And a housing earthquake would hurt many economies far more and compound the bond market rout of the past 12 months if inflation cannot be contained quickly enough to allow central banks to end their tightening in 2023.
Total housing activity – the construction, sales and related demand for goods and services that go hand in hand with housing sales – contributes about 16-18% of annual gross domestic product in the US and UK. It is well over 4 trillion dollars for the former and half a trillion for the UK.
With US long-term fixed mortgage rates above 7% for the first time in 20 years and more than double January rates, US home sales and housing starts are already feeling the heat.
And since real estate has benefited from the bull bond market, low inflation and low interest rates for most of these decades — with the exception of the dodgy subprime mortgage crash of 2007-2008 — any risk of a paradigm shift in this big picture is a major concern.
Twenty years ago, after the dot.com meltdown and stock market crash led to a surprisingly mild global recession, The Economist magazine hit the headlines with an article titled “The houses that saved the world” – concluding that lower mortgage rates, refinancing and withdrawal of equity capital had offset the hit to business demand.
But it is much less likely to come to the rescue after this year’s stock market crash, if only because interest rates are set to rise further until 2023 and many are now worried about potential distress and crime in the area next year.
About 10% of global fund managers surveyed by Bank of America this month believe real estate in developed economies is the most likely source of another systemic credit event in the future.
And Britain, which even the Bank of England assumes has already entered recession, is particularly vulnerable.
UK home owners’ excessive exposure to variable rate mortgages and their greater vulnerability to rising unemployment make the UK market a potential outlier amid the Bank of England rate hike and budget cut expected this week.
Indeed, many believe that the scale of Chancellor Jeremy Hunt’s dramatic fiscal turn away from the bcl September Budget was precisely intended to avoid the kind of brutal interest rate shock the BoE on the property market had originally threatened.
The UK think tank, the National Institute of Economic and Social Research, estimates that around 2.5 million UK households with variable rate mortgages – around 10% of the total – would be hit hard by further rises in mortgage rates. BoE next year, pushing the mortgage costs of around 30,000 people beyond their monthly income if rates hit 5%.
This partly explains why clearing banks Barclays and HSBC expect the final central bank rate to be lower at 3.5% and 3.75% respectively, although money markets still see BoE rates at a peak of 4.5%, down from 3% currently.
NO HOUSING ASSISTANT
Goldman Sachs Chief Economist Jan Hatzius and his team believe the threat of a major credit event in developed property markets may be overstated as many mortgage holders still benefit from long fixed contracts. Maturity and equity are important.
But they say Britain stands out anyway.
“We see a relatively greater risk of a significant rise in UK mortgages,” Goldman said this month. “This reflects the shorter duration of UK mortgages, our more negative economic outlook and the greater sensitivity of default rates to downturns.”
While Australia and New Zealand have higher variable mortgage rates, UK mortgage holders are also more vulnerable to rising unemployment.
Goldman estimates that a one-percentage-point rise in unemployment tends to raise mortgage default rates by more than 20 basis points after a year in the UK – double the 10-basis-point impact based on a similar scenario in the US.
All this bodes ill for UK house prices – although the forecast is still far from doomsday.
UK property firm Knight Frank expects nationwide house prices to fall by 5% next year and again in 2024, a cumulative drop of almost 10%, but that will not bring average prices down from where they were in mid-2021. period.
NIESR economist Urvish Patel agrees with the general idea and predicts that house prices will fall over the next two years, but adds that “fears of a collapse in house prices and the real estate market due to rising mortgage rates are unlikely to become reality”.
The weighing factors are that a majority will be fixed rate, supply will remain tight and stamp duty will need to be reduced again, he said.
But he pointed to the Bank of England’s 2019 study, which looked at over 30 years of data and found that a sustained 1% rise in indexed UK government bond yields could eventually lead to lower prices. 20%.
Perhaps worryingly, 10- and 30-year indexed gold yields were the epicenter of September’s fiscal shock. And while they have since retreated from those peaks, thanks in part to BoE intervention, they are still 2 to 3 percentage points higher than they were at the same time last year.
– The opinions expressed here are those of the author, columnist for Reuters.