A housing market crash is a sudden and sharp fall in the value of properties on the market. Property owners try to sell their properties at any price, while buyers stop coming forward.
In a tense economic climate, can we expect a property crash in 2023?
In this article:
- How does a housing market crash unfold?
- Towards a housing market crash in 2023?
- What should you do if a housing market crash occurs?
How does a housing market crash work?
Although property crashes are not a frequent occurrence in modern economic history (in Europe and around the world), there have been enough of them to identify recurring causes, signs and consequences.
A housing market crash is always the logical consequence of a property bubble.
What is a property bubble?
By definition, a property bubble occurs when property prices rise excessively and rapidly, often above their real value, due to increased speculation.
The causes of the housing market crash
There are several causes, both internal and external, that can trigger a housing market collapse:
- Internal causes: come mainly from the banks, through money printing and/or lending.
- External causes: these are linked to sudden events, such as a war or a pandemic.
When we talk about an ‘internal’ cause, we are talking about a cause related to our economy, in other words something that has been going on for several years and could have been foreseen. External causes, due to their sudden nature, are very often black swans.
Internal causes of an accident
Internal causes are predictable and can be anticipated insofar as an important actor in the economy is often at the origin: the banks.
Banks can cause a housing market crash through money printing, increased lending and low interest rates.
When a bank grants a loan, it creates money ex-nihilo. Money does not exist at the moment: it is created to finance your liquidity needs.
The more loans are granted, the more money is created and the more money is available on the housing market. The more this money is available to households and businesses, the more prices rise because their ability to buy real estate increases.
Here is a simple example:
You have 100,000 dollars set aside, your neighbour Gérard has 110,000 dollars and your neighbour Paul has 120,000 dollars.
If a house is for sale at 95,000 dollars, you can offer 100,000 dollars to buy it, Gérard can afford to offer 105,000 dollars and Paul 110,000 dollars.
Do you follow?
Due to their investment capacity, they can artificially increase the price of the property to make sure they buy it.
It works the same way with bank loans.
If you use bank leverage (the loan) to borrow EUR 100,000, you increase your capacity to EUR 200,000, while your neighbours remain at their respective investment capacities. You can then make a higher offer and buy the property in question for 120,000 dollars.
This example can be applied to any market! The more money is available in a certain market, the higher the prices of goods and services in that market.
What about interest rates? Ease of access to loans and credit is to a large extent linked to the positioning of interest rates. Low rates encourage people to take out loans to access this ‘easy money’ because repayment will be cheap.
If tens of thousands of households become property investors in a short period of time, it is understandable why house prices in Europe are bound to rise.
External causes of a crash
External causes of a property crash are difficult to predict and occur even more suddenly than internal ones, with even more devastating consequences because few, if any, are prepared.
As for wars, everyone will have understood why they cause housing market (and the economy in general) to collapse. The security and peace of mind that your home once offered you is called into question.
This means that your property is deprived of its primary function: to shelter and protect you.
Consequently, when it no longer performs this function and everyone is aware of this, it is obvious that its value collapses, because no one is willing to pay the price.
Pandemics are a different matter. The one we experienced in 2020 is a good example. Your property continues to perform its function perfectly well, so it is a general feeling of doubt, which is not just about the property.
We are questioning our investments and our overall portfolio in the face of an uncontrolled situation: during and after this pandemic, will the properties we know still be a good investment? Will the world have changed and will we have to live in different housing?
As can be seen, the external causes are macroeconomic and not limited to the housing market sector.
Signs of a housing market crash
The signs of a housing market crash are manifold. If they do not all occur at the same time, there is nothing serious; they occur frequently, independently of each other.
On the other hand, if these signs accumulate at the same time, the probability of a property crash increases.
These signs are :
- Abundant liquidity in the market
Banks start printing money on a large scale and access to money is easier.
- Interest rate cuts
Banks grant credit much more easily. Interest rates are low and, to be profitable and generate margins, banks are forced to lend more than they normally would.
- Rapid increase in real estate prices in recent years
House and flat prices are rising sharply: whereas previously the annual rate of increase was 1-2%, we are now beginning to see increases of 5, 7 or even 10% in a single year.
