1. Hot Housing Markets Face Chill of Winter
- Realtors in some of the world’s hottest real estate markets were minted as loose monetary conditions saw a surge of buying from Sydney to Seattle, Stockholm to Singapore.
- Higher interest rates hit the housing market and the real economy through a cascade effect.
Not so long ago, in a suburb not so far away from Sydney, the flow of buyers snapping up high-end real estate sight unseen was relentless.
Realtors in some of the world’s hottest real estate markets were minted as loose monetary conditions saw a surge of buying from Sydney to Seattle, Stockholm to Singapore.
But with interest rates rising, real estate prices are fast cooling, threatening to worsen a global economic slowdown as property is a leading source of household wealth.
To be sure, the slowdown is nothing compared to the sharp crash of the 2008 Financial Crisis, but already frothy markets in Australia and Canada are facing double-digit percentage declines on house prices, and some believe that the pain is just getting started.
Higher interest rates hit the housing market and the real economy through a cascade effect.
Households with mortgages tighten their belts (the rising cost of living doesn’t help either) while the increase in funding costs discourages would-be buyers from entering the property market, dragging down prices and future development.
The sudden shift comes as low interest rates fueled a boom in housing as the pandemic spurred demand for larger homes with home offices or studies and extra room to remain locked down.
Now many homebuyers who paid record prices for their property face loans that are due to reset to higher rates, just as soaring inflation and a potential recession hit home.
But not all housing markets are built equal and how exposed homebuyers are depends on location.
In the U.S., the majority of buyers rely on fixed-rate home loans that go for as long as 30 years, with variable rate mortgages making up just 7% of loans in the past five years.
By contrast, most other developed countries offer fixed-rate housing loans at the offset, before these too, become floating and the correlation between housing price correction and variable-rate loan density is strong.
According to a May report by Fitch Ratings, Australia, Spain, the United Kingdom and Canada had the highest concentration of variable-rate mortgages and are also the housing markets which are showing the greatest signs of weakness.