The Housing Slowdown Could Become a Global Meltdown

And because it does play such a big role in all our lives, property as also historically played an outsized

role in the ups and downs of the economy. In a little while, I'll be taking a quick tour of the world's property markets with Bloomberg economist near Our Shah, warming up for an expansive, even philosophical conversation with Bloomberg Star columnist John Authors, asking why it is that real estate causes us so much trouble and which of theollowing are most likely to blow up the global economy, this time around bankrupt property developers in New York or China.

But first, US economy reporter Maria Paula Micharris Doris has this ground level view of the increasingly cutthroat market for US rentals, where suppliers tight and costs for even long time renters are soaring despite whether the rents go up

or not. I can't afford anything until I get some help from the government with disability from solving secured so that the story is, yes, we have higher rent and now the higher rents are now backering in my ability to rent an apartment in my busical condition because the rents are higher. Deny Keiner had a plan to deal with the big increase in the monthly rent for his as big as apartment to spring. You figure he would just take extra ships at his pretending job on the strip.

Then life intervened a diagnosis of pancreatic cancer and made it hard for him to move, let alone work, and he lost his job. Now he's facing eviction. I don't have enough strength. I'm physically able to walk around like a regular person. I can walk maybe a quarter mile and then I'm done physically. So the question at some point in my life, this terminal disease will kick in to where I can't do anything like even work from

a laptop. Cannery is among the eight point four million Americans who are laid on rent payments as prices continue to increase. According to data by the U S and SIS Bureau, that is of o U S renters. As rental cut sore across the country, Americans are struggling to

keep up. Single family rents grows by a record of fourteen percent nationally over the past year, according to core Logic, a real state data firm, But the increases were even more dramatic in cities that became popular living destinations during the pandemic, including a four one percent increase in Miami, a twenties six percent rise in Orlando, and an eighteen percent jump in Phoenix. Some tenants are seeing their mostly rent bills rise by several hundred dollars even after years

of living in the same apartment. The government block landlords from a big tim many people during the pandemic, but those moratoriums are ending, so too are many emergency rental assistance programs. Now there's a very real chance many Americans could be forced out of their homes. It's pretty much the perfect storm for renters right now. That was Kate Reynolds, principal policy associated at the Washington based Urban Institute. So emergency rental release was authorized as a response to the

pandemic a total of forty seven billion dollars. And these were authorized back at the beginning of What we're seeing now is that a lot of that funding has been spent down and those renters and and their landlords are you know, don't have a place to turn if they're unable to pay the rent. She says that for the first time since the pandemic began, an increasing number of Americans are on their own to COVID strowing housing costs

during the pandemic. Combination of national, state and local moratoriums you have a lifeline to millions of Americans thrown out of work or forced to stay home to care for children. Starting in March, the Federal Cares Act put in the initial one d twenty day ban on evictions that covered as many as forty five percent of U S renters

according to Urban Insitute estimates. That was followed up by a sweeping moratorium imposed by the Federal Centers for the c Control and Prevention, which covered millions more American throughout parts of However, by August of last year, the US Supreme Court struck down the federal moratorium and in art

evictions to RACEUME. So for the first time ever UM in June, we saw median rant prices go above two thousand dollars a month, and you have inflation on essentials like gas, food and groceries as well as energy costs. And then on top of all of that, eviction moratoria were also extended during the pandemic, both by Congress and by UM. The Centers for Disease Control and Prevention, and some local places also had policies and eas. All of

those have expired. There's a few local exceptions. But what we did see is that UM, during the time that those eviction moratory were in place, that eviction filings really did stay below average levels. And so all of these things are sort of happening at the same time, which is really difficult for a lot of friends or households.

There is a great research study out of California that came out, you know, mid in mid crisis UM, that basically showed that a lot of renter households had what we call shadow debts UM, so renters were taking on debt in order to pay their rent because you know, folks worry about UM, you know, in eviction filing or losing their housing and so a lot of times we've seen that. UM. What we say sometimes is that the

rent eats first, UM. And what that means is that folks, uh, you know, put money their money towards rents, even if it means that they can't, you know, buy groceries, even when someone isn't facing eviction. A shortage of available housing and a search of people moving to warmer climates has given landlords an advantage over their tenants. In many cases, then there's are boosting rents by hundreds of dollars and

renters have those choice but to pay for it. Last Yanuary, Carlia Kelly was unable to renew the lease of the two bedroom apartment where she has lived since the thousand nine in the Atlanta suburb of Duluth, Georgia. People from the northeastern California were higher than here. They think george is less expensive and where people can work remotely from a number of jobs. Now they don't necessarily have to

