Home prices are bracing for a decline that seems “scary” after demand for them in 9 rich economies has so far fallen, according to a report from the magazine “”The Economist“.
While the declines in the US have been slight so far, they are already dramatic in other markets. In Canada, for example, the cost of housing fell by 9% compared to February.
As inflation and recession haunt the world, there is likely to be a correction in house prices so deep that real estate agents are pessimistic.
Falling domestic demand is exacerbating the recession, leaving a group of people in financial meltdown and a political storm could begin.
The reason for the crisis is the high interest rates on home loans, as the 30-year mortgage rate in the United States reached 6.92%, more than double the level of last year and the highest since. April 2002.
The US Federal Reserve has greatly increased its financial costs in an effort to curb inflation fueled by several factors, including the Russian invasion of Ukraine.
The purchasing power of borrowers is eroding from Stockholm to Sydney, making it difficult for new buyers to buy homes, which lowers demand and could strain the finances of existing owners, who may have to sell.
However, falling house prices will not cause a financial meltdown, as it did in the United States 15 years ago when it triggered a global financial crisis.
The United States guarantees, or insures, two-thirds of the new mortgages. Through state insurance schemes, taxpayers bear the risk of default.
As prices rise, taxpayers are exposed to losses via the Federal Reserve, which owns a quarter of the mortgage-backed securities.
Sales of existing homes in the United States fell 20% in August year-on-year, and Zillow, a real estate company, reported a 13% drop in new listings from seasonal standards. Sales figures in Canada could decline by 40% this year.
And when people can’t move, it undermines the dynamism of labor markets, a major concern for companies trying to adapt to the labor shortage and energy crisis.
And if prices drop, homeowners may find that their homes are less valuable than their mortgages, making it even more difficult – a problem that plagued many economies since the 2008 global financial crisis.
Some other regions, such as South Korea and the Nordic countries, have seen frightening accelerations in debt, with household debt reaching nearly 100 percent of GDP.
They could face destabilizing losses in their shadow banks or finance companies: the head of the Riksbank likened this to “sitting on top of a volcano”.
But the world’s worst construction-related financial crisis will remain confined to China, whose woes are contained – fortunately within its borders – by massive speculative excesses, mortgage strikes and people prepaying yet-to-be-built apartments.
Another problem remains the concentrated pain of a minority of homeowners, as those who have not set interest rates face rising mortgage bills.
There are relatively few of them in America, where low-interest, fixed-rate 30-year mortgages are the norm.
But four out of five Swedish loans have a fixed term of two years or less, and half of all fixed-rate mortgages in New Zealand have been or are expected to be refinanced this year.
When combined with cost-of-living pressures, this signals an increasing number of cash-strapped households.
In Australia, perhaps a fifth of mortgage debt is owed to households who will see their excess cash flow drop by 20% or more if interest rates rise as expected.
According to one estimate, two million households in Britain may find that their mortgage absorbs an additional 10% of their income. And those who can’t afford the payments may have to take their homes off the market instead.
This is where the political dimension comes into play, as the youngest generation in the rich world feels unfairly excluded from home ownership.
