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How bad will the global housing market crash be?

Credit: Getty.

January 30, 2023 - 1:00pm

Since the last global property bubble in 2006-07 and the financial crisis that resulted from it, central banks have held interest rates close to zero. While few have paid attention, this has led to a reflation of many of the same property bubbles that caused the disaster to begin with. A perusal of the excellent global house price index published by The Economist shows that, since 2008, most housing markets around the world are either registering record valuations or are close to previous records.

Inflation-adjusted house prices across the Western world are reaching their previous peaks, but with interest rates climbing that looks set to change. Over the Atlantic, American house prices have been falling as Canada endures its first annual decline in over a decade. In Europe, British house prices have been falling for four months while the former governor of the Swedish central bank is warning that his country faces a ‚Äúday of reckoning‚ÄĚ.

Does this mean that the world is facing down another 2008-style housing and financial crisis? Quite possibly. But to see if this is a possibility, we need to check a few other metrics. First and foremost is how dependent our economies are on the housing market. House price changes do not hit the economy directly. Rather, the impact on the economy manifests itself as investment; as home-building dries up, builders are then laid off and, through this channel, spending declines.

To see how reliant our economies are on booming housing markets, it is worth looking at investment in dwellings as a percentage of total investment. The chart below compares the levels at the height of the last housing bubble in 2006 with 2021.

As the chart shows, our economies have become extremely reliant on homebuilding again. Considering that homebuilding made up for 26% of total investment in 2006, the difference isn’t all that great from today, which is 24%.

Then there is the threat this poses to the financial system. In 2008, we saw an enormous financial crisis as mortgage-holders could no longer afford to repay their loans in the face of rising interest rates. As these loans soured, the public was made aware of a previously arcane financial product called the ‚Äėmortgage-backed security‚Äô that packaged multiple mortgages together and sold them to investors, banks, and pension funds.

Looking at the data on mortgage-backed securities in the United States today, it paints a grim picture. Mortgage-backed securities held by commercial banks have risen from around $990 billion in 2009 to around $2.7 trillion today ‚ÄĒ in other words, a roughly threefold increase. While we may have expected banks to have learned their lessons the last time around, it appears that low interest rates have pursued them to forgive and forget and once again take the plunge into the market for mortgage-backed securities.

Since October, it has been reported that mortgage defaults are already taking place in the highest risk category of borrower. Meanwhile risk metrics show the potential for a mass default event rising and rising. While the looming housing collapse may not be as bad as the previous edition, it nevertheless looks like it could be quite painful. Considering that the rest of the economy is now much weaker than it was last time around, it could produce similar overall results.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Steven Campbell
Steven Campbell
1 year ago

With global governments rushing to indemnify renters from paying rent and rentals getting more scarce watch for for government intervention to make housing more affordable. Regrettably, this was the formula for the housing crisis in 2008, proving once again that any lesson learned by government, no matter how bad the outcome is worth repeating.

Steven Campbell
Steven Campbell
1 year ago

With global governments rushing to indemnify renters from paying rent and rentals getting more scarce watch for for government intervention to make housing more affordable. Regrettably, this was the formula for the housing crisis in 2008, proving once again that any lesson learned by government, no matter how bad the outcome is worth repeating.

Chris W
Chris W
1 year ago

It could be that the author of the article above is correct. But the information needs to be completed for full understanding.

Presumably the investment numbers he quotes are for banks. Banks are investing about 25% of total investment in houses. What makes up the existing 75%? If the western world has less manufacturing, what else can banks put their money into? In the UK new businesses are tending towards one-man-band enterprises and investment by banks will be relatively small. Personal loans are moving away from banks because of high interest rates and the difficulty in dealing with banks is well-known. Investors who don’t have the title ‘bank’ are proliferating.

So, are banks still relevant?

Elliott Bjorn
Elliott Bjorn
1 year ago
Reply to  Chris W

The banks have been loaning to Corporations to buy back their stock – and to Leverage Pensions, and stock Margin loans, and every crazy kind of financial insanity.

