After two years of runaway growth fuelled by low interest rates and pandemic demand shifts, the overheated housing market is finally showing signs of cooling down. Home price appreciation has slowed considerably since peaking earlier this year. The rapid cooldown has left many potential buyers and sellers wondering – what’s next for property values?
Why Is the Housing Market Cooling?
The cooling can be attributed to several key factors:
- Rising mortgage rates – Interest rates on 30-year fixed mortgages have nearly doubled over the past year, driving up monthly payments and reducing purchasing power. Higher rates decrease affordability and price out some buyers.
- Surging inflation – High inflation is impacting household budgets, forcing some to pull back on discretionary big-ticket purchases like homes. Builders are also dealing with inflated material and labour costs.
- Economic uncertainty – Concerns over a potential recession, stock market volatility, and job losses are making buyers more cautious. Sellers are also hesitant to list in an uncertain market.
- Oversupply – Inventory is starting to rise as more homeowners seek to cash out at peak values. New construction continues to add supply in many markets.
- Investor pullback – Real estate investors rushed into the market during the pandemic. With declining profit margins, many are now sitting on the side-lines.
- Post-pandemic lifestyle changes – Trends like remote work and urban exodus boosted certain markets to unsustainable levels, which are now correcting.
What Happens to Prices During a Cooling Period?
As demand softens, bidding wars cease, and supply constraints ease, the rate of home price appreciation decelerates. This is a healthy shift after the hyper-charged pandemic market.
However, experts do not anticipate an all-out housing crash or foreclosure crisis like 2008. Price corrections are likely to be moderate, with values plateauing or declining slightly in 2023 before resuming modest growth.
The most overvalued markets that saw the biggest pandemic booms will experience the greatest slowing. U.S. markets as a whole remain undersupplied, which should prevent large declines.
Longer-Term Outlook
In the longer-term beyond 2023, demographics and persistent housing shortages suggest home values will continue appreciating above the rate of inflation.
Millennials are ageing into peak home-buying years. Immigration and other population growth outpaces new construction. Remote work flexibility allows more relocations to affordable regions.
While the breakneck price hikes of 2020-2022 are over, the housing market remains on fundamentally firm ground. Property values should hold their value well compared to more volatile assets during a high inflationary period.