be where their company is headquartered. So we do have a big influx of people from the Northeast and from California moving to Georgia. So there was that thing shortage of a part the company that owned the building decided to the renovations that could accommodate new residents who moved from more expensive cities and are willing to pay more for rent. The landlord offered her a space in another of its buildings, bosting her rent by almost six hundred

dollars a month. And the night I got the keys, there were cockroaches running all around the apartment. That was like, pictures were rusted. Light coaches didn't work. Carpeting in the bedrooms was old, um thoughts that didn't work. I mean, there was just a whole list of stuff. The parments builder hadn't been changed. Um, it was just it was horrible. Back in Las Vegas, Keener's rent went from seven hundred fifty to one thousand dollars for our one bedroom, one

bathroom apartment. That might sound cheap for New Yorkers and Californians, but very expensive for people in Las Vegas. Unable to work and facing possible eviction. He's hoping to win financial assistance from a government program that helps low income Americans with housing costs. However, his application has been tied up for months. The money is they opened the federal government

and needs to corps, to these very i agencies. But there's so many people applying for this, but they've called created a weights so I can even apply for the month with the help of a lawyer. He's doing an eviction appeal to buy more time before he has nowhere else to go. As we speak, he's backing his belongings into storage to be pretty moved to a homeless shelter whenever he gets evicted. For Bloomberg News, this is Mariab Stories.

I wanted to start with that piece because conversations about property so often revolve around what's going to happen to house prices and mortgage rates. We talked less about the consequences of those things for a renter just looking for somewhere affordable to live. But super low mortgage rates are one reason why property prices and rents have been going up and up around the world in recent years, and especially if you live in the US or the UK.

You'll know that the property boom didn't let up during the pandemic. If anything, it accelerated. So now mortgage rates are finally heading up in many countries. You have to wonder which property market will pop first, and what the collateral damage will be our UK economists. Near Our Shah has been looking at a series of indicators for nineteen property markets around the world. Has some answers to that question. Near Ash, thank you very much for doing this, Thank

you for having me on, Stephanie. So we should cut to the chase. Everyone wants to know whether they're sitting in a place that's about to blow up. So which countries came top in our in our rankings as places to watch? So New Zealand camp top, but Australian Cannedy were up there as well, and all of those countries are showing now signs of cooling. The more striking thing is Toronto, where as you've seen quite dramatic price falls, and so that's something to watch out having had big

house price rises for a long indeed exactly exactly. But the other places a Czech Republic is well up there from the European Union, but also Portugal within the UR Area. Now both those are not actually sharing signs of cooling as yet, and so but something to want to look out for, especially as the ECB starts raising rates from this month and possibly by fifty basis points in September.

It's interesting because a lot of the countries that we mentioned, certainly Australia and Canada, are actually countries that kind of didn't have a housing market crash in the global financial crisis. They sort of dodged that bullet. But it also meant that prizes were able to just keep going up and up and up and up, and they get even less affordable.

There is a lot of focus on America, given that it was the U s sub prime market that played such a big role in triggering that global financial crisis in two thousand and eight. Actually, there was a fascinating statistic that the Deputy Governor of the Bank of England then broad been calculated at the time. I remember he calculated that UK banks had lost a lot more money on US subprime assets going into that crisis than they

ever did on the UK housing market. So people are looking again at the US and saying, could this now cause another global problem? Is it in a stronger position now than it was then? Well, you absolutely right to

focus on the US. It is actually up there within what the country to look out for, um, But it is actually in a much stronger position than in two thousand and eight, and I think it's not only just tight lending standards than they were during the subprime crisis, it's also the quality of buyer and what I mean by that the last cycle, anyone could practically by get a mortgage. This time, it's been quite difficult for those on more wonderable incomes and so on to get a mortgage.

So we already on a stronger platform in that sense. Sean Donald, who is often on this program, he had done some fascinating analysis of nicely that point. On the other from the other direction, that actually that it was many African American households who weren't particularly poor we're being shut out of the lending boom and the sort of mortgages that you've seen over the last few years in the US. I mean more broadly, households do seem to

be in stronger shape. You know, we talk about the cash that's built up in different countries in the US and the UK from the COVID crisis. People still have a bit of extra cash in their bank accounts. Um in most cases you also have a fixed rate mortgage. So when the European Central Bank or the Bank of England raises interest rates or the FED, that doesn't immediately affect your the cost of your of your mortgage right then, absolutely.