This phenomenon is all the more common in urban areas and large cities, where the people who earn the most and/or benefit the most from money-printing policies are concentrated.
- Increasing rental stock
If house purchase prices rise, another index will also rise: the average rent.
When rents rise, what do investors with considerable investment capacity do? They take out a mortgage, buy a new house to increase their wealth and make it immediately available on the rental market to generate new income!
The calculation is simple: low risk and guaranteed income (for both investor and bank!) It is obvious that everyone rushes into real estate and unwittingly participates in the acceleration of the speculative bubble.
- Acceleration of sales
Property owners realised huge capital gains in just a few years. Appeased by this increase and eager to collect higher and higher incomes, more and more owners put their properties on the market for sale.
As long as demand is greater than or equal to supply, there is no problem. If demand falls below supply, prices start to stagnate and then fall.
In a property market that has been soaring for several years, the first slowdown and signs of a downturn are triggering panic among homeowners: what if the peak has already passed? What if buyers are losing interest en masse?
In this context of fear of not realising the maximum possible capital gain, all homeowners start wanting to sell, making supply even greater than demand and causing prices to fall.
Falling prices induce buyers to withdraw: if the property market is falling sharply, they might as well wait until it stabilises before buying a property at a better price. This reaction makes demand even weaker, again reinforcing the price drop.
In the housing market market, this situation is similar to the so-called ‘death spiral‘ in the stock markets.
The consequences of the crash: the property crisis taking hold
All affected houses lose a huge amount of value.
Investors are sceptical about the recovery of the housing market sector. It usually takes several years before values recover.
Historically, after a collapse, the areas most affected are the ones that have the hardest time recovering.
Towards a housing market crash in 2023?
Taking all the above factors into account, we can legitimately ask the question: is a housing market crash in Europe possible in 2023? Let’s take a look at the french market as an example.
History of housing market in 21st century France
To better understand the future, we need to analyse the past. Let’s take a look at the latest property market crises in Paris, France and elsewhere.
- Housing market crash linked to the Second World War
As an external cause, the war logically dragged down house prices.
- The housing market crash of the 90s
Between 1985 and 1989, prices soared in the Paris region and the south-east (+85% increase in prices in just a few years). This sharp rise is attributed to speculation by property dealers, who found real estate a highly effective way of making a profit.
In 1991, the Gulf War began and calmed everyone’s ardour. Demand began to decline and the property bubble burst: this was the start of a long fall in prices until 1996, when the market corrected by around 40% to bring prices back into line with the economic context.
- The US housing market crash of the 2000s
This is undoubtedly the most famous of all: the infamous US property bubble that ended in the sub-prime crisis.
Although the violence experienced across the Atlantic was not as severe in France and Europe, the French property market nonetheless fell by 3% and 7% in 2008 and 2009 alone, the sharpest decline since the middle of the 20th century.
The property bubble of 2021
Was there a housing market crash in 2021? No.
2021 was a very special year for the housing market market, not least because of the consequences of the anti-crisis measures introduced by the government.
Indeed, the repeated freezes have slowed down housing market activity considerably, affecting both demand and supply. At a time like this, nobody wanted to sell and nobody wanted to buy. For the first time there was a supply and demand crisis!
Business had just restarted when another black swan appeared on the housing market market: for the first time we were witnessing a housing market bubble everywhere except in the cities.
The 2020 crisis has disrupted the world of work, with the widespread democratisation of partial or even total teleworking. Citizens are no longer forced to live in big cities, which are less attractive and above all much more expensive than pleasant provincial towns.
The classic pattern of the housing market bubble is reversed: workers flee the cities and houses in the provinces, especially those in seaside resorts, are taken by storm! A housing market bubble began for these houses.
Interestingly, despite the large-scale departure of many from the capital, Paris, still economically attractive, has seen only a small decline in property prices.
By the end of 2021, prices will have briefly stabilised.
At the beginning of 2022, the increase resumes, but this time much more slowly: the housing market bubble begins to deflate.
