Residential property is the world’s biggest asset class. It has an estimated value of USD 100trn–120trn, up to 50% greater than current annual world GDP. Moreover, it is a highly leveraged asset class with outstanding residential loans of about USD 30trn. Given the magnitude of these figures, swings in the housing market can have repercussions for the economy that affect the business cycle.
Academic research suggests that sharp declines in housing market dynamics are a good indicator of coming recessions. For example, nine of the last 11 US recessions were preceded by a plunge in housing investment.
Our analysis doesn't point to an impending global housing slump. But a deteriorating property market is likely to be a source of vulnerability for some nations, and, globally, the housing market appears to be slowing.
* The upward trend in global house prices, a cumulative 15% in real terms since 2012, appears to be nearing an end. Dynamics in most housing markets worldwide have been slowing in recent quarters. In a sample of 29 countries, average growth in inflation-adjusted house prices fell from its eight-year peak of 3.5% in mid-2017 to less than 1% at the end of last year.
* We can distinguish between negative and positive housing market dynamics based on current house price growth and changes in building permits. The first group, markets with negative dynamics, is characterized by real house price declines and a negative trend in building activity. Australia, Canada, the United Arab Emirates, Israel, and Sweden form part of this group. In these countries the housing market is starting to act as a drag on the economy.
* The second group, markets with positive dynamics, is defined by real house price increases and stable or increasing numbers of building permits. The housing market in the countries in this group is supporting household wealth and the economy, thanks to continued ample financial liquidity and/or a shortage of housing supply in urban centers. This group consists of China, Germany, Spain, Ireland, Poland, and Singapore. In aggregate, this housing slowdown is not yet sharp enough to trigger a broad economic downturn, at least in the short term. Conversely, housing is unlikely to prop up economic growth. The renewed fall in interest rates may offer some relief to over-indebted households, but it is unlikely to prolong the housing market cycle as long as economic uncertainty persists.