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Analysis-Are they as safe as houses? The foundations of the property bubble are being put to the test as interest rates rise

Image: Reuters Berita 24 English -Just a few months ago, a typical three-bedroom house in Toronto's far-flung suburbs would have receiv...

Image: Reuters

Berita 24 English -Just a few months ago, a typical three-bedroom house in Toronto's far-flung suburbs would have received 40 bids on bidding night and sold for much above the asking price. Homebuyers have been scarce in recent years.

Tim Keung, CEO of TimSold Real Estate, a local firm, remarked, "You're not getting the bidding wars anymore."

"A lot of people are waiting for this major correction to happen," says one buyer.

They aren't on their own. As borrowing costs climb and high inflation bites into household budgets, a decade-long property price boom from the United States to Europe and Asia is facing its first true test.

Home prices are already declining in some of the places where they have risen the most, such as China, New Zealand, and portions of Australia, outside of Toronto.

In Singapore and South Korea, growth has stalled, and volumes in the United States and Poland are declining.

Lenders and regulators from all around the world have warned that inflated property prices could now stagnate or decline, in some cases by as much as a quarter.

While each market is unique, they all have one thing: a rise in borrowing costs as central banks throughout the world hike interest rates to combat inflation.

According to the Mortgage Bankers Association, the average rate on a 30-year fixed-rate mortgage in the United States, which serves as a barometer for the rest of the world, has risen from 2.7 percent in late 2020 to 5.5 percent presently, the highest level since 2008.

This is lower than in the 2000s, but the rapid change in fixed and variable rates is putting a strain on buyers and owners who are already dealing with rising living costs.

This risks pricking property bubbles that have been fueled by cheap credit for the past decade and became even larger during the pandemic, when some individuals saved more and sought larger homes.

"Rising mortgage rates and high real estate prices are increasingly a concern for residential property affordability," said Joerg Utecht, CEO of German mortgage broker Interhyp.

Based on criteria such as the link between prices, salaries, and rents, Swiss bank UBS rates Frankfurt, Germany, as the city with the greatest bubble risk, followed by Toronto, Hong Kong, and Munich, Germany.

Similarly, the German bank LBBW predicts that since 2015, property prices in Europe's largest economy have increased by 20% to 25% more than demand and supply would explain, implying that prices could fall by that much if borrowing costs return to where they were.

According to Interhyp, German borrowers were paying under 1% for a 10-year fixed rate mortgage last year, but this has now jumped to 2.5 percent, the highest level since 2014, and could likely reach 3% by the end of the year.

Reuters polled economists, who have already begun to lower their forecasts for home price rise in Germany over the next two years.


Variable-rate mortgage holders are starting to feel the pinch as well.

In Poland, where such loans are common and the central bank has boosted rates from 0.1 percent to 5.25 percent since October to combat double-digit inflation, the government is assisting debtors by granting payment holidays.

Maciej Kawka, a 31-year-old office worker from Rotmanka, has seen his monthly mortgage payments on his small flat increase by 18 percent since taking out the loan in 2018. He now pays a monthly fee of 1,650 zlotys ($384.62). When the recent two central bank hikes are factored in, he anticipates payments to rise to 1,800-1,900 zlotys, further straining his finances, which are already being strained by rising energy and food expenses.

"Our budget will be considerably tighter: no vacations, nothing that isn't necessary," Kawka, who lives with his wife and children, said. "However, if (interest rates) continue to rise, I'm not sure what will happen."

Homeowners in other areas are locking in current prices, fearful of further increases.

Dennis Willeke, a 35-year-old firefighter, has locked in a 2.15 percent fixed rate for the next ten years on his home in Neukirchen-Vluyn, western Germany, where he lives with his wife and two children.

"We raced to refinance because I believe it will continue to rise," he explained.

In New Zealand, Lee Stewart and his wife are concerned about a replay of the property meltdown in 2007-09, when millions of homes were repossessed in the United States alone, and the couple had to sell theirs at a loss.

Stewart has locked in his mortgage costs for three years, fearful of the rate hikes that began in New Zealand sooner than in most other countries.

"Small percentage changes make a tremendous difference... to someone with a big loan," the 40-year-old remarked.

Analysts, on the other hand, do not predict a replay of the collapse that triggered the global financial crisis 15 years ago.

First, in just over a decade, variable-rate loans have dropped to barely 10% of all mortgage applications in the United States and 20% of all household debt in the euro zone.

Second, with the noteworthy exception of China, most countries are still experiencing housing shortages, which are being compounded by a scarcity of labor and supplies as a result of the pandemic's lockdowns. The United States and Germany are two of these countries.

This was perceived as putting a price ceiling in place.

However, Canada and New Zealand demonstrate how quickly this may alter when interest rates rise and demand falls.

"Right now, if a buyer has ten things on their wish list and the house doesn't have eight of them, they're going to pass," said Brad Goetz of Right at Home Realty in Canada. "Previously, it was simply, 'Hey, it has four walls, a kitchen, and a bathroom.' We're OK.'"

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