Inflation is cooling and interest rate hikes are slowing down, and yet regardless of where you are in the world, you're probably spending more and more money on renting or owning your home. Home Ownership has long been a traditional path for building wealth, but as prices skyrocket, that avenue for financial security is becoming less accessible to people across
the globe. Bloomberg's Ari Altstetter and Kara Wetzel report that if you bought or refinanced the house in the last few years, chances are you're going to be paying that high interest rate on your mortgage for years to come with no relief insight.
The pain from higher interest rates is cumulative. It gets harder the longer you have to bear them. Someone, let's say, with a varial great mortgage, who saw their payments or their interest rate go from two and a half to three percent up to seven percent, may think I can bear that seven percent for a few months. But the longer you get past that few months, the harder it gets.
The impact of what we're seeing is that homeowners who have already locked in low rates are sitting on those and are essentially not moving. So our supply has gone way down, and that has led to people who are entering the market to confront still high prices.
I'm Craig Gordon today on the Big Take. The global housing market faces a cold reality, Kara. Interest rate hikes and inflation have both slowed around the world, but despite that, borrowing costs are still higher than they have been in recent years. Why is that.
Well, as central banks began really raising rates aggressively last year and rapidly they sent interest rates much higher, the bond yields have been soaring in most of the world,
and particularly in the US. Tenure treasuries of which a lot of borrowing costs are based on, and particularly mortgage rates are very sensitive to those have gone to this highest level in many, many years, and as such, mortgage rates have followed, and inflation is slowing, and central banks, including the FED in the US, have paused their campaigns to stop their rate hikes.
But the thing is, when central.
Banks stop the rate hikes, that doesn't necessarily mean that the rates go down.
They stay where they are.
So we have had mortgage rates that have soared to the highest level in a generation, and they're going to basically stay there unless there is some major event. That causes central banks to come in and actually lower rates. And the prospect though that they are going to lower rates to where they were for you know, much of the past fifteen years since the financial crisis is pretty low.
So rates and particularly borrowing costs for houses are going to stay elevated as far as we can tell, pretty well into the future.
So ari, how have the increased borrowing costs affected the prices and the supply of available homes.
The impact on prices has been interesting. Borrowing costs are a driver of demand. Higher borrowing costs should equal less demand, and so that has in a lot of countries like Canada, New Zealand the UK, resulted in a decline in prices. The thing is, it hasn't resulted in nearly as big a decline in prices as you would expect as central banks even expected relative to the rise in interest rates.
And the reason for that is because in virtually all these countries across the developed world, there's also a real shortage of supply. There's just far fewer houses than people that need to live in them, and so that's kind of put a bit of a floor and meant that house prices haven't reacted as much as they should have, one would think, or as they need to to make them affordable. Give an interest rates where they are.
So, how has all of this affected the global economies.
Well, it means that for the last decade and a half, housing was a driver of the global economy. It was a tailwind buying and selling building became a big part of a lot of local, national, regional economies. For the foreseeable future, it's probably going to be more of a headwind. They'll just be less buying and selling. They'll also be less building. Builders need to borrow to build, and it's hard to do that when rates are as high as they are, and particularly hard to do that when there's
fewer people buying. So all the activity that goes along with building homes, all the activity that goes along with buying homes. You know, when people buy a home, you got to buy all sorts of white goods, appliances, furniture. That's economic activity. And they'll just be less of that given rates where they are, given the economy where it is.
So Kara, who is most affected by these rate increases? Is there any part of the economy that's sort of immune to them?
Well, depends on where you're looking around the globe. So the US is actually relatively unique in its structure of having thirty year fixed mortgages that are federally backed, and so the effect on that is there are actually a lot of winners and people who are benefiting from these higher rates, and those are people who have mortgages.
That are locked in at low rates.
It's the people who are trying to get into the market now and confronting still elevated prices unless supply combined with higher borrowing costs, that are kind of running into trouble. In other parts of the world, you have mortgages that reset much quicker, you know, one year, two year, five years, and those are people who are now facing higher payment costs.
And again, the people with loans, and particularly the people who took on loans at peak prices during the pandemic boom years and twenty and twenty one that you know, we're maybe already stretching their budgets to pay for the house itself, and now are stretching their budgets with bar rowing costs at a pretty rapidly increased so they are facing you know, higher payments and having to confront difficult choices in how to maybe cut back on spending elsewhere in order to keep their house.
Carol, let's take a look at the US. What does the impact of sustained higher mortgage rates look like.
They're in the US, where the preferred financing mechanism is a thirty year mortgages that are fixed rates. The impact of what we're seeing is that homeowners who have already locked in low rates are sitting on those and are essentially not moving. So our supply has gone way down, and that has led to people who are entering the
market to confront still high prices. So the media and used existing home price is up forty three percent since the start of twenty twenty, So already people are facing very high prices.
