The world’s hottest housing market is facing a painful reset

All over the world, rising borrowing costs are putting pressure on homebuyers and landlords alike.

From Sydney to Stockholm to Seattle, buyers are holding back as central banks raise interest rates at the fastest pace in decades, sending home prices down. Meanwhile, millions of people who borrowed cheaply to buy homes during the pandemic are facing higher payments as loans reset.

A rapid slowdown in the real estate sector – a major source of family wealth – threatens to exacerbate the global economic slowdown. While the recession so far is nowhere near the levels of the 2008 financial crisis, how the downturn occurs is a key variable for central bankers who want to rein in inflation without hurting consumer confidence and triggering a deep recession.

Already, buttery markets such as Australia and Canada are facing a double-dip in house prices, and economists believe the global downturn is just beginning.

“We will observe a simultaneous global slowdown in the housing market in 2023 and 2024,” said Hideaki Hirata of Hosei University, a former Bank of Japan economist and co-author of the IMF paper on global house prices. He warns that the full effect of this year’s large interest rate increases will take some time to wind down on households.

“Sellers often overlook signs of diminishing demand,” he said.

High mortgage costs have affected economies in multiple ways. Households with loans tighten their belts, while rising mortgage payments are discouraging potential buyers from entering the market, affecting property prices and development.

The slowdown is a stark turnaround from a boom fueled by central banks’ concessional financing policies in the years after the financial crisis, and then exacerbated by the pandemic that has prompted people to seek larger spaces and friendly homes to work remotely. Now, many people who have paid record rates are facing loans due to reset completely higher with rising inflation and possible recession.

“Young families who have borrowed in their lifetimes have not seen a sharp rise in interest rates at a time when their real inflation-adjusted wages are falling,” said Rob Subaraman, head of global markets research at Nomura Holdings Inc.. This may come as a shock to them.”

variable risk

The exposure of borrowers to higher rates varies significantly by country. In the United States, for example, most buyers rely on fixed rate home loans for up to 30 years. On average, adjustable rate mortgages represented about 7 percent of conventional loans in the past five years. By contrast, other countries usually have fixed-rate loans of at least a year, or variable-rate mortgages that align closely with official interest rates.

Australia, Spain, the United Kingdom and Canada had the highest concentration of variable rate loans as a share of new assets in 2020, according to a May report from credit rating agency Fitch.

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Other countries have a large proportion of mortgages imminently resetting: in New Zealand, for example, about 55 per cent of the outstanding value of residential mortgages is either a floating rate or a fixed rate that needs to be renewed in the year ending July. 2023.

New Zealand, where prices have soared nearly 30 per cent in 2021 alone, is a spoiled child of the housing boom — and its crash. The central bank has raised interest rates seven times in the past 10 months, and house prices fell 11 percent in July from their November peak last year, according to the Real Estate Institute of New Zealand. Economists predict that they may eventually fall by as much as 20 percent.

Fimke Burger, a 33-year-old insurance case manager, purchased a home in the Wellington area in March 2021 for NZ$825,000 (US$504,000). In the months that followed, the value of her property soared to NZ$1 million, according to home appraisal websites. Those gains have evaporated. Her two-bedroom semi-detached property is now valued for the same amount I paid for it.

“I definitely feel as if there has been a decline in my personal financial well-being,” said Burger, who must refinance her mortgage in the next 12 months. While she is confident she can handle the increase in interest rates, it will still hurt.

Economic Impact

New Zealand, like most of the developed world’s economies, is weathering a housing slowdown so far. Balance sheets and household savings are strong, labor markets are booming and lending standards have tightened since the mid-2000s boom that sparked the financial crisis — meaning a series of defaults is unlikely.

Many homeowners are still sitting on a lot of real estate stock from years of high prices, and in some frenetic areas, lower values ​​may allow buyers to enter the market.

“Given that the housing affordability crisis is very serious in many major economies, cooling home prices could have some positive effects,” said Kwan Ok Lee, a housing specialist at the National University of Singapore.

However, economists remain nervous. If paper losses for homebuyers like Burger turn into more physical declines for households, banks and developers, it could slow the global economy and the International Monetary Fund has warned it is teetering on the brink of recession.

