Era of high home prices ends as central banks raise interest rates | Larry Elliott

It finished. An era of ever-increasing home prices spurred by cheap money is coming to an end. Central banks have created a massive real estate boom, and soon they will have to deal with the consequences of bubble-pricking.

This is what is already happening in China. Banks in the world’s second largest economy are subject to bailout orders real estate development So that they can complete unfinished projects. The mortgage boycott is increasing because people are, unsurprisingly, dissatisfied with paying off loans to purchase properties they cannot occupy.

New real estate sales have plummeted and new home construction has almost halved from pre-pandemic levels, dictating problems for indebted real estate companies, the banks that borrowed from them, and the broader economy. The real estate sector accounts for about 20% of China’s GDP. Home prices are already a thing of the past.

The US economy shrank to The second consecutive quarter In the three months through June, one factor was the rapid slowdown in the property market. Within two years of the start of the coronavirus pandemic in the spring of 2020, US home prices soared, rising 20% ​​in the year through May. But the market is cooling quickly, with the average price of new homes sharply in June.

Building a residential house in California, USA
The housing market is slowing down in the US. Photo: Mike Blake/Reuters

Britain appears to be bucking this trend. According to figures from Halifax, the nation’s largest mortgage lender, home prices are rising at an average rate. 13% annual rate – Top for nearly two decades. Here, too, the picture is changing.

Last week the Office for National Statistics released data on housing affordability, based on the ratio of real estate prices to median income. In Scotland and Wales, the ratio was 5.5 and 6.0, respectively, below the peak reached at the time of the 2007-2009 global financial crisis. The ratio in England was 8.7, the highest since the series began in 1999.

It was there inside England Regional differences. In Newcastle upon Tyne, the cost of the median home was 12 times the annual income of a person in the lowest 10% income bracket. She’s been in London 40 times, and it’s definitely higher now. Office for National Statistics figures cover the period up to March 2021 and since then home prices have comfortably outpaced wages.

There comes a point where housing becomes simply too expensive for potential buyers, but a long period of very low interest rates means that it took time to reach this realistic barrier. Central banks have made unaffordable costs more affordable by ensuring that monthly mortgage payments remain low.

This was true all over the world, and for that reason, from New York to Vancouver, from Zurich to Sydney, and from Stockholm to Paris, the trend in home prices was rising relentlessly.

At least so far. Central banks in the West are aggressively raising interest rates, making mortgages more expensive. Even before the US Federal Reserve announced last week a second in a row With a 0.75 point increase in official borrowing costs, a new borrower taking a 30-year fixed-term home loan was paying a rate of about 5.5%—double the year before. This increase explains why fewer Americans are buying new homes and why prices are dropping.

in the UK , Bank of England It cut interest rates to 0.1% at the start of the pandemic and left them at that level for nearly two years. This has allowed homebuyers to obtain fixed-term mortgages at very competitive rates, reaching 1.4% last fall. But since December last year, the bank has been tightening its policy, and those mortgages will go up when the term runs out. Average home loan rates are now 2.9%.

Central banks say the highest inflation in decades means they have no choice but to tighten policy – but they are doing so at a time when major economies are in recession or heading in that direction. The toxic mix of home prices is rising interest rates, collapsing growth, and rising unemployment. Of those only the latter is missing, but if the winter turns out to be as bleak as policymakers expect, it’s only a matter of time before benefit queues lengthen.

Last week the International Monetary Fund Published forecasts For a world economy that was decidedly bleak. Noting that all three major growth engines – the US, China and the eurozone – were off, the fund said risks are strongly skewed to the downside.

According to the International Monetary Fund, there have been only five years in the last half century when the global economy has grown by less than 2%: 1974, 1981, 1982, 2009 and 2020. EuropeHigh inflation or a debt crisis were among the factors that could lead to 2023 joining that list. A global housing collapse would ensure that.

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This does not mean that there are no good reasons for wanting to get rid of the surplus of the real estate market. Rising home prices discriminate against the young and the poor, lead to a misallocation of capital in unproductive assets, and increase demographic pressures by discouraging spouses from having children.

However, central banks are trying to control a soft landing in which deflation is short and superficial, and the increase in unemployment is enough to relieve upward pressure on wages but is still modest. A house price crash is not part of the plan because it will guarantee a hard landing.

There is no appetite for a repeat of 2007, when the US subprime mortgage crisis caused an almost complete collapse of the global banking system and led to the last great recession before the pandemic. This is why the Chinese government is trying to support real estate developers and why western central banks may stop raising interest rates sooner than financial markets expect. We’ve been here before.

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