A series of continuing increases in the interest rates of many of the world’s central banks has hit the stop switch on a pump that had been rapidly inflating global house prices. Experts expect the rises to end the rapid, two-year surge in house prices and price growth to slow down sharply.
Yet the pandemic-induced housing boom has not ended quite yet. Property viewings in London are still attracting crowds of prospective buyers. Houses are still going for sums that far exceed their asking prices.
Similar pressures are manifesting themselves in other markets. In the US, house prices rose at an annual rate of 20.6 per cent in March, the fastest since records began more than 35 years ago. In the last quarter of 2021, real house prices across the 38 countries of the OECD, the imported club for rich-country, were up 16 per cent in two years. That is the fastest pace since records began 50 years ago.
Much of the impetus for price growth came from rapidly changing low interest rate policies that central banks adopted to mitigate economic damage from the coronavirus pandemic, however. Banks’ actions lowered the costs of servicing mortgages at a time when many households had saved money during the lockdowns. Increased homeworking also pushed up demand, and hence prices.
In recent months, by contrast, the highest consumer price inflation in decades has prompted many central banks to raise their official interest rates, which set the benchmark for the wider financial system. The mortgage rates that lenders charge homebuyers are rising in response. In the US, mortgage provider Freddie Mac’s 30-year mortgage rate rose to 5.23 per cent in May, the highest since 2009. In the UK the average rate on newly drawn mortgages rose to 1.82 per cent in April, up 32 basis points from the low registered last November.
Some signs of slowing price pressures have already emerged. In the US, builder sentiment dropped in May and purchases of new single-family decreased homes by 17 per cent in April compared with the previous month, the weakest since April 2020. In the UK, mortgage approvals in April fell to the lowest level in nearly two years. Annual house price growth slowed markedly to 9.8 per cent in the year to March, from 11.3 per cent in February.
Further rate rises by central banks are likely to push mortgage rates up still higher. Markets expect central banks to raise interest rates by at least 100 basis points by the end of this year or early next year in the eurozone, Canada, Australia and New Zealand.
Most forecasters expect such rises to produce a sharp slowdown in house price growth rates. “We are expecting house price inflation to slow down in both the US and Europe as a result of rising mortgage rates and pressure on debt affordability,” says Barbara Rismondo, senior vice-president at the rating agency Moody’s.
The European Central Bank in May warned that an “abrupt increase” in real interest rates could induce house price “corrections” in the near term.
Bank of England governor Andrew Bailey has taken a similar view. “The direction of travel would be that an increase in interest rates would lead to some cooling off of the housing market,” he told members of the House of Commons’ Treasury select committee in May.
Economists say that in addition to rising mortgage costs, factors contributing to the slowdown in housing inflation include the erosion of real incomes by inflation and the harmful effect of the past boom on households’ ability to save up for deposits. As a result, the consultancy Oxford Economics forecasts that house prices will grow more slowly in 2023 than last year in most countries — and that some countries will experience outright contractions.
James Knightley, economist at ING, says that the past two years’ rapid US house price growth could “quickly flatten out and possibly reverse”.
In the UK, Andrew Wishart, senior property economist at Capital Economics, forecasts prices will fall in 2023 and 2024, with a cumulative 5 per cent drop. That would “reverse a fifth of the surge in house prices since the pandemic began”, he says.
However, few forecasters expect a sharp global contraction in property prices like that during the financial crisis of 2008-09, when economic activity and incomes also fell across the world. That crisis prompted five years of house price declines across the OECD countries. There was a surge in property repossessions, particularly in the US.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, says current conditions are “not 2006”.
“The Fed’s rate hikes will not force current homeowners to sell in large numbers, because very few homebuyers in recent years took out adjustable-rate mortgages,” he says.
The popularity of mortgages with fixed rates of interest is shielding many mortgage customers from the effects of rate rises. In the US, the 30-year fixed-rate residential mortgage has become the most popular product. While other countries have lower proportions of fixed-rate mortgages, the share has increased in recent decades on the other side of the Atlantic as well.
Improvements in the quality of mortgage loans offer additional grounds for relative optimism. In the US, more than two-thirds of people granted new mortgages have a high credit score, more than double the proportion before the financial crisis, data from the Federal Reserve Bank of New York show.
On top of that, historically low unemployment rates and a shortage of houses for sale are supporting housing demand in the most advanced. Numbers of residential properties for sale in the US are at a near-record low, according to Redfin, a mortgage broker that has tracked data since 2012. In the UK, the surveyors’ professional association reports that the housing stock reported by its members is at close to the lowest levels since records began more than 40 years ago.
Innes McFee, an economist at Oxford Economics, says that unless there is a rise in unemployment that would create large numbers of forced sellers, the consultancy does not expect “significant outright in house prices” in “the majority of markets”.
While rising prices are expected to push real incomes down in most, many households, particularly the richest, accumulated large amounts of savings during the pandemic.
Jim Egan, head of securitised research at Morgan Stanley, predicts that limited supply of homes, the significant equity that many homeowners hold in their properties and owners’ healthy finances will all ensure the market avoids following the same trajectory as the “great boom housing and bust of the early 2000s”.
Rismondo says that housing markets in both Europe and North America currently share some features in common — “the desire for more space in a post-pandemic world, healthy household balance sheets, healthy labor markets, solid wage growth, and the fact that many homeowners have locked in low-interest financing”.
Rismondo accepts that higher interest rates will damp demand for credit for housing purchases. But she says she expects those “common factors” to offer some support for property prices on both sides of the Atlantic.