Almost NONE of it ‘Productive Loans’

A productive loan is loaning a Million ¬£ to a guy to buy a big earth mover where a market for earth moving it exists – it makes the economy money that could never have been made without the ability to borrow to buy this equipment. Loaning on home equity so they can go on vacation trips, or to buy Bit-Coin – that is unproductive loans. That is where we are now –

Elliott Bjorn
Elliott Bjorn
1 year ago
Reply to  Chris W

The banks have been loaning to Corporations to buy back their stock – and to Leverage Pensions, and stock Margin loans, and every crazy kind of financial insanity.

Almost NONE of it ‘Productive Loans’

A productive loan is loaning a Million ¬£ to a guy to buy a big earth mover where a market for earth moving it exists – it makes the economy money that could never have been made without the ability to borrow to buy this equipment. Loaning on home equity so they can go on vacation trips, or to buy Bit-Coin – that is unproductive loans. That is where we are now –

Chris W
Chris W
1 year ago

It could be that the author of the article above is correct. But the information needs to be completed for full understanding.

Presumably the investment numbers he quotes are for banks. Banks are investing about 25% of total investment in houses. What makes up the existing 75%? If the western world has less manufacturing, what else can banks put their money into? In the UK new businesses are tending towards one-man-band enterprises and investment by banks will be relatively small. Personal loans are moving away from banks because of high interest rates and the difficulty in dealing with banks is well-known. Investors who don’t have the title ‘bank’ are proliferating.

So, are banks still relevant?

Prashant Kotak
Prashant Kotak
1 year ago

Not agreeing with this analysis. In fact, the stock market crash of autumn 2008 was preceded by a ratchet starting 12 months earlier where money availability dried up across the board, followed by a year long Wile-e-coyote scenario where the housing market and other bubbles peddled on, suspended in mid-air. Then, just before any housing market crash could take place, central banks cut interest rates very aggressively, to almost zirp levels almost immediately after the crash. They did this, not to save people from repossessions, but to reflate the banks, who were stuffed, by allowing an interest rate differential banks could profit from, for example to the higher fixed rates many people were stuck on. But the side effect was that while wage rises ground to a halt, many people who might otherwise have faced livelihood loss followed by repossession in the ensuing recession, managed to survive by taking a cut in living standards.

The point about a general high inflation environment is that house prices don’t in fact go down that much, because they can’t. There is a floor, decided by the cost of materials needed to build a new house, which are all ramping. A crash below that would imply that the new home builders would be forced to sell below cost, which they are not going to do. Seen this movie before: in the period 1977 to 1980, the house my parents bought in the east end of London had doubled in three years when they moved to west London, in a situation where inflation was running at double digits all those years.

Elliott Bjorn
Elliott Bjorn
1 year ago
Reply to  Prashant Kotak

Lots of wrong things in your theories. Real estate happens to be my bag…and London real estate and USA.

The 2008 thing was the Sub Prime loans – not happening now. I remember those subprimes – what a amazing thing they were – I would get a ‘No Doc’ and run amok – but the very best were the nothing down, 110% mortgages with no income verification! And the very best the:

”What is a NINJA Loan?A NINJA Loan (No Income, No Job, and No Assets Loan) is a term used to describe a loan that‚Äôs been extended to a borrower with little or no attempt by the lender to verify certain attributes that predict the applicant‚Äôs ability to repay. It is contrary to most conventional loans, which require applicants to provide substantial proof that they earn sufficient income or possess adequate collateral to qualify for the loan.”

haha! These were real! They were for ‘Equity‘ to allow those who had been ‘excluded’ from the house market to get on – they were insane and destroyed the market –

The 1980 thing there was almost no national debt – and all debts were sane for the most part. The cause was the Oil Embargo and massive inflation it triggered – then the Central Banks raised interest to 20%…so recession and no one could afford to buy, and many had to sell. Nothing like now which looks similar, (although now coincidentally oil is high, and inflation mad – but for totally different reasons, ours are too much money printed – 1980 was supply shock)

This now is from QE, which went from 2009 till last year. QE is Bank Reserves, (it is not M2), to push loans- and keeping interest zero. NO previous case had been created by QE because it was invented For the GFC (2008 crash) (and was insane to do so) and monetary heroin and zero interest, and a 40% Fiscal M2 increase during covid insanity.This is a new thing.

