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The housing crunch in rich countries is far from over


At times during In the long boom that followed the global financial crisis of 2007-09, house prices never seemed to stop rising. Sales have surged as ultra-low interest rates and a shortage of supply have intensified competition for real estate. The situation today is very different. In the developed world, from the United States to New Zealand, sales fell sharply as central banks embarked on the toughest monetary policy tightening in four decades. Prices are also heading in the wrong direction now in many markets, at least from a homeowner’s perspective.

However, with most of the central bank’s rate-hiking campaign over, many in the real estate industry are starting to wonder if the worst will soon be over. In March, both the Fed and the Bank of England raised rates by only 25 percentage points. The market will price it up one more time at most. So far, the world economy has shown resilience under the pressure of tightening policy, even though a handful of commercial banks have failed. That has given investors and homeowners hope that prices may soon bottom out. Perhaps the long-feared housing crunch turned out to be less dire than expected.

This optimism may prove to be unfounded. Just as rate hikes take time to hit housing, relief will come over time. The cushions to soften the blow are starting to look worn out. While fixed-rate mortgages, which protect holders from increased costs, are more common outside the U.S. than in the past, most are short-term fixed rates. In the UK, for example, nearly half of all fixed-rate shares are fixed for a period of no more than two years. In fact, more than two in five mortgage holders will switch to new terms this year. At the same time, the massive excess savings accumulated during the pandemic no longer offered as much protection and have been drawn down in the years since. Low-income households in the euro zone have largely exhausted their buffers, surveys show.

In assessing how much prices still have to fall, the developed world can be divided into three parts. Start with early adjusters including Australia, Canada, New Zealand and Sweden. In many countries, central bankers react quickly to inflation. House prices in these countries have soared amid the pandemic as homebuyers piled on cheap credit, mostly taking out mortgages with floating rates.according to OECDHouse prices in Sweden and New Zealand, the rich-country club, have fallen 14 percent since their peak. In Australia, they fell 9%. Its central bank didn’t raise rates until May, but households have entered a period of indebtedness, averaging more than 200% of net disposable income in 2021, making them more vulnerable to higher interest rates. Relative to their peaks, Goldman Sachs predicts that New Zealand will eventually fall by 19%, Sweden by 17% and Australia by 15%, suggesting that these countries will suffer more.

Next up is Bullet Dodge. The most prominent member of this group is the United States, where homeowners are immune to a tightening of fixed-rate mortgages that typically lasts two to three years. Regulators pushing borrowers to switch to such loans in the wake of the subprime crisis that began in 2007, combined with tighter lending rules, are unlikely to lead to mass defaults that would collapse the financial system. According to Goldman Sachs, the U.S. has already seen half of its predicted peak-to-trough decline, at just 5%. Meanwhile, France, where prices remain stable through 2022, is expected to see a more insignificant decline of 4%. The country benefits from low household debt, which averages 124% of net disposable income in 2021.

Finally, there are slow-moving stocks that haven’t been hit hard yet but are unlikely to escape a correction. While UK prices have already fallen by 5%, worse could be yet to come: consultancy Capital Economics forecasts a peak-to-trough decline of 12%. Homebuilders in the country are sounding the alarm. Many are postponing new home purchases; some are dangling cash for buyers. Britain’s second-biggest builder, Persimmon, even offered to pay mortgages for up to 10 months in an attempt to boost demand. The German Real Estate Federation, a lobby group, predicts that 245,000 apartments will be built in Germany this year, well below the government’s target of 400,000.

Since price falls are driven by rising interest rates, they are unlikely to make housing more affordable. Those looking to climb the property ladder face eye-watering monthly payments. In early adjuster Canada, the average buyer of a detached home is now required to spend nearly 70 percent of their pre-tax household income on mortgages, property taxes and utilities, up from 46 percent in early 2020, according to RBC. Downfalls always make homeowners unhappy. This time around, even potential buyers have little to cheer about.

For more expert analysis of breaking economic, financial and market news, sign up for Money Talks, our subscriber-only weekly newsletter. For more coverage of the turmoil affecting financial markets and the global economy, see our Recession Hub.

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