will the bubble burst in 2023?

The real estate industry has gone through a tough place in 2022 as interest rates jump. The Vanguard Real Estate ETF (VNQ) has dropped by 28% during the year and underperformed the Dow Jones and S&P 500 indices. With interest rates set to remain at an elevated level, the sector could remain under pressure. So, will the next housing crash happen in 2023?

Next housing crash prediction

Analysts are increasingly worried about the impending collapse of the real estate market in 2023. These fears accelerated last week when the Federal Reserve delivered a relatively hawkish statement. In it, the bank warned that interest rates will continue rising in 2023.

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Other central banks like the Bank of England (BoE) and the European Union had a similar message. As a result, higher interest rates will translate to higher mortgage rates, which will affect housing demand. Already, we are seeing house prices decline in key countries like the United States, UK New Zealand, and Australia. In a report, analysts at Goldman Sachs wrote:

“ But there are reasons to think the declines could be substantial: The housing market has already fallen 7% in Canada and Sweden in just six months, for example, and by 11% in New Zealand in eight months.”

Goldman Sachs is not the only bank to predict a house crash in 2023. In a note, analysts at Morgan Stanley said that house prices will drop by more than 4% in 2023. And in a statement, analysts at Wells Fargo warned that the housing sector is worse than expected.

A 2008-type crash not possible

Most people associate a housing crash to what happened in 2008/9 when the housing bubble burst. Fortunately, as I wrote in this article, a similar situation will likely not happen in 2023. For one, market conditions are significantly better than in 2008.

At the time, the housing crash happened because of increasing subprime mortgages in the US. Banks like Lehman Brothers and Wells Fargo sold trillions worth of mortgages to people who were not in a position to pay. They then packaged these mortgages into Mortgage Backed Securities (MBS) and created Collateralised Debt Obligations (CDO). 

Therefore, with interest rates at an elevated level, more people defaulted, leading to a major collapse of the housing market. Today, subprime mortgages have declined and people can still manage to pay their mortgages.

Therefore, while home prices will continue falling in 2023, a panic that triggers a major housing crash will not happen.