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Leaders | The housing horror show

A global house-price slump is coming

It won't blow up the financial system, but it will be scary

[20221022_L]
Oct 20th 2022
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Over the past decade owning a house has meant easy money. Prices rose
reliably for years and then went bizarrely ballistic in the pandemic.
Yet today if your wealth is tied up in bricks and mortar it is time
to get nervous. House prices are now falling in nine rich economies.
The drops in America are small so far, but in the wildest markets
they are already dramatic. In condo-crazed Canada homes cost 9% less
than they did in February. As inflation and recession stalk the world
a deepening correction is likely--even estate agents are gloomy.
Although this will not detonate global banks as in 2007-09, it will
intensify the downturn, leave a cohort of people with wrecked
finances and start a political storm.

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The cause of the crunch is soaring interest rates: in America
prospective buyers have been watching, horrified, as the 30-year
mortgage rate has hit 6.92%, over twice the level of a year ago and
the highest since April 2002. The pandemic mini-bubble was fuelled by
rate cuts, stimulus cash and a hunt for more suburban space. Now most
of that is going into reverse. Take, for example, someone who a year
ago could afford to put $1,800 a month towards a 30-year mortgage.
Back then they could have borrowed $420,000. Today the payment is
enough for a loan of $280,000: 33% less. From Stockholm to Sydney the
buying power of borrowers is collapsing. That makes it harder for new
buyers to afford homes, depressing demand, and can squeeze the
finances of existing owners who, if they are unlucky, may be forced
to sell.

The good news is that falling house prices will not cause an epic
financial bust in America as they did 15 years ago. The country has
fewer risky loans and better-capitalised banks which have not binged
on dodgy subprime securities. Uncle Sam now underwrites or
securitises two-thirds of new mortgages. The big losers will be
taxpayers. Through state insurance schemes they bear the risk of
defaults. As rates rise they are exposed to losses via the Federal
Reserve, which owns one-quarter of mortgage-backed securities.

Some other places, such as South Korea and the Nordic countries, have
seen scarier accelerations in borrowing, with household debt of
around 100% of gdp. They could face destabilising losses at their
banks or shadow financial firms: Sweden's central-bank boss has
likened this to "sitting on top of a volcano". But the world's worst
housing-related financial crisis will still be confined to China,
whose problems--vast speculative excess, mortgage strikes, people who
have pre-paid for flats which have not been built--are, mercifully,
contained within its borders.

Even without a synchronised global banking crash, though, the housing
downturn will be grim. First, because gummed-up property markets are
a drag on the jobs market. As rates rise and prices gradually adjust,
the uncertainty makes people hesitant about moving. Sales of existing
homes in America dropped by 20% in August year on year, and Zillow, a
housing firm, reports 13% fewer new listings than the seasonal norm.
In Canada sales volumes could drop by 40% this year. When people
cannot move, it saps labour markets of dynamism, a big worry when
companies are trying to adapt to worker shortages and the energy
crisis. And when prices do plunge, homeowners can find their homes
are worth less than their mortgages, making it even harder to up
sticks--a problem that afflicted many economies after the global
financial crisis.

Lower house prices also hurt growth in a second way: they make
already-gloomy consumers even more miserable. Worldwide, homes are
worth about $250trn (for comparison, stockmarkets are worth only
$90trn), and account for half of all wealth. As that edifice of
capital crumbles, consumers are likely to cut back on spending.
Though a cooler economy is what central banks intend to bring about
by raising interest rates, collapsing confidence can take on a
momentum of its own.

A further problem is concentrated pain borne by a minority of
homeowners. By far the most exposed are those who have not locked in
interest rates and face soaring mortgage bills. Relatively few are in
America, where subsidised 30-year fixed-rate mortgages are the norm.
But four in five Swedish loans have a fixed period of two years or
less, and half of all New Zealand's fixed-rate mortgages have been or
are due for refinancing this year.

When combined with a cost-of-living squeeze, that points to a growing
number of households in financial distress. In Australia perhaps a
fifth of all mortgage debt is owed by households who will see their
spare cashflow fall by 20% or more if interest rates rise as
expected. In Britain 2m households could see their mortgage absorb
another 10% of their income, according to one estimate. Those who
cannot afford the payments may have to dump their houses on the
market instead.

That is where the political dimension comes in. Housing markets are
already a battleground. Thickets of red tape make it too hard to
build new homes in big cities, leading to shortages. A generation of
young people in the rich world feel they have been unfairly excluded
from home ownership. Although lower house prices will reduce the
deposit needed to obtain a mortgage, it is first-time buyers who
depend most on debt financing, which is now expensive. And a whole
new class of financially vulnerable homeowners are about to join the
ranks of the discontented.

Dangerous properties

Having bailed out the economy repeatedly in the past 15 years, most
Western governments will be tempted to come to the rescue yet again.
In America fears of a housing calamity have led some to urge the Fed
to slow its vital rate rises. Spain is reported to be considering
limiting rising mortgage payments, and Hungary has already done so.
Expect more countries to follow.

That could see governments' debts rise still further and encourage
the idea that home ownership is a one-way bet backed by the state.
And it would also do little to solve the underlying problems that
bedevil the rich world's housing markets, many of which are due to
ill-guided and excessive government intervention, from mortgage
subsidies and distortive taxes to excessively onerous planning rules.
As an era of low interest rates comes to an end, a home-price crunch
is coming--and there is no guarantee of a better housing market at the
end of it all. #

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This article appeared in the Leaders section of the print edition
under the headline "House-price horror show"

Leaders October 22nd 2022

  * Welcome to Britaly
  * A global house-price slump is coming
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  * India's next green revolution
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A house-price horror showA house-price horror show

From the October 22nd 2022 edition

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