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Has the worldwide decline in the housing market come to an end?

The housing markets in several major economies are showing surprising resilience despite expectations of a significant downturn. Australia has experienced three consecutive months of rising house prices, while in the United States, a widely watched index of housing values has increased by 1.6% since its low in January. Housebuilders’ share prices have outperformed the overall stock market. The property market in the euro area appears steady, with analysts suggesting that the negative drag on GDP growth from the housing sector will be marginal. This contrasts with previous predictions of a severe housing slump.

During the pandemic, global house prices experienced their fastest rate of increase ever recorded. Although there has been a recent correction, with prices now 3% below their peak (or 8-10% lower after adjusting for inflation), they remain significantly higher than in 2019. Many millennials and Gen-Zers, who hoped for a crash to enable them to enter the housing market, may be disappointed by the current situation.

However, unlike previous housing slumps, there are no signs of financial contagion resulting from lower house prices. Banks seem unconcerned about a surge in bad mortgages, as they have fewer risky loans and have avoided subprime securities. Mortgage arrears in New Zealand are above pre-pandemic levels but remain relatively low. Delinquencies on single-family mortgages in the United States are at a post-financial-crisis low, while in Canada, the share of mortgages in arrears is close to an all-time low.

The weaker housing investment is having a small drag on economic growth, but it has not led to a decline in the number of builders or negatively affected the labor market. Construction employment in South Korea has dropped slightly from its pandemic highs but is now showing signs of growth again. Similarly, in the United States, construction employment is rising in line with the long-run average, and construction vacancies in New Zealand are above historical levels.

Three factors contribute to the unexpected resilience of the housing market in the rich world: migration, household finances, and shifting preferences. Migration is reaching record levels in many countries, supporting housing demand. Strong household finances, particularly among wealthier households, have driven the housing boom, while locked-in low interest rates and accumulated excess savings from reduced consumption during the pandemic have cushioned the impact of higher mortgage rates.

Preferences have also played a role, with people desiring home offices and larger living spaces. The average household size has shrunk in many countries, indicating a decreased willingness to share living spaces. In an environment of higher inflation, physical assets like property are seen as better stores of value in real currency. These factors suggest that housing demand may remain higher than pre-pandemic levels, limiting potential price declines.

While the possibility of a delayed housing bust exists, indicators suggest that the worst may be over. Consumer confidence is rising, excess savings are still significant, housing shortages persist, and the demand for home offices and additional amenities remains strong. The housing market’s cooling may be more of a gradual slowdown rather than a sharp crash.