As consumers experience increasing financial strains, frothy real estate markets are positioned for double-digit price falls. Rising borrowing costs are putting pressure on property owners and homebuyers worldwide.
As central banks hike interest rates at the quickest rate in decades, driving down home prices, purchasers retreat from the market in cities like Sydney, Stockholm, and Seattle. Millions of Americans who took up low-interest loans to buy houses during the property boom now have higher payments due to loan resets.
A global economic crisis is in danger of getting worse due to the quick cooling off in real estate, a major source of household wealth. While the current downturn hasn’t reached the same heights as the financial crisis of 2008, how it develops will be a crucial factor for central bankers trying to control inflation without harming consumer confidence and starting a severe recession.
Economists fear that the global downturn is only getting started since double-digit housing price drops are already being experienced in bubbly areas like Australia and Canada.
According to Hideaki Hirata of Hosei University, a former Bank of Japan economist who co-authored a report on global house prices, “We will experience a worldwide synchronized housing market slump in 2024 and 2024.” He cautions that it would take some time for homes to feel the full effects of this year’s dramatic rate increases. He claimed that “sellers frequently ignore indicators of declining demand.”
Economies are impacted by higher real estate financing costs in a variety of ways. As growing mortgage payments deter would-be purchasers from joining the market, households with loans tighten their budgets, which has a negative impact on real estate prices and development.
The slowdown is a sharp contrast to the boom that was stimulated by the central bank’s easy-money policies in the years following the financial crisis and then accelerated by a pandemic that drove individuals to seek out larger rooms and homes that were conducive to remote work. Currently, many customers who paid record prices must refinance their loans at higher interest rates as high inflation and a possible recession take hold.
Varying Risk in housing markets
Each nation has a different level of exposure to rate increases for borrowers. For instance, in the US, the majority of buyers rely on fixed-rate mortgages for up to 30 years. Over the previous five years, conventional loans made up, on average, 7% of all loans. In contrast, loans in other countries are sometimes fixed for only a year or have variable-rate mortgages that closely follow government interest rates.
According to a May analysis from Fitch Ratings, the countries with the biggest concentration of variable-rate loans as a percentage of new originations in 2020 were Australia, Spain, the United Kingdom, and Canada.
Many mortgages in other nations are slated to reset soon. For example, in New Zealand, around 55% of the outstanding value of residential mortgages is either on variable rates or fixed rates that need to be renewed in the year leading up to July 2024.
One of the poster children for the pandemic housing boom and its unwinding is New Zealand, where prices increased by about 30% in 2021 alone. According to the Real Estate Institute of New Zealand, house prices were down 11% in July from their peak in November of last year despite seven rate increases by the central bank in the previous 10 months. According to economists, this might eventually result in a 20% decline.
Femke Burger, a 33-year-old insurance case manager, paid NZ$825,000 ($504,000) for a home in the Wellington area in March 2021. According to websites that assess homes, the value of her property soared to NZ$1 million in the months that followed. Those advantages have vanished. The current valuation of her two-bedroom, semi-detached home is approximate.
https://www.cnbc.com/2022/09/09/housing-market-confusion-whats-happening-next.html
financial Impact
Like the majority of industrialized countries, New Zealand has so far managed to survive the housing recession. A cascade of defaults is unlikely since household balance sheets and savings are robust, job markets are booming, and lending standards have tightened since the mid-2000s boom that precipitated the financial crisis.
Many homeowners still have a sizable amount of equity in their homes after years of price increases, and in some overheated markets, decreased values would make it possible for buyers to enter the market.
According to Kwan Ok Lee, a housing expert at the National University of Singapore, “given that the housing affordability situation is so significant in many major nations, cooling home prices may result in some positive consequences.”
