A Turbulent Market:

The COVID-19 pandemic pushed the global real estate market towards record numbers trending towards recession, due to a confluence of extremely low interest rates, a severe shortage of homes for sale, and shifts in household spending. But with the gradual recovery from the effects of the pandemic and the emergence of new economic challenges, the world saw significant inflation in commodity and real estate prices, alongside an increase in debt and mortgage rates. In response, central banks around the world turned to quantitative tightening to contain runaway inflation and raise lending costs. This has led to higher mortgage financing costs, which have negatively impacted real estate markets around the world in different ways. Policymakers are now watching fluctuations in real estate markets very carefully, as real estate is a main source of household wealth and a major multiplier of economic activity in any country.

Worrying Indicators

Recently, there has been widespread concern about a true crisis in the global real estate market. The main indicators pointing to that are:

1. Expectations of a housing shortage by 2030: A global real estate market crisis is looming, the signs of which have appeared in a number of countries amid global concerns about the negative impact of a housing crisis on the lives of millions of people. According to the World Bank, the housing crisis is expected to affect the lives of 1.6 billion people by 2025. The world will also need an additional 96,000 decent and affordable housing units every day to accommodate 3 billion people by 2030.

2. Rising housing costs in most countries: Data from the International Monetary Fund (IMF) shows that the cost of housing is rising faster than income in most of the world. In a study of 200 cities worldwide, it was found that 90% of those cities are not livable, as the average cost of residences is more than three times the average income. This imposes a huge financial burden on citizens, especially young people in the prime of their lives.

3. High rent prices in many countries: According to the Housing Anywhere International Rent Index by City, rising rent prices have become a main feature of many countries. In Europe, for example, rents increased for all types of housing by 14.5% in the first three months of 2022.

Meanwhile, Asia is now home to some of the most expensive and fastest-growing real estate markets in the world. Renters spend more than half of their income on housing, according to the Cost of Rent Index, which compares the average cost of a three-bedroom home in more than 50 countries. This is the crisis facing the United States, where around 11 million Americans spend more than half of their income on rent.

4. Concerns about worsening homelessness: The exorbitant rise in real estate prices, whether for ownership or rent, threatens to increase homelessness. An estimated 100 million people around the world do not have a home, a quarter of whom live in conditions harmful to their health and safety, according to the United Nations Human Settlements and Sustainable Urban Development Program (UN-Habitat). Amid rising housing costs and global inflation in the prices of goods and services, as well as declining economic growth, the burdens on those who do not own housing are increasing. This, in turn, exacerbates the phenomenon of homelessness, and threatens to leave millions of people without shelter in inhumane conditions.

5. High mortgage costs: In light of the rising cost of home ownership and the continuous rise in interest rates, mortgage rates have spiked. The average 30-year mortgage interest rate was around 6.29% in the week ending on September 22, up 6.02% from the previous week, according to the US Federal Home Loan Mortgage Corporation (Freddie Mac). The rate is much higher than the rate during the corresponding period last year, when it was 2.88%, and is the highest rate since October 2008.

This raises concerns about a global recession, for which there is evidence. In the last week of September, after the mortgage rate increase, the S&P 500 index fell to its lowest level since November 2020. The Nasdaq 100 has also fallen by about 30% this year, wiping out trillions of dollars of market value. The rise in interest rates is driving investors to reevaluate many of their actions, especially since higher interest rates means reduced future profits for real estate companies, alongside inflation and the increasing value of the dollar.

Varied Causes

Despite the global economy’s impact on the real estate market in various countries around the world, there are more detailed and specific causes that distinguish each country. These include an increase in mortgage rates, a rise or fall in demand for real estate, economic slowdown, the country’s demographic trajectory, local economic conditions, tax changes, crime rates, the quality of local services, etcetera. In the following, we review the most prominent and important factors, using some countries as models, in order to understand the disparate causes of the real estate crisis currently emerging:

1. Dwindling mortgage repayments by debt-ridden Chinese companies: Real estate companies in China have been hit by a major crisis, as the Chinese government tightens lending opportunities for the real estate sector in order to reduce debt risks. This comes following the accumulation of financial obligations on the Chinese Evergrande Group, which had an estimated $305 billion in debt it defaulted on in December 2021. For 11 months in a row, housing prices and sales have declined in China, amid weak consumer confidence in the real estate market. This has left real estate developers with a major dilemma: paying for construction.

