Higher Interest Rates Are Shattering Housing Dreams Around the World

The end of the property boom is diminishing homeownership as a path to wealth and deepening economic divides.

Homes under construction in Sacramento, California. Photographer: David Paul Morris/Bloomberg

The shock that rippled through global housing markets as central banks rapidly raised interest rates last year has given way to a cold new reality: The real estate bonanza that fueled wealth for millions of people is over.

Markets around the world are caught between sharply higher borrowing costs — likely here to stay — and a shortage of homes that's keeping prices elevated. That's made housing in many areas even less affordable, while property owners with resetting loans face increasing financial strain.

The US market, dominated by 30-year mortgages, is effectively frozen as homeowners with low rates are reluctant to sell and buyers are squeezed. In the longtime boom areas of New Zealand and Canada, values haven’t fallen meaningfully for house hunters, and people who paid peak prices are now struggling with higher loan payments. From the UK to South Korea, distress is mounting for landlords. And in many places, higher interest rates are only making it harder to build.

The scenarios may be playing out differently in each country, but they all add up to a potential drag on global economies as people shell out more of their income for housing, whether they rent or own. And with buyers increasingly locked out, the viability of homeownership as a path to middle-class security — a bedrock of personal finance for generations around the world — is suddenly looking a lot more difficult. The winners are longtime owners who’ve captured equity from soaring values or don’t have a mortgage, freeing them to put cash in higher-yielding investments.

“The golden age of single-family housing is behind us,” said Mark Zandi, chief economist at Moody’s Analytics. “If you bought in the wake of the financial crisis, you built up a lot of equity in most parts of the world, but the next 10 years is going to be more of a slog.”

Zandi expects that US 30-year mortgage rates, currently about 7.4%, will average somewhere around 5.5% over the next decade, compared with a low of 2.65% in early 2021. Most other developed countries will see a similar increase, he says, even if particular levels vary.

A lot remains unknown. A deepening war in the Middle East and the ongoing economic troubles of China — contending with its own series of property crises centered on its highly indebted developers — could contribute to a broader global downturn that would reduce housing demand and push down prices substantially, causing far worse financial turmoil. And in terms of real estate, commercial property has become more worrisome for the economy. 

But even as inflation cools and many countries’ rate-hiking campaigns are easing, consumers are starting to come around to the idea that borrowing costs may never be as low as they were in the 15 years since the financial crisis. It was one thing when rates suddenly shot up and people facing higher payments thought they could muddle through, or take on mortgages with the expectation of refinancing later. It’s another when the higher costs drag on for years.

Homes under construction in Sacramento, California.Photographer: David Paul Morris/Bloomberg
Homes under construction in Sacramento, California.Photographer: David Paul Morris/Bloomberg

‘Glacial Period’

In the US, the collision of low inventory, rising prices and the highest mortgage rates in a generation has sent sales of previously owned homes to the lowest level since 2010, according to the National Association of Realtors. Contract closings in October fell by the most in nearly a year, dropping 4.1% from a month earlier, the group reported Tuesday.

Read More: US Existing-Home Sales Slide Further, Still Lowest Since 2010

The market is now the least affordable in four decades, with about 40% of the median household income required to purchase a typical home, data from Intercontinental Exchange Inc. show.

The most severe effects may still be to come: In a report last month, Goldman Sachs Group Inc. economists said that the impact of sustained higher mortgage rates will be the most pronounced in 2024. They estimated that transactions will fall to the lowest level since the early 1990s. 

“In some ways we’re in the early stages of this glacial period, and it’s unlikely to thaw anytime soon,” said Benjamin Keys, a professor at University of Pennsylvania’s Wharton School. “This weirdness can last for a long time.”

That stands to have knock-on effects. Mobility for jobs could be limited, family members and friends may more often be forced to live together, and, as the elderly age in place, homes may be kept off the market that could otherwise be purchased by younger families. At the same time, homeowners are sitting on near-record equity and the vast majority are unaffected by rate hikes, which might otherwise force sales or result in foreclosures that would give buyers a chance to enter the market.

