Published on December 18th, 2022.

No one has a crystal ball and we can’t be certain what the future holds for any investment asset. Even with hours of research, the best algorithms and the most skilled analysts, there’s always the potential for something completely unexpected.

Like a global pandemic.

The last few years have looked completely different to what was projected before the outbreak of Covid-19, and there is always the potential for something new and unaccounted for to come along.

Even so, it makes sense to look to the future to at least provide some guidance as to the impact on our finances. It might not be perfect, but it’s the best we’ve got.

This is particularly true for the housing market. For many people, buying a home is the single largest purchase they’re ever going to make. It makes sense to really want to get it right. It also takes many years of saving and planning, which is why looking as far into the future as possible is a good idea.

Sure, it might work out differently than you’d expected, but having a plan in place at least means you're taking steps in the right direction, regardless of the actual outcome.

So what is the property market looking like it’s going to do over the next few years?

1 Year

It’s probably not going to come as a shock that the property market is expected to soften over the next year. After a period of record low interest rates, we’ve seen a large increase in the average mortgage after four subsequent 0.75 percentage point hikes from the Fed as they tackle sky-high inflation.

According to data from Freddie Mac, the average interest rate on a 30 year fixed mortgage is currently 7.08%. Just one year ago, that same average was under 3%. That’s a massive difference and it is going to have a major impact on first time home buyers or would-be movers.

For example, a 30 year mortgage of $300,000 at a rate of 2.98% would result in a monthly repayment of $1,262. That same mortgage at the current average rate of 7.08% would mean an increase of $750 per month to $2,012.

That’s an extra $750 per month at a time when budgets are already stretched and pay rises are hard to come by.

With all that as a backdrop it’s no surprise that Goldman Sachs are projecting property prices to fall 5 to 10% over the next 12 months in the United States.

3 Years

That same research from Goldman Sachs is expecting the property market to bottom out in late 2023. A rapid turnaround isn’t expected, with projections showing prices leveling off and remaining relatively flat until mid 2024.

This aligns with the Fed chairman Jerome Powells speech after the most recent interest rate hike. Powell suggested that the interest rate cycle is likely to last longer than had originally been anticipated, peaking just under 5% at the end of 2023.

This also goes along with much of the guidance being given by public companies. The layoffs in the tech sector in particular are becoming very widespread, however this is expected to improve their bottom line and position them well for future growth.

We can expect to see this change shake out over the next few months, but it would stand to reason that it would stabilize towards the middle of next year.

We can expect the housing market to follow a similar trend. While rates continue to risk there will be pressure on house prices as mortgages become more expensive over time. As this goes on and it appears that we’re coming close to the end of the tightening cycle, home buyers are likely to hold off on their purchases, further slowing the market.

If mortgages are looking very expensive, but they’re expected to come back down over the next 6 to 12 months, would you wait? Many probably will.

Into 2024 and 2025, research house Capital Economics is predicting a gradual rebound of house prices. We aren’t likely to see the ‘hockey stick’ growth that was experienced during the pandemic years, but values are likely to creep up towards the end of the period.

5 Years

Looking forward five years is challenging. It’s far enough away that there are a million different unexpected events that could occur, derailing our expectations on what the economy and housing market is likely to do.

With that said, there are always experts who are happy to make a long term forecast. Overall, the long term outlook is positive.

Chief economist for the National Association of Realtors Lawrence Yun believes we are likely to see total price growth across the country of between 15% - 25% over the next five years. As mentioned earlier, this is likely to be in the form of a drop over the coming year, a leveling out into 2024 and then a subsequent period of relatively strong growth.

Bankrate chief financial analyst Greg McBride is in agreement. He believes that the US property market is likely to provide an average annual return of mid to low single digits over the next five years.

Long term we know that property generally provides consistent long term returns above the rate of inflation. It’s never a straight line, but the longer the time frame the more sure we can be about the general direction of travel, and with real estate, that’s historically been up.

Falls off a high base

It’s important to keep in mind that the falls that are expected over the next 1 to 2 years are coming off a high base. Goldman Sachs projections show the bottom of the housing market in March 2024, with the market coming back down to the level last seen around December 2021.

So overall, the growth over this five or ten year period is likely to still be very good. The main issue impacting housing affordability isn’t going to be the changes in the value of properties, it will be the increased cost for the mortgages required to buy them.

What future home buyers can do to prepare

So we’re likely to see the hot housing market slow down a bit, but mortgages are going to get more expensive at the same time. That leaves potential home buyers stuck. Those who’d been dutifully saving for their down payment might now find that the property that they had in mind is out of reach, as the mortgage has just added $500+ to their bottom line.

It might mean that time lines need to get stretched out and that down payment figure needs to go up.

Really, there’s only two ways to improve that situation. Save more money or get better investment returns on it. Now obviously it goes without saying that if you’re considering investing the funds for your down payment, you need to have a long enough timeframe for that to make sense.

If you’re planning on buying in the next 12 months, cash is king. If you’ve got 3 to 5 years, or more, investing might be worth a look.

Even so, you don’t want to be taking crazy risks. It’s for a home after all. For investors like you, we created our AI-powered Portfolio Protection. It’s like an insurance policy for your investments.

Every week our AI analyzes your portfolio and assesses its sensitivity to various types of risk such as interest rate risk, market risk and even oil risk. It then automatically implements sophisticated hedging strategies which aim to protect the downside when markets get volatile.

It’s like having a personal hedge fund in your pocket, and we’ve made it available for everyone.

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