The pandemic-induced housing frenzy is starting to cool down, as central banks in developed nations look to raise interest rates in an effort to dampen soaring inflation and sidestep the possibility of a global recession. 

The move by many central banks to raise interest rates, faster and more aggressively than ever before, follows after years of the economic downturn caused by the COVID-19 pandemic. 

Throughout months of economic inactivity, countries - developed and underdeveloped - kick-started their economies with government-backed stimulus aid packages, and lowered interest rates to a zero percentile. 

While lowering the cost of borrowing helped many to control personal debt and loan paybacks throughout an uncertain economic period, the sudden turnaround resulted in a housing boom that would cause real estate prices to soar near new extremes. 

The property boom that resulted in depleted inventory and skyrocketing property prices is slowly but surely coming down, a much-needed sigh of relief for those in the residential property management sector. 

The stark change in direction of house prices is influenced by a handful of factors, which in the past managed to help predict future guidance of the market. This time, things are different, as central banks work aggressively to raise interest rates, as inflation takes a toll on many consumers, eating away at their earnings and savings. 

It has taken a lot of sacrifices, and money to get where we are now. The effects will be lasting and could leave a stark reminder on the global real estate market for years to come. 

Frothy markets have never been this dull, and it’s left many real estate brokers and property experts wondering what the road to recovery will look like. 

Some predict that a total collapse could see property values, and real estate prices plummet in the next few years, as the real estate bubble nears an inflection point. Another argument is that property prices will substantially decrease over time, but with the worrying side effect that property values will be brought down alongside it. 

Regardless of which side of the fence you may be on, there’s a strong indication that recovery could be longer, and slower than many anticipated. 

Several factors could make it possible for the global property market to experience a major - slow and long - downturn in the years to come. Shrinking economic activity within the marketplace as interest rates increase inflationary conditions and a sinking sentiment related to real estate investment. 

Moreover, other factors have also contributed in some regard to the growing issues that are currently facing the global real estate market. 

For starters, the supply and inventory of housing have been a major problem for many markets, even long before the economic cycle started shifting. 

In some developed economies, including the U.S., Canada, the United Kingdom, and New Zealand, there’s been a significant decrease in the amount of available new houses to purchase throughout the home buying frenzy. 

The skyrocketing demand meant that more people in the market and less demand to fulfill their needs managed to see buckle prices even more. Now that most of the most are showing signs of waning, inventory levels could start building traction again, but could take another few months, or even a year before it’s able to hit pre-pandemic levels. 

According to economic analysts, some estimate that New Zealand is most at risk in terms of the current housing problem, as the country has the highest risk of price correction among 19 OECD nations. 

The cost of construction has also been a major headwind for the markets that experienced the post-pandemic purchase mania. 

Major supply chain disruptions around the world meant that some markets were unable to receive the necessary materials to start or complete any construction projects. This comes even after the seemingly endless time construction work was halted due to pandemic-related restrictions. 

At the start of the year, geopolitical tension between Russia and Ukraine only worsened an already tight supply chain, as many raw materials needed in the construction industry are either shipped from or passed through this region. Then there was China’s six-week-long ‘Zero COVID’ lockdown, which shut down ports and other major production facilities. 

Coupled with rising transportation costs, and a tight labor market, the construction industry started to unravel itself, causing house prices only to increase further. 

Builder sentiment has come down to its lowest figures since the spring of 2020, falling into negative territories in early August. The construction of single-family homes was down 15.7% from a year ago in the United States. 

In the UK, construction activity has also dwindled throughout most of the summer months with the headline construction PMI sinking to 48.9 in July, a downgrade from June’s 52.6, the lowest recording since May 2020, Reuters reported.

In other parts of North America, major labor shortages have also largely contributed to the growing issue. In Canada, a shortage of truck drivers, the long and complicated process of immigration and settling in Canada, and other illegal operational activities by trucking companies have made conditions on the housing front even worse. 

In the United States, the American Trucking Association (ATA) noted that America has a shortage of more than 80,000 truck drivers in 2021, by 2030, the shortage could double to 160,000. 

Over the pond in Europe, housing prices have also increased significantly during the first quarter of the year, with the average house price now sitting 10.5% higher than the same period last year as reported by figures from the European Commission. 

Further estimates indicate that the average home in the Eurozone is overvalued by 15%, and up by 60% in some European countries. Only three countries have seen house prices come down significantly between 2010 and 2022, including Greece (23%, Italy (10%), and Cyprus (8%).

Inactivity in the local market, and even more stringent economic performance have meant that house prices have been unable to see a substantial drive in recent years, even well before the pandemic took hold of the continent's domestic economy. 

Further east, in China, the real estate market is seen reporting its 11th consecutive month of price declines, as the nation is rapidly heading towards a housing market bust. Investors are swiftly pulling out of the local market, as confidence starts to sink lower, causing more turmoil that could soon be felt in the near term. 

The country has seen major developer defaults in recent years, as slowing economic activity caused by stringent lockdown regulations has brought the entire industry to a halt for several weeks on end, even as COVID started to wane throughout most of the world. 

Debts held by major developers are now dangerously spreading, causing a knock-on effect, as many have stopped paying their suppliers, leading to some halting payment for employees or even causing major lay-offs. The point of concern here is that construction makes up a vital part of the country’s economy and performance. Cut out a major driver of economic activity, and there’s a slight chance we might feel this knock-on effect soon hitting our doors back home. 

The small hot pocket of shining real estate communities around the world is slowly starting to dwindle further into the abyss. 

Although home prices have stalled, and sales have slightly come down from their all-time high, it’s not necessarily to say that it will help affordability in the near term. 

In several real estate markets prices have already come down significantly. In the U.S., home sales fell nearly 6%, as the 30-year fixed mortgage rate rose from 3.22% in January to 5.81% in June. 

Median house prices have also fallen in New Zealand by 1.8% from a year earlier, the first decrease in more than 11 years. Over in the UK, average property prices are down 1.3% in some of the major markets across the country. 

Even with the slight decrease in prices, there’s still a chance that many buyers and investors will first hold out before jumping into the real estate market. 

The fact that some central banks have been raising interest rates back to back means that the cost of borrowing or taking out a mortgage has gotten more expensive, even for households or investors that make above minimum wage as the high cost of living puts more pressure on their wallets. 

Additionally, home prices will most likely stabilize, somewhat higher than many anticipated, as ongoing labor shortages and supply chain bottlenecks persist. 

While real estate inventory may increase by several percentile points in the coming years, it could still be far off from pre-pandemic figures. 

Those markets that are severely sensitive to changes in economic cycles could feel the impact of higher mortgage rates a lot quicker as central banks look to get control over the soaring cost of living. 

With many buyers and investors putting their appetite for real estate purchasing aside, for now at least, the next chapter in the property market could look somewhat different than what it did in the post-COVID era. 

Higher housing prices won’t last forever, but we can expect the current conditions to stick a bit longer before completely fading. What we could see here is higher prices, coupled with high interest rates that have the potential to completely create pull back in the market. 

This is both good and bad, as the long term effects could mean that the market will dive headfirst towards correction territory, a downturn property broker and economic experts are trying to avoid as much as possible. 

The bottom line is, depending on which side of the water you may be on, the housing market may have slightly missed heading straight for correction. While it’s clear that broader challenges in the market may persist - for now at least - the road to recovery and a potentially booming real estate market will be slow and long, even as buyer and investor sentiment changes alongside improving macroeconomic conditions.