowed down and home sales quieted down in the US, the labor market is working and no increase in consumer loan defaults has been seen so far.
Also published on the subject: analyst Matias Arola's article about the Nordic real estate sector: More challenging operating environment reflected in the valuation of the Nordic real estate sector