World’s hottest housing markets face painful reset

AROUND the world, soaring borrowing costs are squeezing homebuyers and property owners alike.

From Sydney to Stockholm to Seattle, buyers are pulling back as central banks raise interest rates at the fastest pace in decades, sending house prices falling. Meanwhile, millions of people who borrowed cheaply to purchase homes during the pandemic boom face higher payments as loans reset.

The rapid cooldown in real estate — a leading source of household wealth — threatens to worsen a global economic downturn. While the slump so far isn’t near the levels of the 2008 financial crisis, how the decline plays out is a key variable for central bankers who want to tamp down inflation without hurting consumer confidence and triggering a deep recession.

Already, frothy markets such as Australia and Canada are facing double-digit house-price declines, and economists believe the worldwide downswing is only getting started.

“We will observe a globally synchronized housing market downturn in 2023 and 2024,” said Hideaki Hirata of Hosei University, a former Bank of Japan economist who coauthored an International Monetary Fund paper on global house prices. He warns the full impact of this year’s aggressive rate hikes will take time to play out for households.

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

Higher real estate financing costs hit economies in multiple ways. Households with loans tighten their belts, while rising mortgage payments discourage would-be buyers from entering the market, dragging on property prices and development.

The slowdown is a stark turnaround from a boom fueled by central banks’ easy-money policies in the years after the financial crisis and then supercharged by a pandemic that sent people searching for bigger spaces and remote-work-friendly homes. Now, many people who paid record prices face loans due to reset higher just as soaring inflation and a potential recession hit.

“Young families that have taken on debt have never experienced in their lifetime a sharp rise in interest rates at a time when their real, inflation-adjusted wages are falling,” said Rob Subbaraman, head of global markets research at Nomura Holdings, Inc. “This could come as quite a shock to them.”

VARIABLE RISK

How exposed borrowers are to rising rates varies notably by country. In the US, for instance, most buyers rely on fixed-rate home loans for as long as 30 years. Adjustable-rate mortgages represented, on average, about 7% of conventional loans in the past five years. By contrast, other nations commonly have loans fixed for as little as a year, or variable-rate mortgages that move closely in line with official interest rates.

Australia, Spain, the UK and Canada had the highest concentration of variable-rate loans as a share of new originations in 2020, according to a May report from Fitch Ratings.

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

New Zealand, where prices rose close to 30% in 2021 alone, is something of a poster child of the pandemic housing boom — and its unraveling. The central bank has hiked interest rates seven times in the past 10 months and house prices were down 11% in July from the peak in November last year, according to the Real Estate Institute of New Zealand. Economists predict they may eventually drop as much as 20%.

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

Many property owners are still sitting on plenty of home equity from years of soaring prices, and in some overheated areas, lower values may allow buyers to enter the market.

“Given that the housing affordability crisis is very serious in many major economies, cooling house prices may result in some positive effects,” said Kwan Ok Lee, who specializes in housing at the National University of Singapore.

Economists, however, are still nervous. If the paper losses experienced by homebuyers such as Burger turn into more material declines for households, banks and developers, that could hit a slowing world economy the International Monetary Fund has warned is teetering on the edge of recession.

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

In some countries, governments have already intervened to help hard-pressed consumers facing rapidly escalating repayments. In South Korea — one of the first AsiaPacific economies to start hiking rates — policymakers recently agreed to outlay more than 400 billion won ($290 million) in funds to help reduce the share of households on variable-rate mortgages.

China is dealing with an escalating property crisis tied to a wave of developer defaults and borrowers withholding payments on mortgages for unbuilt homes. In other countries, the ripples are also starting to spread.

In Sweden, formerly one of Europe’s hottest markets, home prices have fallen about 8% since the spring, with most economists now expecting a 15% drop. Rising rates also are pressuring property companies that borrowed heavily on the bond markets to finance their operations, leaving investors increasingly concerned about their ability to refinance that debt.

Price declines also are accelerating in the UK. Home values are flat or dropping in almost half of London’s boroughs, a Bloomberg analysis shows. HSBC Holdings Plc has warned the UK is on the “cusp of a housing downturn” and demand probably will plunge 20% over the following year.

About 1.8 million UK borrowers are due to refinance in the next year. Most vulnerable are the firsttime buyers who bought homes as prices spiraled during a stamp duty tax holiday introduced in summer 2020 to bolster the market during the pandemic. Those who fixed for the short term face significantly higher repayments at a time when real wages are falling at a record pace and the cost of living is soaring. —