Our Opinion: 2022
Faltering housing markets
As interest rates rise, house prices in the world’s most overpriced markets are starting to fall. Will it be a slowdown, or a full-blown crash?
One of the most important factors driving house prices higher has been the low and falling interest rates. When interest rates fall, you can borrow more to buy a house; most homebuyers borrow to their limit to get the best house they can afford. In practice, they’re not worrying about the overall price, they’re worrying about the monthly payment.
A drop in the price of money means a given monthly payment will buy you a bigger home loan, and so more money goes into the housing market, and house prices go up. It’s practically a mechanical relationship.
Since interest rates are now going up, the obvious question is: when do house prices start to crater?
The UK is not one of the world’s most vulnerable housing markets. A recent article in The Economist contained a table which shows that Britain only ranks 13th of 20 countries in its house-price risk table. Sweden, the Netherlands and New Zealand comprise the top three, with Australia coming in at five, similarly expensive Canada is at seven, and the US joint eighth place (with Denmark).
In the two pandemic years (taking average prices from the end of 2019 to the end of 2021), British house prices have “only” risen by around 18%; prices in New Zealand by contrast, are up by 46%.
In Britain, the share of homeowners who own homes with mortgages outstanding is about one in three. New Zealand has double that. Britain has a very low proportion of mortgage-holders on variable-rate loans. In Norway (fourth on the vulnerability list), 94% of loans are variable rate. In the UK, it’s below 10%. That said, apparently about half of those who have fixed mortgages are on two-year loans – so that’s not as reassuring as it may sound at first.
Finally, in terms of overall indebtedness, the UK is again mid-table. Borrowers in the most vulnerable countries are far more over-extended than we are. Given that the cost of necessities has been rising and continues to do so, that bodes ill for people struggling to keep up with their payments.
In short, high property prices are a global problem. Some countries and areas are worse than others, but overall, the global drift lower in interest rates in the last 40-odd years has helped to inflate prices in the majority of economies.
This suggests a couple of things. One, if there were a house-price crash in the UK, it will have plenty of company. Two, if you want to get an idea of just how vulnerable housing markets are to rising interest rates, we probably just need to look at how our riskier cousins are doing.
On that score, the answer is clear, with prices in Canada and New Zealand already falling. The Bank of Canada started raising interest rates from 0.25% in March this year – they’re now up to 2.5%, with another rise likely on 7th September.
In April, house prices in Canada fell for the month in two years, according to one popular measure, while sales volumes were down by more than 25% on the year. Sales fell across 80% of local markets.
That’s a significant figure, and it’s clear what’s causing it – concerns about rising interest rates. There are plenty of other economic concerns, including the rising cost of living. But it’s a fear of rising mortgage rates that are really rattling the market. Analysts are starting to roll out their predictions of 10%-20% corrections.
It’s a similar story in New Zealand.
House prices showed an almost immediate reaction to rising interest rates. Prices peaked in November 2021 and have been edging lower since and are down by more than 5% since then. Transactions fell by 30% in a single month in April 2022. Economists are starting to talk about 20% falls. That’s a crash – but at the same time, it would only return prices to early 2021 levels, which implies that perhaps prices have further to fall.
Is Britain heading for a house-price crash?
It is not obvious from the latest data that there are jitters. Asking prices recently hit another fresh record high, and are up 10% on last year. However, while the UK market is probably slightly less sensitive to rate changes than some others, it’s only a matter of time.
That doesn’t necessarily spell a crash: rising rates are one side of the equation – they affect demand for houses (in terms of the potential price paid). But for crashes to happen, there need to be forced sellers. Otherwise, what happens is that sales volumes fall, but prices remain static. No one wants to sell their home at a loss, so they just don’t move.
Forced sellers are mostly a recession phenomenon. Whilst a recession is very possible, it is not yet inevitable. The jury is out on whether it’ll be a slowdown, or a crash.
What could stop a slowdown? At this point, he main thing that could spark a rally now would be the same thing as we saw in 2005. Central banks panic because they think that inflationary pressure is going to give way to recession. As a result, they start to relax monetary policy again. Homeowners and vendors breathe a sigh of relief, while frustrated first-time buyers give up holding out for a crash and decide to leverage up as much as they can and buy.
This is possible. As soon as markets believe that central banks might relent through fear of recession, you have a trigger for the “buy the dip” psychology returning. But we are likely to see tougher times ahead.
If you’re buying a home to live in, then you shouldn’t try to time the market. The important thing to focus on is your personal circumstances: is this the right home for you? Does it work with your commute? What are the schools like? And all the rest of it.
But be cautious when thinking about your immediate circumstances for the future. Don’t overstretch yourself. You might be able to fix your mortgage interest rate, but your living costs aren’t likely to stop rising for a while yet.
2nd September 2022