During 2022, prices tended to stagnate or even fall in many areas of Europe. Rising mortgage interest rates do not make it any easier for investors to buy property.
Property crisis underway?
Will we therefore see a collapse of housing market in 2023?
Property prices are growing more slowly, but in Paris they are still rising at the same rate.
Prices in the main provincial cities (Bordeaux, Marseille, Lyon, Lille, etc.) have skyrocketed after the first confinements.
Beach resorts and cities near the sea and the ocean are also oversubscribed, despite a slowdown since the end of 2022.
It is hard to find a city with more than 10,000 inhabitants where prices are falling Can it be said that we are in the midst of a bubble?
Let us examine the list of elements inherent to the formation of a housing market bubble that we compiled at the beginning of the article.
Market prices? After a rapid upward trend, prices are now stable in the big cities and slightly declining in the provinces.
Abundant liquidity? Let’s talk about rates: since 2020 the FED (US Federal Reserve) has printed almost 30% of the dollars in circulation since the beginning of its history.
How difficult is it to obtain a mortgage? In 2023, getting a mortgage is an obstacle course: it is impossible to get a loan without a solid track record and a substantial deposit.
Interest rates? Although interest rates have been very low in recent years, they have risen sharply since the second quarter of 2022, reaching levels not seen in decades.
Conclusion: 2 out of 4 conditions have been met
While the Fed and ECB were thought to be nervous about keeping interest rates high, both central banks seem to be holding their ground. For the time being, the housing market is stagnating (except in Paris) despite the poor conditions. it is difficult to say whether keeping interest rates high could cause the market to collapse to date (April 2023) it seems to be holding up
The economic policies of the coming months will therefore be decisive for the future of the housing market.
What should you do in the event of a housing market crash?
There are several possible reactions to a crash.
We are talking here about a rental property investor (who may be an individual) who invests his or her money in property with the aim of making a profit.
Obviously, the owner-occupier of a property can be totally impervious to a fall in market prices if he has no intention of selling his property.
To avoid the worst: taking precautions
The best cure is prevention! Even if the market is performing well, think of the worst. When you buy a property, you need to plan for potential crises.
You can easily estimate the impact of a crash on your real estate by answering the following questions:
- Is my property ideally located ?
- Is it close to a tourist attraction, a business park, etc.?
- Is the accommodation decent and well equipped?
- Could I live in this property one day?
- Do you yourself like this property and will you be able to live there if you lose your main residence?
If you answer yes to these 3 questions, then the impact of a property crash will be absorbed more quickly, because over and above the financial aspect, your property has assets that are totally uncorrelated with market prices and unchangeable: whatever the price, it serves a purpose.
Don't panic and be ready for the ascent
The bubble has just burst, the crash has devastated the market and your property has lost most of its value.
You have two options:
- Sell now
- Hold on to your property in the hope of a recovery
Before making your choice, it is essential to analyse your property in detail and consider various market signals.
If your property meets the above criteria (good location, good amenities, etc.), there is no doubt: keep it, because it is bound to increase in value over time.
If your property does not meet any of these criteria, then you have to play the game more finely by analysing a second essential criterion that stems from the following question: where do we stand with the bursting of the bubble?
If the demand is still there and you believe that the market may fall further because the wrong signals are still there, then you need to sell as quickly as possible. You will get rid of a property that may not return to its price level for a long time.
Once the storm has passed and the entire property market has been shaken by the collapse, you can proceed to buy an equivalent property or, conversely, invest in a property more in line with these criteria to minimise its discount during a potential next property bubble.
Take advantage of these difficult times to invest in your current home: renovate, extend, etc. It is a good time to carry out work to prepare your property for the next upturn!
It’s impossible to make predictions when it comes to the economy. The unpredictable nature of housing market crashes doesn’t make your job any easier. Bear in mind that all markets, including the property market, are merely a succession of upward and downward fluctuations. As a result, everything is temporary! Not every property is destined to remain close to zero, even if it has suffered the worst property crash.
I’m passionate about saving and investing. I modestly try to offer you simple, and sometimes not so simple, solutions to beat inflation.