Which real estate markets are most exposed to the interest rate storm? Economist Report
Rising mortgage payments will be harder to bear in some countries than others. Here are which ones. The Economist in-depth study
Stocks are sinking, the cost of living crisis is in full swing, and the specter of global recession looms. But that doesn't sound like looking at the wealthy world's real estate markets, many of which continue to break records. Homes in America and Britain are selling faster than ever. Housing prices in Canada have risen 26% since the start of the pandemic. Average New Zealand property could cost you more than NZ $ 1 million ($ 640,000), a 46% increase from 2019.
For more than a decade, homeowners have benefited from ultra-low interest rates. Now, however, an interest rate storm is brewing. On May 5, the Bank of England, after predicting that inflation in Britain could exceed 10% this year, raised its policy rate for the fourth time, to 1%. The day before, the US Federal Reserve raised its policy rate by half a percentage point and hinted that a further tightening will follow. Investors expect the federal funds rate to rise more than 3% by early 2023, more than three times the current level. Most other central banks in the rich world have also begun to press monetary brakes, or are preparing to do so – writes The Economist .
Many economists believe a 2008-style global housing crash is unlikely. Household finances have strengthened since the financial crisis, and lending standards are stricter. Poor housing supply coupled with robust demand, high levels of household net wealth and strong labor markets should also support property prices. But the rising cost of borrowing could make homeowners' existing debt difficult to manage, increasing their repayments, and alienating some potential buyers. If this hit on demand is large enough, prices could start to fall.
The vulnerability of homeowners to sharp increases in mortgage payments varies from country to country. In Australia and New Zealand, where prices jumped more than 20% last year, values have gotten so out of hand that they are sensitive to even modest interest rate hikes. In less torrid markets, such as America and Britain, interest rates are expected to approach 4% for house prices to plummet, according to consultancy Capital Economics. In addition to the price level, however, three other factors will help determine whether the home car will slow down or stop: the extent to which homeowners have mortgages, rather than owning their properties directly; the prevalence of floating rate rather than fixed rate mortgages; and the amount of debt assumed by families.
Let's first consider the share of mortgage holders in an economy. The fewer homeowners who own their properties outright, the greater the impact of a rate hike. Denmark, Norway and Sweden have some of the highest shares of mortgage holders in the world. A loosening of lending standards in response to the pandemic has caused the lending turbo. In Sweden, tax breaks for homeowners have further fueled the mortgage rush, while a dysfunctional rental market, characterized by overpriced (and illegal) subletting, has pushed more tenants to own home. All of this puts the Nordic banks in a difficult position. In Norway and Sweden, home loans make up more than a third of banks' total assets. In Denmark they account for nearly 50% of banks' books. A sharp fall in house prices could result in losses.
In contrast to the Nordics, where home ownership was fueled by the growth of mortgage markets, many families in Central and Eastern European countries bought homes without debt in the 1990s because properties were so cheap. In Lithuania and Romania, more than four fifths of households are permanent owners. Mortgage-free households are also more prevalent in Southern Europe, particularly Spain and Italy, where inheritance or family support is a common route to home ownership. Germans, for their part, are more likely to rent than to own their homes. Rate increases will therefore have a less direct impact on prices.
The mortgage debt structure – the second factor – is equally important. The rise in interest rates will be felt almost instantly by variable rate borrowers, who fluctuate with changes in political rates; for those at a fixed rate, the pain will be delayed. Mortgage rates in America tend to be fixed for two to three decades. In Canada, nearly half of home loans have interest rates set for five or more years. By contrast, loans in Finland are almost entirely variable rate. In Australia, around four-fifths of mortgages are linked to variable rates.
However, simply looking at the proportion of fixed-rate versus variable-rate borrowers can be misleading. In some countries, mortgage rates can often be fixed, but for too short a period to protect borrowers from the interest rate storm. Fixed-rate mortgages make up the majority of existing loans in New Zealand, but nearly three-fifths are fixed for less than a year. In Britain nearly half of the fixed rate stock is for up to two years.
Resistance to rate hikes will also depend on the amount of debt taken on by households – our third factor. High debt was brought into focus during the global financial crisis. With house prices declining, families with mortgage repayments so high relative to their income have found themselves squeezed. Families are richer today, but many are more in debt than ever. While Canadians added C $ 3.6 trillion ($ 2.8 trillion) to their savings pool during the pandemic, bringing their net wealth to a record C $ 15.9 trillion at the end of 2021, their ravenous appetite for housing has pushed family debt to 137% of income. The share of new mortgages with extreme loan-to-income ratios (i.e. above 4.5) also increased, prompting the Canadian central bank to issue a warning about high debt levels in November 2021.
Guard dogs in Europe are equally concerned. In February, the European Systemic Risk Board warned of unsustainably high mortgage debt in Denmark, Luxembourg, the Netherlands, Norway and Sweden. In Australia, the average homeowner's debt as a share of income has ballooned to 150%. In all of these countries, households will face gigantic monthly repayments even as rising food and energy costs are consuming incomes.
Put all of this together, and some real estate markets look set to suffer more than others. Ownership in America, which has borne the brunt of the aftermath of the subprime mortgage crisis, seems better isolated than many large economies. Borrowers and lenders have become more cautious since 2009, and fixed rates are much more popular. The housing markets in Britain and France will do better in the near term, but appear exposed if rates rise further. Properties in Germany and southern and eastern Europe seem even less vulnerable. Conversely, prices may be more sensitive to rate hikes in Australia and New Zealand, Canada and the Nordic countries.
A basis for house prices is that, in most countries, demand still far exceeds supply. Strong labor markets, hordes of millennials approaching home-buying age, and the shift to remote work have all driven the demand for more living space. New properties remain scarce, which will support competition for homes and keep prices high. There were 36% fewer property listings in the UK in February than in early 2020; in America there were 62% fewer ads in March than the year before. Nor is the alternative to home ownership – rent – particularly attractive. In Britain, average rents were 15% higher in April than at the beginning of 2020. In America they increased by a fifth in 2021; in Miami they jumped by almost 50%. Prospective tenants of controlled rental properties in Stockholm have an average waiting time of nine years.
As the era of ultra-cheap money is coming to an end, therefore, housing demand is not about to collapse. Yet, one way or another, renters and homeowners will face an ever-tighter squeeze.
(Extract from the press review of eprcomunicazione)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/mercati-immobiliari-aumento-tassi-interesse/ on Sat, 14 May 2022 06:04:36 +0000.