This article is from the Australian Property Journal archive
AS the housing downturns becomes global, the world’s GDP growth could drop as low as 0.3% in 2023.
According to modelling by Oxford Economics, the world at large is teetering on the edge of broad property market downturn, which in the worst of their three scenarios could see global GDP grow reach 0.3% next year, with the baseline forecast at 1.5%.
The baseline forecast anticipates annual prices rises of 15% in Q1 2022 reducing to a 1% decline by Q2 2023, based on a sample of 20 major global economies.
With also 12 of the 20 economies anticipated to see a housing downturn by the first quarter of next year, as defined by at least two consecutive quarters of falling house prices.
This is one of the key factors that implies GDP per capita growth of just 0.5% in 2023, nearing the IMF definition of a global recession.
The housing market could impact on global GDP through reduced consumer spending and household wealth as a result of falling house prices.
If global house prices fell 10% below Oxford Economics baseline forecast, GDP would be cut by 0.2% in 2023.
Falling house prices are also historically connected with diminishing residential investments, which would also negatively impact GDP.
While a slow down for residential investment would likely be lower than during the GFC, a drop of around 10% on the baseline forecast could be possible and would reduce world GDP in 2023 by another 0.6%.
The market downturn could also result in a tightening of credit conditions, as higher losses are anticipated for lenders and collateral effects.
If credit conditions were to tighten by even one-fifth of the scale witness during the GFC, global GDP would be reduced by another 0.5% in 2023.
The worst case scenario modelled, wherein GDP growth sits at just 0.3%, GDP would actually decline on an annual basis temporarily in Q3 2023.
A major point of difference when comparing the current economic landscape to the GFC, is the housing market in China.
While most major economies from 2008 through to 2010 saw house prices drop by around 10%, China report a flatlining of house prices, before strong growth as a result of strong stimulus policies.
This time around China is seeing a trajectory more on track with other major economies, downturn and all. Particularly in terms of construction, as same shortages and supply chain constraints are at play.
“So rather than offsetting the impact on world output of a global housing downturn, as was the case after the GFC, the Chinese housing sector is contributing to the slump,” said Adam Slater, lead economist at Oxford Economics.
“Moreover, given the real estate sector’s large footprint in China’s GDP, there are substantial potential negative spillovers from a Chinese housing slowdown, both regionally and globally.”
The most vulnerable economies currently, according to the report, are Canada, Taiwan, Finland and New Zealand. Based housing investment as a share of GDP sitting above the average of the sample countries.
On the opposite end, economies less at risk are Japan, Italy and the US, where housing investment as a share of GDP is below the average and well below peak pre-GFC levels, with Japan also sitting lower than the 10-year average.
Australia sits relatively middle of the pack in these terms, with housing investment as a share of GDP at 5.7 currently, at 0.0 for the 10-year average and at -1.3 below the pre pre-GFC peak.
This compared to say Japan, where current shares are at 3.5, compared to the 10-year average are at -0.2 and compared to pre-GFC are at 1.5.
“Our scenarios above assume a blanket 10% decline in residential investment across economies. But in fact, it is likely that residential investment trends in a deeper housing downturn will vary across economies – as they did during the GFC. This is because the different economies start from very different places in terms of the initial conditions of their house building sectors,” concluded Slater.
