2022 – Analyzing Safely Like Homes? Rising interest rates test the fundamentals of the housing boom Reuters

© Reuters. FILE PHOTO: A sign for sale is displayed in front of a house in Toronto, Ontario, Canada on December 13, 2021. Photo: Carlos Osorio/Reuters

By Francesco Canepa and Julie Gordon

(Reuters) – In a remote Toronto suburb, just a few months ago, a typical three-bedroom home was attracting 40 bids on bidding night and selling for well above asking price. Now home buyers are hard to find.

“You no longer get involved in bidding wars,” said Tim Keung, managing director of TimSold Real Estate, a local agency.

“Lots of buyers are sitting… on the sidelines waiting for this big correction.”

You’re not alone. A decade-long boom in home prices from the United States to Europe and Asia faces its first real test as rising borrowing costs and high inflation weigh on household budgets.

Outside of Toronto, real estate prices are already dropping in some of the places that saw the highest appreciation, such as China, New Zealand and parts of Australia.

Growth has slowed in Singapore and South Korea, and volumes are declining in the United States and Poland.

Lenders and regulators from most developed countries have warned that inflated home prices may now fall or fall – in some cases by as much as a quarter.

While every market is different, almost all of them have one thing in common: an increase in the cost of borrowing as central banks around the world raise interest rates to fight inflation.

The average 30-year fixed-rate mortgage interest rate in the United States, a measure of the rest of the world, has risen from just 2.7% at the end of 2020 to 5.5% now, the highest rate since 2008, according to the Association of Banks.

That’s lower than levels in the 2000s, but the massive pace of change in fixed and floating interest rates is weighing on buyers and owners who are already grappling with the rising cost of living.

This threatens to explode the housing bubbles that have been fueled by cheap credit over the past decade and have grown even larger during the pandemic as some people save more and look for bigger homes.

“High real estate prices and high mortgage interest rates are becoming an increasing problem with the affordability of home ownership,” said Joerg Utecht, CEO of German mortgage broker Interhyp.

Swiss bank UBS ranks Frankfurt as the city most at risk of a bubble in Germany, followed by Toronto, Hong Kong and Munich, Germany, based on factors including the relationship between prices, income and rents.

Similarly, Germany’s LBBW estimates that house prices in Europe’s largest economy have risen 20% to 25% more than justified by demand and supply since 2015, meaning they could fall by that amount if borrowing costs return back to where they are. time.

German borrowers paid just 1% for a 10-year fixed-rate mortgage last year, but that jumped to 2.5%, the highest rate since 2014, and could reach 3% by the end of the year, according to Interhyp.

Economists polled by Reuters have already begun lowering their forecasts for home price growth in Germany over the next two years.

(Graph: Homes are getting less and less expensive – https://fingfx.thomsonreuters.com/gfx/mkt/zdvxowkgapx/Homes%20have%20become%20less%20and%20less%20affordable.png)

I feel hot

Homeowners with adjustable mortgages are also feeling the pinch.

In Poland, where such loans are the norm and the central bank has raised interest rates from 0.1% to 5.25% since October to curb now double-digit inflation, the government is stepping in to help borrowers by suspending payments.

In the northern town of Rotmanka, 31-year-old office worker Maciej Cauca has seen his monthly mortgage payments on his small apartment increase 18% since getting the mortgage in 2018. He now pays 1,650 zlotys ($384.62) a month. However, he expects payments to increase to 1800-1900 zlotys when taking into account the recent increases of the central bank, which will put further pressure on its finances, which are also under pressure due to high energy and food prices.

“Our budget is getting tight: no holidays, nothing beyond everyday life,” said Kawka, who lives with his wife and daughter. “But if (prices) keep going up, I don’t know what will happen.”

Elsewhere, homeowners are keeping current rates on hold because they fear further increases.

Dennis Willecki, a 35-year-old firefighter, has earned a flat rate of 2.15% for the next 10 years on the home he lives in with his wife and two children in Neukirchen-Fluen, western Germany.

“We rushed to refinance because I think it’s going to increase,” he said.

In New Zealand, American Lee Stewart and his wife are concerned about a repeat of the 2007-2009 housing crash when millions of homes were expropriated in the United States alone and the couple sold their homes at a loss.

Fearful of rising interest rates, which started earlier in New Zealand than in most other countries, Stewart set the cost of his mortgage for three years.

“Small changes in this ratio make a big difference… for someone with a very large loan,” the 40-year-old said.

However, analysts do not expect a repeat of the collapse that caused the global financial crisis 15 years ago.

First, in just over a decade, the share of adjustable-rate loans has shrunk to just 10% of all mortgage applications in the US and 20% of total household debt in the eurozone.

Second, most countries except China are still facing housing shortages, now exacerbated by labor and material shortages, in part due to the fallout from the lockdown during the pandemic. These countries include the United States and Germany.

This was seen to suppress prices.

But Canada and New Zealand are showing just how quickly that can change when higher interest rates dampen demand.

“Right now, if there are 10 things on a buyer’s wish list and the house doesn’t have eight, it just happens,” said Brad Goetz, an agent at Canada’s Right at Home Realty. “Before, it was just, ‘Hey, it’s got four walls, a kitchen, and a bathroom.'” We are ok.'”

(Chart: US mortgages are getting more expensive – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrnlyrvm/US%20mortgages%20have%20become%20much%20more%20expensive.png)

($1 = 4.2900 zlotys)