Housing markets face a brutal squeeze | The Economist - 0 views
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interest-rate rises have now returned mortgage rates to levels not seen for decades. A year ago the 30-year fixed-rate mortgage in America was below 3%. Today it is only a little shy of 7%
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Three factors will determine where the pain is most acute, and thus where these consequences are most likely. The first is recent price growth. Housing markets where prices have surged since the pandemic are especially vulnerable to cooling demand
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Borrowing levels are the second factor. The higher household debt is as a share of income, the more vulnerable owners are to higher mortgage payments and defaults.
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The third factor is the speed with which higher interest rates pass through to homeowners. The biggest risk is to borrowers on floating-rate mortgages
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not all fixed-term loans are alike. In America the bulk of them are fixed for two or three decades. In other countries, even fixed-rate borrowers will face soaring mortgage costs soon enough
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all the ingredients for a deep housing slump are in place. This time, though, it is likely to be led not by America, but by Canada, the Netherlands, Australia, New Zealand and Norway
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First-time buyers and recent borrowers are especially vulnerable. Many stretched their finances to buy a home, leaving less spare cash to cover a jump in mortgage costs
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First-time buyers have also had less time to accumulate equity. Oxford Economics estimates that a 15% drop in house prices in America over a year would cancel out two-thirds of the housing equity they have accumulated since the start of the pandemic
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the housing squeeze will have profound consequences. “The housing cycle IS the business cycle”, wrote Edward Leamer of the University of California, Los Angeles, in a paper published in 2007
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The link between the two cycles arises because housing confers “wealth effects” on owner occupiers. When house prices rise, people feel good about their financial situation, so borrow and spend more.
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2019 research by the Bank of England found that a 10% increase in house prices raises consumption by 0.35–0.5%
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Another important channel between the housing market and the rest of the economy is investment. Capital spending associated with housing, especially house building, can be extremely volatile—and is often the difference between a growing or shrinking economy.
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Some people see an upside to a housing crash. They hope lower prices will allow young folk to buy their first houses. These hopes are almost certain to be dashed. In housing corrections, and sometimes for years after, home ownership rates tend to fall, rather than rise
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Economic conditions that cause house prices to fall simultaneously imperil the chances of would-be homeowners. Unemployment rises and wages decline. If interest rates jump, people are able to borrow less and mortgage lenders tend to become more skittish about lending
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In countries where home ownership is seen as a rite of passage, lower prices without any increase in affordability will rub salt in already sore wounds. “Falling to what? Falling to absurdly grotesque prices instead of just unthinkable?”
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For years more established homeowners took comfort in the thought that, even if real-wage growth was terrible, at least the price of their house was rising. Those days are over. Even baby-boomers, the great winners from a decade of price growth, now face the prospect of living off a smaller nest-egg in retirement, as downsizing becomes less lucrative
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All this means rising interest rates will have unpredictable political repurcussions, as people who once benefited from the status quo discover what it feels like to lose out.