Read More: The US Housing Market Has Become an Impossible Mess

“Things might get a little more affordable, but certainly not to what people would have hoped for,” Niraj Shah, an economist with Bloomberg Economics, said of global housing markets. “It’s going to be a struggle on both ends.”

He predicts a “slow puncture” in prices for developed economies rather than a crash, saying that an economic slowdown is unlikely to result in heavy job losses that would cause severe housing distress. But homeowners pinched by higher rates may have to cut back on spending in other areas to keep up with their mortgage payments, Shah said.

“You have distressed people, but not distressed sales,” he said.

Homes in Wellington, New Zealand.Photographer: Mark Coote/Bloomberg
Homes in Wellington, New Zealand.Photographer: Mark Coote/Bloomberg

Watching Pennies

One of the most extreme cases is playing out in New Zealand, the South Pacific nation that was home to one of the world’s biggest pandemic booms, with property prices rising almost 30% in 2021 alone. About 25% of the current stock of mortgage lending was taken out that year, and a fifth of those were first-time buyers, according to the Reserve Bank of New Zealand. 

Mortgage rates in the country are typically fixed for less than three years — meaning the central bank’s 525 basis points of rate hikes since October 2021 are sending house payments soaring. The RBNZ says around half of the outstanding stock of mortgages have been refinanced this year. It estimates the share of borrowers’ disposable income dedicated to interest costs will rise from a low of 9% in 2021 to around 20% by the middle of 2024.

That’s squeezing the budgets of people such as Aaron Rubin, who took out a NZ$1 million ($603,000) mortgage in 2021 to finance the purchase of a NZ$1.2 million four-bedroom house. After moving to New Zealand from the US eight years ago, he and his wife, Jessica, thought buying a home in the coastal city of Nelson was a decision that would provide stability for their two young children. 

At first, the couple paid around NZ$4,000 a month on their mortgage. After a refinancing, it’s now up to about NZ$6,400.

“We can no longer afford to visit our family in the US and we are literally watching every penny that flows in and out of the account,” said Rubin, a 46-year-old software engineer. “It’s time consuming and stressful, and it’s changed our lifestyle.”

He considers himself lucky — his financial situation isn’t dire, and the couple can afford to continue paying their mortgage. He sees many Kiwis under far greater pressure.

The saving grace for many households has been strong wage and employment growth that has kept distress to a minimum, said Sharon Zollner, chief New Zealand economist at ANZ in Auckland. 

“Once you deflate it by household income growth, debt is actually considerably lower than it was in 2007,” she said. “But of course, the average hides a million stories, and there are certainly some stressed people out there.”

A residential building under construction in Montreal.Photographer: Graham Hughes/Bloomberg
A residential building under construction in Montreal.Photographer: Graham Hughes/Bloomberg

Investor Pullback

The global housing boom of the last decade made real estate a fast path to wealth in countries such as New Zealand, Australia and, especially, Canada, where tens of thousands of people turned into amateur investors. By 2020, people with multiple homes had come to account for almost a third of the housing stock in two of Canada’s three most populous provinces, Ontario and British Columbia. 

But higher interest rates and bond yields mean the math has suddenly flipped. Owning a condo in Canada’s biggest city, Toronto, will now yield only 3.9% after mortgage costs and other expenses, less than the 5% earned by investing in a Government of Canada treasury bill, according to a Bank of Montreal study. 

“I don’t see how you can replicate the last 20 years going forward,” said Robert Kavcic, the Bank of Montreal economist who authored the report. “You’re going to have a whole generation of investors learn a pretty hard lesson.”

Higher borrowing costs have already pushed some investment properties deep into negative cash flow, forcing their owners to sell while also damping interest in new purchases. That could spell trouble for regular people just looking for a place to live too.