“If central banks tighten too much, the potential for a soft landing diminishes,” said Neeraj Shah of Bloomberg Economics. “House prices could fall faster, exacerbating and prolonging the recession.”

In some countries, governments have already stepped in to help hard-pressed consumers cope with rapidly escalating repayments. In South Korea – one of the first economies in the Asia-Pacific region to start raising interest rates – policymakers recently agreed to spend more than 400 billion won (US$290 million) in money to help reduce households’ share of variable rate mortgages. .

And in Poland, where monthly payments to some borrowers doubled as interest rates rose, the government intervened earlier this year to allow Poles to suspend payments for up to eight months. The move wiped out the profits of major banks after the industry was forced to book about 13 billion zlotys (US$2.78 billion) in provisions.

China is dealing with an escalating real estate crisis linked to a wave of developer defaults and borrowers withholding mortgage payments for unbuilt homes. In other countries, ripples began to spread as well.

In Sweden, once one of Europe’s hottest markets, house prices have fallen about 8 percent since the spring, and most economists are now forecasting a 15 percent drop. Higher interest rates are also putting pressure on real estate companies that have borrowed heavily in bond markets to fund their operations, leaving investors increasingly concerned about their ability to refinance that debt.

Prices are also accelerating in the UK. Bloomberg’s analysis has shown that home values ​​are flat or declining in nearly half of London’s boroughs. HSBC Holdings Plc has warned that the UK is on the verge of a “housing slump” and demand is likely to drop by 20 per cent over the next year.

Some 1.8 million UK borrowers are due to be refinanced next year. Most vulnerable are first-time buyers who bought homes as prices soared during the stamp tax exemption introduced in summer 2020 to boost the market during the pandemic. Those who hold steady in the short term face much higher payments at a time when real wages are falling at a record pace and the cost of living is rising.

While the US has lower risks from resetting mortgages, the increase in borrowing costs in recent months has pushed rate-slashing buyers to more flexible loans that carry cheaper interest rates. The share of adjustable-rate mortgages in loan applications in July jumped to a 15-year high, according to data from Zillow Group Inc.

Goldman Sachs Group Inc. expects US national prices stabilize in 2023, although there are already signs of a more rapid decline in certain areas. Sellers are slashing prices in areas of a pandemic boom that have attracted remote workers and seen some of the biggest gains in recent years, while home builders compete with glutted inventory they can’t sell.

Prepare for pain

In Australia and Canada – two of the most bubbly markets in the world – economists predict a marked crisis.

While stress testing requirements for most Canadian borrowers before taking out a mortgage make large-scale defaults unlikely, a round of belt tightening that could be felt across the economy looks increasingly certain. Variable-rate mortgages accounted for nearly 60 percent of all new home loans at the height of the country’s mortgage frenzy earlier this year.

Of the nearly half a trillion Canadian dollars in variable mortgage debt outstanding, about a third have seen their monthly payments rise in line with the central bank’s benchmark rate, according to research from the National Bank of Canada. Combined with things like lines of credit and upcoming fixed-rate mortgages to renew, these increased interest payments could collectively cut 0.65 percent of Canadians’ disposable collective income over the next three years, the research shows.

“We are in danger of seeing a material slowdown in spending activity,” said Robert Cavic, an economist at Bank of Montreal. “We are not expecting a technical recession, but we are very close.”

Alarm bells may be sounding loudest in Australia, where house prices in August posted their biggest monthly drop in nearly four decades. While households that have secured cash so far have shown resilience in the face of higher interest rates, the vulnerability will come next year, with billions of fixed mortgage loans emerging at record low interest rates to refinance. In Australia, term loans tend to be relatively short of two to three years.

That would hurt homeowners like Sindhuja Vetcha, a 30-year-old architect who dipped her toe into the Sydney property market last May, hoping interest rates would remain at record low levels. But with prices for everything from petrol to food soaring, loan payments for her two-bedroom apartment in western Sydney are beginning to rise rapidly. It’s already paying A$260 ($178) a month more for just 40 per cent of the loan which was at variable intervals, and rates are expected to go up even more.

At the same time, the value of her home has taken a hit – similar properties are currently being advertised for around A$70,000 less than she paid – meaning it will take some time before she returns to positive equity again.

“It goes well beyond what the drug is worth at any time in the near future,” Vetcha said.