And normally, when.
Borrowing costs would rise, those prices will come down. But because there's just not enough supply out there, because few homeowners want to give up their two and a half percent three percent rate to move into a new house and take on a seven or eight percent mortgage rate,
there's just not enough supply to meet demand. So you've got now, what is the least affordable housing market since the nineteen eighties, According to the Intercontinental Exchange and Goldman Sachs estimates in twenty twenty four transactions will fall to the lowest level since the nineteen nineties. So we have
just kind of essentially it's a frozen market. It is what the professor at the Warton School, Benjamin Keys, called the early stages of a glacial period, and it's unlikely to thaw anytime soon.
It's just going to be a very long slog.
As Mark Sandy from Moody said in our story of just the housing market muddling along, and that has knock on effects limiting mobility for jobs. You might force family members to live together and elderly people to age in place, which just keeps more homes off the market that could otherwise go to a family. And it's also you know, more effects on building and supply, and it's just creating the situation where few people will be able to buy houses, which is a key driver of wealth.
So all right, this is clearly a global phenomenon, but let's zero in on some individual countries to talk about the situations there. New Zealand has experienced a massive boom and property prices since the start of the pandemic. How has the Central Bank's rate hikes there affected housing payments.
The Central Bank has raised its benchmark rate five hundred and twenty five bases points since October twenty twenty one, which is a lot in a very short amount of time. And the thing that's unique about New Zealand compared to the US is that mortgages have to be renewed or refinanced every three years or less.
There.
That means borrowers who bought right at the peak are facing a renewal really soon. Twenty five percent of mortgages in New Zealand were taken out in twenty twenty one, and that was approaching the top of the market right now there, and a fifth of those were first time home buyers. So there's just a very large pool of people in New Zealand who will be exposed to these higher interest rates over the course of this year and
into next year. That'll have an effect on their disposable income, that'll have an effect on their lifestyles, and you're starting to see that now. People are being forced to cut back in their spending as they accommodate to this much higher interest rate. Shock is what it's often called, and that'll weigh on the New Zealand economy for the next few years, and some people may end up in actual financial distress. Some people who aren't able to cut back
their budgets elsewhere redirect money to interest payments. Some people who just don't have enough money may find themselves in distress, may end up having to sell their homes or have the banks take their homes.
Are there any economic factors that are sort of helping buffer against some of these more extreme outcomes.
Well.
New Zealand, like some of these other countries, benefits from very good population growth, which helps support house prices, and
also low supply. Frankly, New Zealand is another country that hasn't been building enough houses for a very long time, and fundamentally those factors this imbalance between supply and demand demand driven by population growth and supply which has been constrained and looks like it will continue to be constrained by various factors, including shortia's labor materials, limited land that's zoned for residential that'll continue to sort of support New
Zealand home values even as this subset of mortgage holders faced some tough years ahead.
After the break. How the high cost of borrowing is affecting homeowners around the world, so ari in Canada more so than most countries, the global housing boom contributed to the purchase of investment properties. How has this changed with the higher interest rates?
Investment in real estate became something of a cottage industry in Canada over the last decade and a half. Recently, a study from the government found that up to a third of homes were owned by investors in two of
the country's most populous provinces, British Columbia and Ontario. It really turned into a bit of a frenzy where that was the place you put your money if you had some savings, because there were just better returns in buying a Toronto condo or a Vancouver condo and renting it out than you could get investing in stocks or bonds. But that switched right now. The surge and interest rates the last year two years has really turned that out
on its head. So now Bank of Montreal did a study buying a Toronto condo now would yield about three point nine percent to an investor annually buying just a Vanilla Government of Canada treasury bill. That's a one year treasury bill that'll get you five percent, and so you don't have to think about it very long. Owning real estate, it's a bit of a headache. You got to keep the thing from falling over. You got to make sure
people are paying their rent on time. A Treasury bill doesn't require any of that, and so that is expected to sort of draw some of this demand that has helped spur the Canadian housing market to record heights. That'll start to sort of be pulled away in the coming years for as long as this math holds up.
So is this affecting the construction of new housing in Canada.
Absolutely. Another development of investors playing a bigger role in the Canadian housing market has been they became a source of financing for new development. New condo projects would sell units pre construction, and of course the buyers for these would be investors. Conda Developments had to sell us which is eighty percent of their unit's pre construction to even get a bank loan to get started. That math sort of turned on its head now and developers can't rely
on it anymore. Thousands of units that were slated for construction in Toronto in Vancouver have been canceled or put on hold because there's not enough investor demand. So the evaporation of this source of demand in the housing market could end up limiting new construction in the future, and that's a problem in Canada. It's also a problem in other countries as well.
