Agencies – Gaza Post
soaring house prices ending as central banks raise rates
An era of high house prices is vanishing gradually. Central banks created a massive estate boom and soon they will have to cope with the consequences.
This is what is already happening in China. Banks in the world’s second largest economy are under orders to bail out real estate developers so they can complete unfinished projects. People are not satisfied with the payment of real estate purchase loans, so mortgage boycotts are increasing.
New real estate sales fell and new housing began to almost halve. The real estate sector accounts for about 20% of China’s GDP. Home prices are already a thing of the past.
The US economy contracted for the second consecutive quarter in the three months and one of the factors was the rapidly slowing real estate market. In the first two years of the coronavirus pandemic in the spring of 2020, US house prices rose by 20% in the year to May. The market is rapidly cooling, with the average price of new homes falling sharply.
Britain does not seem to be keeping pace with the trend. According to figures from Halifax, house prices are rising at an annual rate of 13% – the highest in nearly two decades.
The Office for National Statistics last week published data on housing affordability, based on the ratio of real estate prices to median income. In Scotland and Wales, the ratios were 5.5 and 6.0, respectively, below their peak at the time of the 2007-2009 global financial crisis. In England, it’s 8.7, the highest since the series began in 1999.
There are regional differences within England. 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. In London, it was 40 times and now higher. The ONS figures only cover the period up to March 2021 and since then housing prices have outpaced wages.
At a time when housing becomes too expensive for potential buyers, but a long period of very low interest rates means that it took time to reach this realistic barrier. Unaffordable costs are made 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.
Central banks in the West raise interest rates very dramatically, which has made mortgages more expensive. Before the US Federal Reserve announced last week a second consecutive 0.75 point increase in official borrowing costs, a new borrower taking a 30-year fixed home loan was paying a rate of about 5.5% — double what it was a year earlier. This increase explains why fewer Americans are buying new homes and why prices are dropping.
The harmful combination of housing prices is high interest rates, collapsed growth and high unemployment
In the UK, the Bank of England cut interest rates to 0.1% at the start of the pandemic and left them at that level for about 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 rate in decades means they have no choice but to tighten policy. 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 the queues for benefits lengthen.
A week ago, the International Monetary Fund published a bleak outlook for the global economy. With all three major growth engines – the US, China and the eurozone – on hold, the fund said risks are down.
The International Monetary Fund said there were only five years in the last half century when the global economy grew by less than 2%. A complete shutdown of Russian gas supplies to Europe, stubbornly high inflation or a debt crisis were among the factors that could lead to 2023 joining that list. A global housing collapse would ensure that.
There can be good reasons for wanting to get rid of the surplus property market. Rising home prices against the young and poor lead to a misallocation of capital into unproductive assets, and increase demographic pressures by discouraging spouses from having children.
Central banks have tried to cool a slowdown in which the downturn is short and superficial, and the increase in unemployment is enough to relieve upward pressure on wages but it remains modest. A house price crash is not part of the plan because it will guarantee a hard landing.
In 2007, the subprime mortgage crisis in the United States caused an almost complete collapse of the global banking system and led to a major downturn before the downturn caused by 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.