Investors buying units pre-construction has become a key source of financing for developers in the last decade, and their pullback has already seen the delay or cancellation of thousands of planned units in cities like Toronto. Canada's already under-supplied market is one reason home prices have proved surprisingly resilient to higher interest rates, and the expected slowdown in building could only exacerbate the shortage.

A similar situation is playing out in Europe, where higher rates and soaring construction costs threaten to intensify supply strains. In Germany, new building permits fell more than 27% in the first half of the year, and in France they dropped 28% through July. Sweden, suffering its worst slump since a crisis in the 1990s, has building rates running at less than a third what's deemed necessary to keep up with demand, threatening to further test the limits of affordability.

Read more: Europe’s Great Housing Crisis Is Only Getting Started

And that's not even getting into the compounding strain from skyrocketing consumer prices generally. In the UK, which is facing the highest cost-of-living increase in a generation, nearly two million people have resorted to using buy-now-pay-later credit to cover groceries, bills and other essentials, according to a survey this year by the Money and Pensions Service. With more than one million homeowners estimated to be refinancing their mortgages this year at much higher levels, that pressure will only get worse.

Residential properties in Guildford, UK.Photographer: Jason Alden/Bloomberg
Residential properties in Guildford, UK.Photographer: Jason Alden/Bloomberg

A report released in September by KPMG showed almost a quarter of UK mortgage holders are considering selling and moving to a cheaper property due to the surge in financing costs, and mortgages with late payments now account for over 1% of the value of outstanding home loans. For landlords, who often have floating-rate mortgages, it can be worse, and that translates directly into pressure on renters.

London landlord Karen Gregory had little choice but to sell her building after her mortgage payment jumped more than threefold, leaving her with the prospect of evicting a young couple with a baby on the way. They found a new home before her deal, but the situation left her fed up.

“Landlords have had enough of the increase in interest rates,” Gregory said.

Asia Shakeout

In Asia, South Korea is contending with its own landlord fallout. The country has the developed world’s highest ratio of household debt-to-gross domestic product, at 157%, if the roughly $800 billion is counted from “jeonse” — a rental system unique to the country.

Under the system, landlords collect a deposit called jeonse that’s equal to roughly half of a property’s value at the start of the lease period, which typically runs for two to four years. When interest rates go up, jeonse becomes less attractive than paying monthly rent and the size of the deposits landlords can get from renters falls. Because owners often use new deposits to pay back old ones when leases expire, it becomes harder for them to meet their obligations. 

The risk of defaults from jeonse landlords is expected to persist through 2024, because the contracts coming due were signed when prices — and hence deposits — were at record highs.

Newly constructed residential apartment buildings in Gimpo, South Korea.Photographer: SeongJoon Cho/Bloomberg
Newly constructed residential apartment buildings in Gimpo, South Korea.Photographer: SeongJoon Cho/Bloomberg

Hong Kong, meanwhile, has been hit by China’s slowdown, a population exodus and rising rates that have halted once-unstoppable price gains. Since its currency is pegged to the greenback, the city’s monetary policy generally moves in tandem with the US. That’s caused mortgage rates to more than double since the beginning of 2022. Existing-home prices in the notoriously expensive area have fallen to a six-year low, builders are offering deep discounts and the government is slashing extra stamp duties for some buyers to revive the hub.

Unless interest rates start falling, the Hong Kong housing market will continue to suffer. Prices in the city had surged so much in the past decade that homes are still unaffordable to many, meaning the recent drop in values doesn't offset the higher borrowing costs — the same scenario that’s playing out in much of the world.

Housing markets “have had a real party the last two decades, and this is simply because you’ve had record low interest rates and lack of supply fueling house prices,” said Shah of Bloomberg Economics. “The decade ahead has to be the decade of great moderation.”

(Updates with existing home sales data in ninth paragraph.)

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.

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