So ari where else are we seeing higher rates affect the construction and the stock of new housing.
Well, it's actually a very big problem in Europe, where similar to the US, similar to Canada, similar New Zealand, there's a pre existing shortage of homes it's been building over years. But in continental Europe the pace of construction has really really dropped, largely because of high interest rates. Developers need to borrow money to get developing and gusure it's where they are prevent them from doing that. In Germany, new building permits of fallen twenty seven percent. In France
they fall in twenty eight percent. Sweden, which is one of Europe's worst housing crisis, is the building permits of the worse since the nineteen nineties, and the pace of building there is calculated to be about a third of what the country needs to meet the needs of its citizens to make sure everyone can find a place to live in Sweden, so high interest rates when it comes to the development of new homes has really made a
bad situation worse in Europe. And for as long as these high rates persist, it's hard to see how the problem in these European countries is going to get solved.
Sokara, We've talked a lot about how these rates are affecting borrowers and some extent, but developers as well. What about landlords, How is this affecting the rental market?
Well, the rental market in many places, you know, rent gains have slowed, just as job gains have slowed, et cetera.
But there are as Ari was saying, people who looked at housing as an investment, seeing the price gains everywhere, So people who perhaps stretched themselves and took on extra houses with the hopes of renting them out, thinking that it was kind of like a no lose bet that there will always be rental demand and interest in these houses, to which you know extent, because there is a shortage,
there is going to be rental demand. But it's the people who perhaps took on debt and especially variable rate mortgages, that would then be running into trouble.
We're seeing this particularly pronounced in.
The UK, where the buy to lette industry is a pretty big one, and you've seen mortgages there that reset pretty quickly, and the landlords that took on these mortgages are almost all variable rates, so they're seeing an increase in defaults there by landlords. And the UK is of course dealing with a pretty severe cost of living crisis with higher energy prices and the effects of the Ukraine
War really playing out there. So that's another area where this rapid increases rates is really hitting both the housing market and the people who are benefiting it for so many years, landlords being one of them.
Ari and the story you write that the impact of sustained higher mortgage rates will be most pronounced in twenty twenty four.
Why is that this is particularly in the US, but it really applies to most countries. Tell you the truth, it's because the pain from a higher interest rates is cumulative. It gets harder the longer you have to bear them. Someone, let's say, with a variable rate mortgage who saw their payments or their interest rate go from two and a half to three percent up to seven percent, may think I can bear that seven percent for a few months, But the longer you get past that few months, the
harder it gets. So you see that, I mean in countries with a high proportion of variable rate mortgages like the UK for those buy to let landlords. In Canada there's also very high percentage of variable rate mortgages, also Australia, and anyone who has to reach new in one to three years. Those are people that got in with the lowest possible rate who are now going to have to refinance at the highest rate in decades. And the longer they have to deal with that, the harder it's going
to get. Which is why in a lot of countries where there's a big wave of refinances coming in twenty twenty four, the housing markets there could get worse. And you see that in New Zealand, you see that in Canada. In the US, where there's not the same refinancing risk, it's also expected to get worse. Strangely enough, and that's just because the freeze the CARE was talking about, the glacial period. It also gets worse the longer it goes on.
Any buyers or sellers who for whatever reason had to or ready to already at the beginning of this period of higher interest rates, they've made their move and so they'll just be fewer houses for sale, fewer buyers able or willing to buy. The longer we go into this era of very high interest rates, which for casters like Goldman Sachs expect to continue in the US into next year.
So, Cara, that all sounds kind of grim. Do you see any relief coming from high mortgage rates or the shortage of housing stock?
Well, not really, not anytime soon. I mean, the Federal Reserve has signaled we are in a higher for longer era, and that's kind of what it all boils down to.
Last year. You know, when rates began rising.
There was this concept around the US that mortgage brokers would try to sell marry the house, state the rate, figuring you could just buy the house you need to buy and you can worry about refinancing you rate longer.
Well, you know a.
Lot of those people, they're not gonna be able to refinance into anything lower probably anytime soon. There might be some moderation, as you know, the Fed pauses potentially even cuts if the economy slows, but you know, you're not going to go back to three percent anytime soon. So it's just going to make it harder and harder for
people to enter the market. The bright spot is like nobody is calling for a housing market crash, which arguably would be far worse for the economy, for the financial system, and to see prices plunge to the point that it hurts everybody and hurts the economy. So we're sort of in a better situation than we were in say, two thousand and eight, when there were foreclosures incredible distress and
pain for people being forced to sell. Now it's just a frozen state, and so you know, you could argue, you, I guess that's better than the financial crash, you know, but a lot will depend on what happens with the economy. I think it's you know, still remains to be seen, just kind of what lies ahead in twenty twenty four
for the economy. And of course there's all sorts of things we don't know that could happen and effect things either way and potentially push housing prices down if there was an economic slowdown and job losses, and that might make it a little easier for borrows to enter and make the FED decide to cut rates and thaw things out a bit. But as of right now, I think we're talking years where we might be the situation in the US.