By the way I exited from my UK real estate just this winter – 4 months fall in value, and soon I am sure January will be falling prices too.

If you like UK real estate the very best youtube show is ‘‘Moving Home With Charlie” Really – watch it, he is Great fun – and is saying a 35% drop in 2023. Cannot recommend him enough – if you are buying or selling in UK – check him out.

Elliott Bjorn
Elliott Bjorn
1 year ago
Reply to  Prashant Kotak

Lots of wrong things in your theories. Real estate happens to be my bag…and London real estate and USA.

The 2008 thing was the Sub Prime loans – not happening now. I remember those subprimes – what a amazing thing they were – I would get a ‘No Doc’ and run amok – but the very best were the nothing down, 110% mortgages with no income verification! And the very best the:

”What is a NINJA Loan?A NINJA Loan (No Income, No Job, and No Assets Loan) is a term used to describe a loan that‚Äôs been extended to a borrower with little or no attempt by the lender to verify certain attributes that predict the applicant‚Äôs ability to repay. It is contrary to most conventional loans, which require applicants to provide substantial proof that they earn sufficient income or possess adequate collateral to qualify for the loan.”

haha! These were real! They were for ‘Equity‘ to allow those who had been ‘excluded’ from the house market to get on – they were insane and destroyed the market –

The 1980 thing there was almost no national debt – and all debts were sane for the most part. The cause was the Oil Embargo and massive inflation it triggered – then the Central Banks raised interest to 20%…so recession and no one could afford to buy, and many had to sell. Nothing like now which looks similar, (although now coincidentally oil is high, and inflation mad – but for totally different reasons, ours are too much money printed – 1980 was supply shock)

This now is from QE, which went from 2009 till last year. QE is Bank Reserves, (it is not M2), to push loans- and keeping interest zero. NO previous case had been created by QE because it was invented For the GFC (2008 crash) (and was insane to do so) and monetary heroin and zero interest, and a 40% Fiscal M2 increase during covid insanity.This is a new thing.

By the way I exited from my UK real estate just this winter – 4 months fall in value, and soon I am sure January will be falling prices too.

If you like UK real estate the very best youtube show is ‘‘Moving Home With Charlie” Really – watch it, he is Great fun – and is saying a 35% drop in 2023. Cannot recommend him enough – if you are buying or selling in UK – check him out.

Prashant Kotak
Prashant Kotak
1 year ago

Not agreeing with this analysis. In fact, the stock market crash of autumn 2008 was preceded by a ratchet starting 12 months earlier where money availability dried up across the board, followed by a year long Wile-e-coyote scenario where the housing market and other bubbles peddled on, suspended in mid-air. Then, just before any housing market crash could take place, central banks cut interest rates very aggressively, to almost zirp levels almost immediately after the crash. They did this, not to save people from repossessions, but to reflate the banks, who were stuffed, by allowing an interest rate differential banks could profit from, for example to the higher fixed rates many people were stuck on. But the side effect was that while wage rises ground to a halt, many people who might otherwise have faced livelihood loss followed by repossession in the ensuing recession, managed to survive by taking a cut in living standards.

The point about a general high inflation environment is that house prices don’t in fact go down that much, because they can’t. There is a floor, decided by the cost of materials needed to build a new house, which are all ramping. A crash below that would imply that the new home builders would be forced to sell below cost, which they are not going to do. Seen this movie before: in the period 1977 to 1980, the house my parents bought in the east end of London had doubled in three years when they moved to west London, in a situation where inflation was running at double digits all those years.

