Global housing downturn – the markets most at risk

Houses and mortgages are often taught as a neat example of ‘complementary goods’ – you usually don’t buy one without the other, and as the cost of mortgages falls, the demand for housing tends to increase. Deutsche Bank analysts explain it with more pizazz, describing low rates as “the rocket fuel that charged house prices in recent years”. And as a decade of low interest rates comes to an end, the global impact on house prices could prove substantial. 

The perils of rising rates are clear: higher mortgage payments will intensify cost of living pressures, while affordability concerns will drag on housing demand, weighing on house prices. Although evidence for a 'wealth effect' is mixed, Deutsche Bank analysts find that consumers tend to tighten their belts as house prices fall. This all has the potential to reduce household spending, and exacerbate the recessions looming worldwide. 

But, to coin a phrase, while economies are facing similar storms, they are not in the same boat. Goldman Sachs economists forecast significantly greater “payment shocks” for the UK, Canada and Australia than for the US, where 30-year fixed mortgages are common and households are more insulated from rising interest rates. 

In the UK, a ‘fixed rate’ mortgage is a significantly less enduring affair – with most borrowers fixing rates for either two or five years. According to data from Pantheon Macroeconomics, around 7 per cent of these fixed rate mortgages are refinanced every quarter, leaving borrowers facing a 3.8 percentage point jump on the interest rate on their loan. It comes as little surprise that in the UK fewer people thought in the third quarter that now would be a good time to buy a property than at any point during the 2008-2009 recession. 

There is a silver lining: according to Goldman Sachs, stricter leverage requirements plus interest rate stress tests have contributed to significant increases in credit quality since the financial crisis. But some countries will still find themselves in an uncomfortable position. 

Deutsche Bank analysts looked at a range of factors including affordability and debt burden, and produced a ranking of which housing markets are most at risk. The UK is currently mid-table: interest rates may have risen fast, but household debt as a proportion of household income is ‘just’ 148 per cent, and only 28 per cent of households have a mortgage at all. 

The situation looks worse for Australia, ranked second most risky, due to its indebtedness (household debt is 202 per cent of net disposable income) and high prevalence of variable rate mortgages. UBS analysts predict a “mortgage cliff edge” for Australian households as short-term fixed deals expire next year. A third of borrowers will face rapidly rising mortgage costs as rates increase from 2.25 to 6 per cent, which could trigger a house price slump of up to 15 per cent. 

The outlook is also gloomy for heavily mortgaged Canada, which tops Deutsche Bank’s risk table. According to Oxford Economics, Canada’s elevated household debt burden and stretched housing valuations have left it particularly vulnerable to higher interest rates. Economists now forecast an enormous 30 per cent house price decline – far bigger than the 9 per cent dip seen on average in comparable past Canadian recessions.

But context here is key: Oxford Economics note that Canadian house prices surged by 50 per cent during the pandemic, and argue that “a decline of this magnitude is overdue and necessary to help restore balance to the market”. In a similar vein, UK house prices rose by almost a quarter over the course of the pandemic. This means that even a worst-case scenario of a 15 per cent drop would leave them higher than they were three years ago.