When we come back. How persistent high rates will shape global economies in the years to come. So Ari Kara mentioned the US Federal Reserve and this idea of higher for longer, higher interest rates to try to stamp out inflation. How are other nation central banks looking at this problem and are there taking any steps to help?
I think generally the higher for longer eras a global phenomenon. I mean, the US is unique in the fact that the economy is just humming along despite the higher rates, and so other places that we talked about, like Canada, like New Zealand, other countries that have higher debt loads, higher consumer debt loads than the US, and like we
said before, have more frequently renewing mortgages. They're more exposed to those higher interest rates, and so they're starting to feel it already and they're probably going to be starting to feel it more in the next year or two, and so that will put more pressure on central banks in those countries to cut rates earlier, as their economies
will slow faster and potentially more severely. But overall, our interest rates and mortgage rates going back to what they were in twenty twenty, twenty twenty one, even for a good chunk of the decade and a half before that,
probably not. And that is really a global change that I think only recently is started to sync in to financial markets, professional traders, but also just regular people for whom the most important interest rate is the one that allows them or doesn't allow them to buy a home.
So, Kara, what are you watching for sort of next? What do you think might be the next story we might be writing in this incredibly interesting series of developments around mortgage rates.
I think we're waiting for signs where buyer demands is somewhat exhausted and people gave up, and maybe there are signs that the borrowing costs are just too high, so there will be sellers out there like regardless, some people do need to sell and move for whatever reason, and people will decide to put their homes on the market, and maybe it will slow down and so prices will moderate somewhat and perhaps enable more buyers to get in.
We will be closely watching the Fed and Treasury yields to just see signs that mortgage rates will come down.
They have come down somewhat in recent weeks. As FED has signaled, you know that it might stay on pause for a while. Now.
Maybe home buyers who've grown accustomed to the fact that, okay, mortgage rates are at this level and will be for a while, are just going to make it work and buy it because fundamentally, people do need to buy homes, and you're just going to have to accept the fact that it's going to cost more to do that. So you can still see some sort of leveling of supply and demand. But which way is it going to go.
Is it going to be the rebound in demand from people accepting these higher rates, or is it going to be kind of supply edging up as homeowners decide to sell and there is more of a balance there.
All right, what are you watching for globally in this front?
I think in this short term I'll be on the lookout for distress in a lot of these countries, These countries that have a high proportion of variable rate mortgages, a high proportion of mortgages that need to be renewed or refinanced after two, three or five years, that wave of renewals could get some homeowners into trouble. And with
interest rates expected to stay where they are. That means there's not a lot of buyers, and even a marginal increase in forced sellers put some pressure on prices, and so I think that'll be something to watch over the
next three to six months. By the middle of next year, more economists outside the US are starting to think interest rates could at least start coming down, and short term ingistrates, the ones controlled by central banks, those starting to come down cause long term interistrates bond yields, which are dictated by traders in the bond market, that could cause them to come down more too, which means both fixed rate mortgages which are set off bond yields, and very rate mortgages,
which are set off central bank rates, could start to come down. It'll be interesting to see what happens with the housing market when that happens, because you'll see already supply is starting to build from the distress we have seen and the pressure of high interest rates, and so the marginal increase in the demand may offset that may not,
And that'll be the real question. And the real estate market is a very seasonal market, and everyone spends their time waiting for the big spring market, when most buyers and sellers decided to come, and I think in places like Canada, Northern Europe, the UK, the spring market is going to be an interesting bell weather because a lot of people who might have to sell might be holding
on until then. And that's also a time when central banks may start to lower interest rates or signaling that they could lower the strates, which would cause bond yields to come down. And so I think that the spring market will be a key test for real estate markets in a lot of countries.
Thank you Kara, thank you Ari.
Thank you Craig.
Thanks Craig.
Thanks for listening to us here at The Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcast, Bloomberg CarPlay, or wherever you listen, and we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net. The supervising producer of The Big Take is Vicky Vergalina. Our senior producer is Catherine Fink. This episode was produced by Sam Gebauer. Hilda Garcia is our engineer.
Our original music was composed by Leo Sidron. I'm Craig Gordon. We'll be back tomorrow with another big take.