Around the world, soaring borrowing costs are squeezing homebuyers and property owners alike. Already, frothy markets such as Australia and Canada are facing double-digit house-price declines, and economists believe the worldwide downswing is only getting started.
Higher real estate financing costs hit economies in multiple ways. Households with loans tighten their belts, while rising mortgage payments discourage would-be buyers from entering the market, dragging on property prices and development.
The slowdown is a stark turnaround from a boom fueled by central bank’s easy-money policies in the years after the financial crisis and then supercharged by a pandemic that sent people searching for bigger spaces and remote-work-friendly homes. Now, many people who paid record prices face loans due to reset higher just as soaring inflation and a potential recession hit.
In the US, for instance, most buyers rely on fixed-rate home loans for as long as 30 years. Adjustable-rate mortgages represented, on average, about 7% of conventional loans in the past five years. By contrast, other nations commonly have loans fixed for as little as a year or variable-rate mortgages that move closely in line with official interest rates. Australia, Spain, the UK, and Canada had the highest concentration of variable-rate loans as a share of new originations in 2020, according to a May report from Fitch Ratings.
Variable-rate mortgages as % of 2020 new loans. Other countries have a large proportion of mortgages resetting imminently: In New Zealand, for instance, about 55% of the outstanding value of residential mortgages is either on a floating rate or on a fixed rate that needs to be renewed in the year to July 2023.
In Poland, where monthly payments for some borrowers have doubled as rates rise, the government stepped in earlier this year to allow Poles to suspend payments for up to eight months. The move wiped out profits of major banks after the industry was forced to book about 13 billion zloty ($2.78 billion) in provisions.
China is dealing with an escalating property crisis tied to a wave of developer defaults and borrowers withholding payments on mortgages for unbuilt homes. In other countries, the ripples are also starting to spread.
In Sweden, formerly one of Europe’s hottest markets, home prices have fallen about 8% since the spring, with most economists now expecting a 15% drop. Rising rates also are pressuring property companies that borrowed heavily on the bond markets to finance their operations, leaving investors increasingly concerned about their ability to refinance that debt.
Price declines also are accelerating in the UK. Home values are flat or dropping in almost half of London’s boroughs. HSBC Holdings Plc has warned the UK is on the “cusp of a housing downturn” and demand probably will plunge 20% over the following year. While the US has less risk from resetting mortgages, the surge in borrowing costs in recent months has pushed price-squeezed buyers into more flexible loans that carry cheaper interest rates.