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Real estate crisis, Will it eliminate global growth in 2023?

 The real estate sector in different parts of the world faces challenges that could decisively affect global economic growth. In the worst-case scenario, it could fall by 0.3% in 2023, affected by a decline in the real estate market, lower investments in the sector and tighter credit terms.

After years of prosperity, the international property market shows similarities to the situation that preceded the major financial crisis of 2007-2008, according to the Swiss newspaper Le Temps.

Real estate crisis, Will it eliminate global growth in 2023?

In the United States, mortgage interest rates are approaching the 7% threshold, more than doubling in less than a year, while in Great Britain they increased sharply to 4% - a level close to the 2003 level - compared with 2.5% in the eurozone, which has doubled since April and May, according to Oxford Economics, a consultancy.

In China, this year's real estate sector has experienced an unprecedented crisis since the late 1990s, with most Chinese real estate developers struggling to refinance their local bonds, amid a decline in housing prices over the past 11 months.

In the 10 years following the global financial crisis, China's domestic debt-to-GDP ratio rose from about 150% to more than 250%, thus increasing the debt of households, local governments, real estate developers and government companies faster, creating a precarious dynamic, with major real estate developers incurring enormous debt.

Real Estate Challenges:

According to Oxford Economics chief economist Adam Slater in a recent study, higher mortgage interest rates were factors that contributed to the decline in confidence of a generation of homeowners who believed interest rates would remain low forever.

The International Monetary Fund (IMF) expects it to fall to 2.7% next year, its lowest level since 2001, excluding periods of financial crisis and pandemic.

According to Oxford Economics, this figure may fall to 0.3% under 3 factors: a 10% decline in house prices, 10% housing investment and 5 times less tightening credit terms than was observed during the 2008 financial crisis.

If only the first two risks are achieved, growth will reach 0.7%, and growth will reach 1.3% if the decline in house prices becomes a reality in 22 of the world's major economies. However, the UK consulting firm expects the global economy to grow by 1.5% in 2023.

Real estate prices actually fall:

Prices began to fall across the Atlantic, and the highly followed Keys Schiller index fell between June and July for the first time since 2012 and after two years of remarkable monthly increases.

Meanwhile, the index measured by the US mortgage guarantee organization Freddie Mac has declined in the last three months, the first since 2011.

In total, 9 out of 18 advanced economy markets analyzed by Oxford Economics are experiencing a decline in real estate prices at its estimate.

According to several academic studies, a 10% decline in house prices will lead to a 0.4 to 0.5% contraction in household consumption and spending in advanced economies.

In the United States, the real estate developer's confidence index was the lowest since 2012, having fallen further compared to the year preceding the 2008 crisis. As a result, existing home sales shrank by about 25% in one year.

Two factors that will be critical in the coming period in the real estate market are the extent of high unemployment (a factor that will be determined if homeowners are forced to sell at lower prices), and the degree to which households withstand the fluctuation of mortgage interest rates or fixed rates that will be set at much higher levels.


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