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Since 2021, there have been warning signs of froth in the worldwide housing market. Similar to the US housing market, Germany's housing industry is in transition. 

The terms of trade of energy-importing economies like Germany deteriorated due to an energy crisis brought on by the conflict in Ukraine and a sharp rise in import costs. The difficulties are great because interest rate-sensitive industries like housing are negatively impacted by the tighter monetary policy required to fight rising inflation.

The immediate effects of rising interest rates are lessened in Germany and the United States due to the small percentage of variable-rate mortgages. The policy rates of central banks in Europe are lower than those in the US. While a moderate housing correction still stands as the most likely outcome, it is impossible to dismiss the possibility that a tighter-than-anticipated monetary policy could lead to a more severe price correction in Germany (and the US). 

Even nations like Spain and Italy, which did not experience a surge during the pandemic, are vulnerable to negative shocks coming from Germany due to the euro-connections. area's Due to their inability to completely recover from the 2008 housing bubble, the two nations were already weak.

Concerns about spillovers to the global economy beyond Germany or the U.S. arise from the potential for a domino effect, where buyers withdraw from international real estate in search of safety and liquidity elsewhere. 

The fragile Chinese housing market 2 also presents its own collection of problems. It suffers from overbuilding in some areas and concurrent overpricing in affluent cities, which could pose a significant danger to the domestic economy as well as the global economy. 

Housing booms end as financial issues arise

A common indicator of consumer housing affordability is the price-to-income ratio, with larger readings showing greater difficulties for buyers (Chart 2). There is evidence that affordability problems frequently follow housing booms. 

Chart 2 shows a decline in housing cost that was particularly pronounced during the pandemic.

(Click on image to enlarge)

Prior to worldwide deterioration, the United States has typically shown signs of declining affordability. 

But the United States and the rest of the world largely agreed during the pandemic boom. While the global price-to-income ratio grew at its fastest rate and by its largest amount, the U.S. price-to-income ratio hit a peak not seen since 1975. In the second quarter of 2022, worldwide indications of moderation appeared.

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