The rapid growth in US home prices will soon grind to a halt, and higher borrowing costs raise the risk of the boom turning to a bust, according to consultancy Capital Economics.
Global property markets — which have boomed during the last decade of low interest rates — are now coming under pressure, as central banks tighten monetary policy in an effort to cool inflation. CapEcon now expects gains to US home prices to slow to zero, according to a Monday note from its senior economic adviser, Vicky Redwood.
House prices in the US have risen about 38% since February 2020, before the onset of the pandemic, according to the Case-Shiller Home Price Index. The shift to remote work helped fuel demand, helped by low borrowing costs.
In other parts of the world, home prices will drop, CapEcon predicts. The leading economics consultancy said they would fall by between 5% and 20% in New Zealand, Australia, Canada, Sweden, the UK and Norway. Redwood pointed to central banks’ monetary tightening as a key factor.
“Interest rates may rise further than we expect — in which case, price falls would spread to other countries, including the US,” she said.
The CapEcon note was published just as traders ramped up their expectations for US interest-rate rises in the wake of Friday’s red-hot inflation data.
A week ago, traders expected the Fed to hike interest rates to 3% by February. But as of Tuesday, they expect rates to hit more than 3.75% by that date, according to Bloomberg data. Mortgage approvals in the US have already started to fall sharply as the Fed’s interest-rate rises — both actual and expected — have pushed up bond yields and borrowing costs.
Applications fell at a 52% annualized rate in the three months to May, data out last week showed. That amounted to a “meltdown,” according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“The chance a short period of clear declines in prices is increasing, primarily because new home inventory has shot higher,” he wrote in a note last week.
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