After rising for five years, growth in global house prices slowed in 2018 with sharp corrections in some countries, including Australia and Sweden.

House price growth reflects an economy’s health. If unemployment is low, real wages growing, debt levels modest and interest rates are expected to stay down, it is hard to be too concerned about the housing market outlook. However, if prices rise without these fundamentals in place, the trend may be unsustainable.

And if prices fall, the impact depends on the cause. A housing oversupply may hit construction sharply but only modestly affect property values and consumer spending. However, a slowdown resulting from falling demand caused by slow growth, rising unemployment or higher interest rates could exacerbate the economic weakness particularly if it feeds into the banking sector.

House prices in Sweden and Australia have fallen after years of sharp rises because of increased supply rather than weakening macro fundamentals.

Australia’s fall also reflects lower foreign demand and tightened lending standards, but low unemployment means loan arrears remain low and an expected cut in central-bank interest rates should allow the slowdown to remain orderly.

In Sweden, consumer confidence deteriorated but broader growth remains relatively robust. Housing construction has fallen sharply, but other employment growth remains steady with real wages rising and central-bank rates negative.

Other countries have seen more gradual falls that follow interest-rates rises. Norway seems at the end of its rate cycle, so increases in debt-service costs are limited. New Zealand’s central bank has now cut rates – but because of a weakening economy that may now dampen the property market.

Canada’s house price growth slowed sharply because of taxes on foreign purchases and tighter mortgage lending regulations. Prices reached historic highs with debt servicing at record levels too. The strong job market has so far limited mortgage arrears but as interest rates started rising in mid-2017, Canada may face financial challenges from mid-2019.

South Korea’s economy has slowed, with debt-service costs rising – but because house prices did not rise sharply over recent years the market may avoid a sharp correction.

Housebuilding slowed almost everywhere in 2018. Sweden’s fell most but Canada, Australia and the US all saw falls. The reduced supply could support prices, but, as many of these countries face a housing shortage, construction may recover once prices find a floor.

And interest rates should be supportive for housing markets. We expect the global aggregate policy rate to fall by the end of 2020 – though central banks have other tools to limit property lending, from capping loan-to-value ceilings to countercyclical capital buffers.

Cooling housing markets aid financial stability but how a slowdown feeds into the wider economy varies by country. Sweden’s price fall has had a limited impact on household spending and employment. Australia may be similar. But rising mortgage costs in Canada and weaker growth in New Zealand – and both in South Korea – could put prices there under pressure. However, the US had no bubble and thus has less excess to shed if the economy turns.

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