House of Letters – Top Channel

Shares are sinking, the cost of living crisis has hit and the ghost of the global recession is approaching. But such a situation is not being reflected in affluent housing markets, many of which continue to break records. Homes in America and Britain are selling faster than ever.

House prices in Canada have risen by 26% since the pandemic began. The price of an average property in New Zealand has increased by almost 46% since 2019.

For more than a decade, homeowners have benefited from extremely low interest rates. However, changes are now beginning. On May 5, the Bank of England, after predicting that inflation in Britain could exceed 10% this year, raised the interest rate for the fourth time, to 1%.

The day before, the US Federal Reserve had raised the key rate by half a percentage point and hinted that it would impose even more austerity. Investors expect the federal funds rate to rise above 3% by early 2023, more than tripling the current level. Most other central banks in rich countries, ranging from Canada to Australia, have either begun to impose monetary brakes, or are preparing to do so.

Many economists believe that a global property crisis, such as that of 2008, is unlikely to happen. Household finances have strengthened since the financial crisis and lending standards have been tightened. Low housing supply, along with strong demand, high levels of household net worth, and strong labor markets, should also support property prices.

But increasing the cost of money can make it difficult for homeowners to manage their debt burden, increase their repayments, and encourage some potential buyers. If this blow to demand is large enough, prices may start to fall.

Homeowners’ vulnerability to sharp increases in mortgage payments varies by country. In Australia and New Zealand, where prices rose by more than 20% last year, values ​​have gone so far out of control that they may even be sensitive to more modest interest rate hikes. In America and Britain, interest rates may have to rise to 4% for house prices to fall, analysts at Capital Economics say.

In addition to price levels, there are three other factors that will help determine whether the housing market momentum will slow down or stop: the degree to which homeowners have mortgages; the prevalence of variable rate mortgages, rather than fixed rate loans; and the amount of debt owed by households.

We first take the share of mortgage holders in an economy. The fewer homeowners who fully own their property, the greater the likely impact of raising interest rates. Denmark, Norway and Sweden have relatively high percentages of mortgage holders (see table).

A easing of lending standards in response to the Covid-19 pandemic spurred borrowing. In Sweden, tax cuts for homeowners have spurred the provision of mortgages, while a dysfunctional rental market has pushed more tenants to seek ownership of a home.

All this puts the Nordic banks in a complicated position. In Norway and Sweden, home loans make up more than a third of a bank’s total assets. In Denmark, they make up almost 50%. The sharp fall in housing prices could cause losses.
Drying of revenue

Unlike the Nordics, where home ownership was driven by the rise of mortgage markets, many families in Central and Eastern European countries bought homes without borrowing in the 1990s because property was very cheap. In Lithuania and Romania, more than four-fifths of households are full owners.

Mortgage-free families are also more prevalent in Southern Europe, especially in Spain and Italy, where family inheritance or support is a common route to home ownership. Germans, on the other hand, are more likely to rent than to have their own homes. Therefore, raising rates will have less of a direct impact on prices.

The structure of the mortgage debt, the second factor, also matters. Rising interest rates will be felt almost immediately by borrowers with variable rates; for those with fixed rates, the pain will be delayed. In America, mortgage rates tend to be fixed for two or three decades.

In Canada, nearly half of home loans have rates that have been set for five years or more. In contrast, lending in Finland is almost entirely variable priced. In Australia, about four-fifths of all mortgages are linked to variable rates.

However, if only the proportion of borrowers with fixed rates versus variable rates is observed, an accurate idea of ​​the situation may not be created.

In some countries, mortgage rates can often be fixed, but for a period that is too short to protect borrowers from the interest rate storm. In New Zealand, fixed-rate mortgages make up the bulk of existing loans, but nearly three-fifths are fixed for less than a year.

Resilience to rising interest rates will also depend on the amount of debt owed by households, the third factor. High debt returned to the limelight during the global financial crisis.

As property prices plummeted, families with high mortgage payments relative to their income, got into trouble. Today families are richer, but many of them are burdened with more debt than ever.

As Canadians added $ 3.6 trillion ($ 2.8 trillion) to the total savings during the pandemic, boosting their net worth to a record $ 15.9 trillion by the end of 2021, their appetite for had a home, increased family debt to 137% of income.

The share of new mortgage loans with extreme credit-to-income ratios (ie, exceeding level 4.5) has also increased, prompting the Bank of Canada to issue a warning for high debt levels in November passed.

Financial regulators in Europe are equally concerned. In February, the European Systemic Risk Board warned of high volatile mortgage debt in Denmark, Luxembourg, the Netherlands, Norway and Sweden.

In Australia, the average debt of homeowners, as part of income, has risen to 150%. In all of these countries, households will face higher monthly payments, while rising food and energy costs will lower their incomes.

All shapes and sizes

Taking these factors together, we conclude that some housing markets seem prone to more pain than others. Property in America, which has suffered most of the consequences of the risky credit crunch, seems more isolated than many large economies.

Borrowers and lenders there 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 short term, but may be affected if rates rise further.

Property in Germany, and in Southern and Eastern Europe, seems less vulnerable. Conversely, prices may be more sensitive to rising rates in Australia, New Zealand, Canada and the Nordic countries.

In most countries, demand still far exceeds supply. Strong job markets, crowds of young people approaching the age to buy a home, and shifting to distance work have all increased the demand for more living space.

New properties remain scarce, which will boost competition for homes and help keep prices high. In Britain, there were 36% fewer property listings in February, compared to early 2020; in America, there were 62% fewer listings in March than a year ago.

Even the rental alternative does not seem particularly attractive. Average rents across the UK were 15% higher in April than in early 2020.

In America, they grew by one-fifth in 2021, especially in popular places like Miami, where they almost doubled. Lease controls cause another type of pain. Potential tenants of such properties in Stockholm, face an average waiting time of nine years.

As the era of ultra-free money comes to an end, demand for housing is not yet ready to decline. Sooner or later, however, tenants and homeowners will face increasing tightening./ Monitor

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