But what has exacerbated the current real estate crisis is the refusal by tens of thousands of home buyers to pay mortgages for unfinished construction projects. Buyers are not confident in the ability of real estate companies to complete the projects. As a result, the financial situation of real estate developers has deteriorated further, amid a decline in sales and a continuous rise in mortgage rates.

Measures taken by the central government to support real estate developers, such as small interest rate cuts, have had little effect on dissuading buyers from their stances. This increases expectations of heavy losses in the Chinese economy, given that the sector accounts for around a quarter of the country’s economic activity.

2. Rising cost of living and inflation in the United Kingdom: Experts in the UK warn that housing prices in the country are likely to fall by 20% amid the current mortgage crisis. That is a logical outcome of the rising cost of living and increased borrowing costs, which have curbed a market that had flourished for years. Inflation is at its highest level in 40 years, at more than 10%. Energy bills are also expected to rise by 80% starting in October, which means more financial pressure on families. In addition to that, the Bank of England raised interest rates to 1.75% from their lowest level of 0.10% during the COVID-19 pandemic.

Most of the published data indicates that housing prices are currently increasing continuously. According to the Halifax Mortgage Lending Unit of the Lloyds Banking Group and the Nationwide Foundation, housing costs increased by 0.4% and 0.8% during this past August. But the annual rate of housing cost growth in the UK did not exceed 10% in August, which is less than 11% in July.

3. Significant increase in demand versus a shortage of supply in the United States: According to a study by Moody’s Analytics, the US is currently suffering from a shortage of housing by 1.5 million homes, which is lower than at any point in the last 30 years.

In an attempt to understand the reasons for the rise in real estate prices in the US, the Federal Reserve in the US city of Dallas points to a number of factors associated with transformations in the disposable income of citizens, supply disruptions, and the increased cost of borrowing from banks, as well as a constant rise in interest rates this year. The cost of raw materials is also rising, which has helped entrench a widespread belief that the strong rise in real estate prices today will continue. Increased expectations of strong gains from the purchase of real estate may be driving an increase in demand, despite the significant rise in housing prices. The average house currently costs $435,000.

4. Real estate shortage in Canada: Canada faces similar challenges to the US in the real estate market, in terms of the declining number of homes available for purchase. According to the Canada Mortgage and Housing Corporation (CMHC), the country needs to build 5.8 million homes by 2030 to meet the high demand for real estate. This may be a difficult task in light of the extremely high costs of building homes, the supply crisis, labor shortages, and high cost of financing.

Adding to concerns about insufficient housing supply to accommodate future growth, Canada is expected to receive 1.2 million immigrants between 2021 and 2023, according to Statistics Canada. This means more pressure on the already decreasing supply in the real estate market. Despite Canada’s declining population, demand is increasing from immigrants and investors. This is what prompted the Canadian government to impose a tax of between 15% and 20% on foreign investors who buy real estate in the province of Ontario, in an attempt to clamp down on opportunities for speculation in the real estate market and make the supply available to citizens.

5. Low demand and inflationary pressures in New Zealand: New Zealand is one of the most expensive real estate markets in the world. But with inflationary pressures and high interest rates, citizens’ ability to afford real estate has decreased, especially with the average home price reaching $741,000 this past June. This led to a sharp decline in the value of housing by 18%, escalating the real estate crisis in the country, according to data from the investment bank Goldman Sachs. The absence of young buyers in New Zealand’s property market has helped drive the country’s home ownership rate to its lowest level in 70 years, and further slowed the housing rate in the country.

Safe Investment

In general, although the global real estate market is exposed to great risk—if for varied reasons—it cannot be concluded that investing in real estate is not safe. There is a misconception among many that the latest price will last forever, but that is impossible. It is not at all likely that real estate prices will continue to rise or fall indefinitely. Going back to the laws of finance, we find that the truth is that markets that go through periods of increased or decreased prices will, over time, return to a price point that aligns with the average rate of increase over the long term.

This applies to prices in the real estate market. After periods of a rapid rise in prices or fall in value, prices return once more to the average rate of increase, which is known as reversion to the mean. That reversion will happen either quickly or gradually. Housing prices could move quickly to a point that brings them back in line with the long-term mean, or they could remain flat until they return to the mean after a while. The evidence of that is that the tensions in real estate markets in different countries around the world will not last, no matter how long it takes. They may return to the average soon, which means that property is still a safe investment. Still, it is wise for a buyer or investor to choose a time when the market is fairly stable, to avoid buying at a very high price, or selling at a low price.