A serious crisis threatens the real estate sector around the world against the backdrop of central banks raising interest rates to “very high” limits, which may significantly affect borrowing families, according to Bloomberg.
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A looming global real estate crisis could cause a ‘painful reset’ for families
Western media sources revealed that “there is a crisis in the real estate sector all over the world”, against the background of central banks raising interest rates to “very high” limits, which may significantly affect borrowing families.
Higher borrowing costs are causing “a significant increase in financial pressure, both on homebuyers and property owners” worldwide.
According to Article published in BloombergIn many cities like Sydney, Stockholm and Seattle, buyers have fallen as central banks raise interest rates at their fastest pace in decades, sending home prices down.
On the other hand, the article said, millions of people who borrowed cheaply to buy homes during the pandemic are simultaneously facing higher payments with the loan reset process.
“The rapid slowdown in the real estate sector, which is a major source of household wealth, threatens to exacerbate the global economic slowdown,” the article noted.
The current slump in the markets is approaching the levels of the financial crisis of 2008, as this slowdown in the real estate sector is a key variable for central banks that want to rein in inflation without hurting consumer confidence and causing a deep recession in the economy, according to Bloomberg.
A “painful” reset and families “tighten their belts”
Volatile markets such as Australia and Canada are facing a twofold fall in house prices, and economists believe that the global downturn in this sector has “just begun”.
“We will observe a simultaneous global slowdown in the housing market in 2023 and 2024,” said Hideaki Hirata, a researcher at Hosei University and former economic advisor at the Bank of Japan, one of the economists who co-authored an IMF paper on global house prices.
The researcher warned that significant increases in interest rates applied this year “will take some time to affect households…sellers often ignore signs of diminishing demand.”
Higher mortgage costs affect economies in many different ways, for example, borrowing households “tighten their belts”, while rising mortgage payments discourage potential buyers from entering the market and making purchases, affecting property prices and overall development.
A “blatant” mutation in a previous mutation may cause “shock”
The slowdown is a “stark turnaround from an earlier boom fueled by central banks’ easy financing policies in the years following the financial crisis, and then exacerbated by the pandemic that has prompted people to seek larger spaces and friendly homes to work remotely.”
At the moment, “many people who got home loans are having trouble paying record rates because the loans are reset to new, higher rates with rising inflation and possible recession.”
In turn, Rob Subbaraman, head of global markets research at Nomura Holdings Inc, said this “could come as a shock to them (for families).”
The extent of the risks to this sector varies by country, for example in the United States, most buyers rely on fixed rate home loans for up to 30 years. These adjustable rate mortgages represented, on average, about 7% of conventional loans in the past five years.
Conversely, other countries usually have fixed-rate loans for at least a year, or variable-rate mortgages that align closely with official interest rates.
According to a report by Fitch Ratings Agency, Australia, Spain, Britain and Canada have all focused heavily on variable rate loans as a share of new assets in 2020.
Other countries with a large proportion of mortgages are resetting their loans as well. In New Zealand, for example, about 55% of the approved value of residential mortgages (either variable rate or fixed rate) will reset in 2023.
In Sweden, once one of Europe’s hottest markets, house prices have fallen about 8% since last spring, and most economists now expect a 15% drop. Higher interest rates are also putting pressure on real estate companies that have borrowed heavily in the bond markets to fund their operations, leaving investors increasingly concerned about their ability to refinance that debt.