Brian Villanueva
Brian Villanueva
1 year ago

I spent a few years in the mortgage and real estate business in America, both before and after 2008. Compared to then, the risk of default in mortgage backed securities (at least in America) is vastly lower today. Interest rates have ben so low for so long that fixed rate mortgages now dominate today’s MBS instruments — no rate adjustments mean less default risk. Also, underwriting standards were effectively nonexistent from 2004-2007 (stated income loans? really?). Again, vastly different today.
I agree that the real estate market is overvalued and will likely face a decline. The big picture is straightforward: rising interest rates = bigger house payments = less ability to purchase = fewer buyers at a given price = lower prices.. Although the price declines will likely be mostly in real terms only, as economy-wide inflation may well catch up to much of the nominal home price increases of the last decade.

Last edited 1 year ago by Brian Villanueva
Prashant Kotak
Prashant Kotak
1 year ago

I agree, there won’t be much of a drop in absolute money, rather inflation will eat away at value in real terms. Which is bad for those young people who have bought recently because they will be stuck in negative equity for years, but good for most of the younger generations, because it will finally allow incomes to catch up with house prices, assuming wages rise too (for which there is fragmented evidence this is happening at least to some extent).

Last edited 1 year ago by Prashant Kotak
Prashant Kotak
Prashant Kotak
1 year ago

I agree, there won’t be much of a drop in absolute money, rather inflation will eat away at value in real terms. Which is bad for those young people who have bought recently because they will be stuck in negative equity for years, but good for most of the younger generations, because it will finally allow incomes to catch up with house prices, assuming wages rise too (for which there is fragmented evidence this is happening at least to some extent).

Last edited 1 year ago by Prashant Kotak
Brian Villanueva
Brian Villanueva
1 year ago

I spent a few years in the mortgage and real estate business in America, both before and after 2008. Compared to then, the risk of default in mortgage backed securities (at least in America) is vastly lower today. Interest rates have ben so low for so long that fixed rate mortgages now dominate today’s MBS instruments — no rate adjustments mean less default risk. Also, underwriting standards were effectively nonexistent from 2004-2007 (stated income loans? really?). Again, vastly different today.
I agree that the real estate market is overvalued and will likely face a decline. The big picture is straightforward: rising interest rates = bigger house payments = less ability to purchase = fewer buyers at a given price = lower prices.. Although the price declines will likely be mostly in real terms only, as economy-wide inflation may well catch up to much of the nominal home price increases of the last decade.

Last edited 1 year ago by Brian Villanueva
Elliott Bjorn
Elliott Bjorn
1 year ago

Rather silly article

What about China property? They are the biggest elephant in the Estate Agents office…….

And it is very weird РI think it is so crazy, Yet the prices will crash Рbut that is crazy. With the inflation as it is if prices just went sideways they would be dropping in real terms 10% + a year. 4 years and they would have dropped 50% in Real Terms if inflation continues. Now add actual $ and £ Price drop too Рand it is nuts.

Buy now for ¬£100,000. It drops 35% in 2 years, you get ¬£65,000 for it then. But inflation has removed 25% from that ‘Real Value’ on top – so you get ¬£ 46,000 in real terms… Not good.

Instead put your money in Treasuries , 3% (six months bonds), in 2 years buy it for ¬£65, and you got it for ¬£59….That is my plan.

Billy Bob
Billy Bob
1 year ago
Reply to  Elliott Bjorn

The author won’t say anything bad about China, he’s only interested in predicting the downfall of the west

Billy Bob
Billy Bob
1 year ago
Reply to  Elliott Bjorn

The author won’t say anything bad about China, he’s only interested in predicting the downfall of the west

Elliott Bjorn
Elliott Bjorn
1 year ago

Rather silly article

What about China property? They are the biggest elephant in the Estate Agents office…….

And it is very weird РI think it is so crazy, Yet the prices will crash Рbut that is crazy. With the inflation as it is if prices just went sideways they would be dropping in real terms 10% + a year. 4 years and they would have dropped 50% in Real Terms if inflation continues. Now add actual $ and £ Price drop too Рand it is nuts.

Buy now for ¬£100,000. It drops 35% in 2 years, you get ¬£65,000 for it then. But inflation has removed 25% from that ‘Real Value’ on top – so you get ¬£ 46,000 in real terms… Not good.

Instead put your money in Treasuries , 3% (six months bonds), in 2 years buy it for ¬£65, and you got it for ¬£59….That is my plan.