Global fall in real estate prices: can we expect a general crash in 2023?

After two booming years for the real estate market, the trend seems to be reversing all over the world against the backdrop of the war in Ukraine. Rising credit rates, inflation, tense global political situations, a downturn in the real estate market is underway. From the United Kingdom to France via the United States, Sweden or China, transactions are on the decline and prices are falling. The post-pandemic real estate price boom has come to an end and a visible decline in real estate transactions has begun. So can we expect a general real estate crash in 2023?

Update on the situation of the global real estate market 

According to The Economist, Britain's leading weekly economics news magazine, the global house price crash is near. In a report on financial stability published last October, the IMF referred to a “tipping point” for global real estate. Indeed, there is a downward trend in housing prices in recent weeks. A drop was observed in several countries such as the United Kingdom, the United States, Canada, New Zealand, Germany and Sweden. In France, the price per m2 in Paris has fallen below the 10,000 euros. 


In Sweden, prices fell by 14% in one year. Indeed, the energy crisis we are going through is pushing Swedes not to to hold on investing in individual houses that are much more difficult to heat in winter than an apartment. 


In the United Kingdom, interest rates on mortgages recently exceeded 6% before falling back to around 5%. Owners and new buyers who have chosen to take out variable rate credit mortgages have found themselves stuck with rising costs. Another direct consequence of this rise in interest rates, is that real estate demand has fallen by 44% and sales by 28% in the last three months in the country. 


But that's nothing compared to China, which has seen its real estate sales drop 43% in one year. Some countries can therefore expect a moderate decline in their real estate market and others a steeper decline in the coming months. 


So, is this the sign that a general crash is looming? 


Inflation and interest rates largely responsible 

This decline in the real estate market on a global scale is due to inflation linked to the global political situation. But in Europe, it is above all, the war in Ukraine has had considerable impact, with an increase in the cost of raw materials, soaring prices of electricity, gas, oil, but also wheat. This increase in the prices of raw materials and energy, results in an increase in the costs of all the products we consume (food, heating, transport, etc.). Manufacturers pass on the increase in production costs to end consumers. Overall, the economy is slowing down. 


At the same time, central banks have increased interest rates significantly in recent months, which reduces the borrowing capacity of potential buyers in the face of  high property prices. This data reminds us of the permanent link that exists between the evolution of interest rates and its effects on the real estate market. An increase in interest rates undoubtedly reduces the granting of mortgages and blows a cold wind on the economy. As the global real estate market operates largely on loans, a sharp rise in interest rates (like we currently see) has a very significant impact on the sector. 

This trend could intensify with the threat of a possible future recession. At the moment, different scenarios are envisaged by the experts: from the bursting of a real estate bubble to a more paced correction of market influences.   


From a slowdown in the real estate market to a general crash? 

If we look at the United States, the Fed announced a reduction in its own monetary program in an attempt to stem inflation on its territory. If we look at Europe on a global scale, the ECB must deal with the rise in the price of raw materials caused by the war in Ukraine and the need to maintain the economy of the euro zone at a certain level. 


If we focus on France, nearly one in two mortgages was refused in 2022. The wear rate, which everyone has been talking about for weeks, is the main reason for these refusals. As a reminder, the usury rate is the maximum legal rate that banks are authorized to charge when granting a loan. It is set by the Banque de France at the end of each quarter for the following quarter. The wear rate is currently 3.03% for a fixed rate loan with a term of 20 years or more. But overall, credit rates are around 2% at the moment. 


The conditions for access to credit have tightened as recommendations and obligations have been imposed by the HCSF and bank interest rates have increased. Importantly, interest rates have doubled since the start of the year, leaving many future buyers on the sidelines. 


When we know that the ECB had raised its key rates by 0.5 points in December (unheard of in history!), that the Banque de France shows no sign of easing the rules for granting mortgages (maximum debt ratio at 35% / repayment period set at a maximum of 25 years) and that the cost of French 10-year debt has literally exploded in one year; access to real estate credit and property purchases does not seem as simple in 2023. 


It should be noted that even though loan rates have recently increased, they are still at an exceptionally low historic level. 


The real estate crisis of 2008/2009 in the USA, United Kingdom, Ireland and Spain which led to a financial crisis served as a lesson. Since then, banks have had to comply with more rules concerning the granting of mortgages. 


At the same time, the latest decisions taken by the FED and the ECB could lead to a further increase in mortgage rates, a drop in the number of real estate transactions...and therefore a drop in real estate prices. 


In the current state, we can anticipate a slowdown in the real estate market, but we will continue to monitor this trend closely in 2023. However, real estate remains a good long-term investment, as we have seen in the past.





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