Real estate prices have brushed off higher rates. Can that last?
[…] All this [price resilience and some price hikes] has taken most economists by surprise. Since the start of 2022 [...] central banks have raised interest rates by an average of five percentage points. Economists thought house prices would crash as buyers’ purchasing power declined, mortgage-holders struggled to repay their debts and the economy slowed.
Three factors explain why housing markets have so far brushed off higher rates. The first is a shift in preferences. The pandemic seems to have made people more hermit-like: they work from home more and spend more time on home entertainment than on going out. People thus place a higher value on their living space, raising demand for housing. This arrests price declines.
The second factor is a changed mortgage market. In some countries, it has long been common to borrow on fixed rates, allowing people to insulate themselves from central-bank rate rises. In the years before 2022 households in other countries shifted in the same direction. Between 2011 and 2021 the share of mortgages in eu countries on variable rates fell from nearly 40% to less than 15%. The effect has been to delay the impact of rate rises. Since 2021, the average mortgage rate across the rich world has only risen by half as much as the average central-bank policy rate.
Household finances also make rising interest costs more manageable—the third factor supporting house prices. Following the property crisis that began in 2007, many governments introduced tougher regulations, shutting out less creditworthy borrowers. Richer folk find it easier to weather higher interest bills. In addition, many borrowers are still sitting on large “excess savings” accumulated during the pandemic, which they can use to make their repayments. The latest estimates suggest that, in the average rich country outside America, these savings still amount to 14% of yearly disposable income.
Could housing-market pain merely be delayed? Mortgages with short-term fixes will soon expire. Households will then need to refinance, possibly at the high rates of today; if inflation remains sticky, central bankers may need to raise rates even further. Excess savings will run out eventually, and a rise in unemployment, linked to a weak economy, would also imperil some homeowners. But for now the rich world is a long way from City Hall.
This an edited and shortened version of the original, which you can find here.
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