But when you talk about fixed rates, and the US has always been one of those countries where you used to have ten thirty years do make the average the normal to get a thirty year fixed rate, which I thought was incredible when I lived at the stakes, But globally now that has been going and so the UK you have eight actually over eighty percent of people on fixed rates, and significant of those are not going to be renewing them until two years time in the line,

so they've got that breathing space to adjust and doubt you point out, and in the piece that you've written, you point out the house prices are record high globally. There's an International Monetary Fund Global House Price Index which is higher now even than it was before the last the last crash. And we know in the US and in UK and Europe it's a constant source of discussion how difficult it is for young people to get on

the housing ladder to buy houses. Um. Yet you know, when government's tried to address this, the last thing that they would appeal to is the idea of actually a fall in house prices that would be the most direct way of making houses more affordable um and instead they have ways to coax people into buying houses and having less and needing less and less money to buy a house.

We won't go into our respective ages, but you will have I'm sure lots of friends who have faced this issue, even with quite well paid jobs in in the UK and in London. Is it just that the people who have all the houses sit on now all this housing value and vote a lot more regularly than the young people that are struggling to get at home. It's quite an interesting thing, isn't it, Where the people who are on the housing ladder and so on are the ones

who tend to vote the most. And the other sort of interesting thing on this is going back to how most the first time the UK in many decades, you've got more people who own their home outright then have mortgages. The government is quite aware of all this so sort of gives these trinkets of little things that we're doing something to get to you on the ladder. But home ownership has gone significantly down for those on the lowest income groups and young age people. Basically it's halved of

the last I think fifteen years. And that's you know, that's quite a shocking really with you and your friends sort of you know, more or less starting out in the in the working force, or quite early in your careers. If you opened, if you if you turn on the TV tonight and they said house prices early on a four by ten percent or trying to strip out the fact that you're an economist, and you would worry about all the consequences. But just among your friends, I think

they would think it was good news. I can definitely match for a few of my friends, they would be absolutely celebrating. They do wish there's their house and crash. I s this is about time, and they do resent all the enormous blenks that governments try and go to to prevent one. But again, this is the thing governments. If if there is a housing crash, there would be financial stability would be quite profound. You could have a far deeper recession and so on. So would actould be

worsel for everyone. Sure that's what you say to your friends when they say, what a great thing it would be. Thank you very much, thank you very much. I'm delighted now to be drawing all the strands together with one of the stars in the world of financial journalism, John Authors, for many, many years one of the most read columnists for the Financial Times. In fact, we overlapped a little bit at the Ft and now definitely the most read

columnists on finance and markets for Bloomberg. And John thank you so much for taking time to be part of our season finale. Well, thank you very much for that

very kind introduction. Yes, it's good to be working together again, and appropriately given what we're going to talk about, your sitting and you're talking to us from from New York, and I wanted to focus on property in this episode, not only because the cost of housing affects all of us in one way or another, or because the ups and downs in the value of real estate has historically played such a role in amplifying the booms and busts in the broader economy, but also it occurred to me

in a slightly more philosophical way that it seemed to embody the tensions the contradictions we're seeing playing out in this chapter of global capitalism. When you look at any given country where governments and those who have prospered in these years of rising asset prices they're all doing all they can to prop up property markets, But then you have a big chunk of the population, including lower income

households and young people. We heard some of them at the beginning of the show who'd like nothing better than to see house prices fall and for housing finally to become more affordable. So, before we get into some of the sort of market dynamics, where you stand on this particular issue very much depends on where you live or don't live, doesn't it. Well, certainly where I live in Manhattan, the issue of affordability is about as acute as it's

possible to imagine. One of the critical problems you always faced with their property is that even though people treated as an investment, it's something you truly need. Shelter is a very basic human need. You could argue it's almost an urged it's it's um goes back to John Locke and the whole idea of property rights, that you cannot really be a full fledged citizen or a full fledged

participants in the economy without some property. So yes, it's this is always more difficult for governments and more dangerous for the economy than stocks. You could, let you know, in two thousands, um the dot com boom blew up, and there was a mild procession thereafter. In two thousand and seven, the housing bubble blew up and all hell broke loose, And there's a there's a reason for that. You people can bear the notion of losing money on

other assets. Losing money on property is a fundamentally different proposition. And that's why I would say you should always in any kind of financial you know, tour of the horizon, you should always be on the lookout for whether real estate is in danger. That's what can tip a financial

event into something more serious. There's a lot of economic evidence now that when you look back and you say, well, why wasn't you know, for example, the you know, the market crash of barely remembered now, and indeed the stock market was more or less back where it was by the end of that year. They didn't have that knock on effect for the broader economy that you did see for example before the global financial crisis when the U s.

US housing obviously triggered all these things. So it definitely does seem to make the difference between the sort of minor market correction and a broader economic recession. So I guess that the big question we have to ask is do you see that transition happening today? Do you see enough problems in the housing market that what we've seen in the financial markets in the last few months possibly a bear market now that's going to turn into something

much worse. I do see the real possibility of that. I don't. I wouldn't say it was yet an inevitability. If you start with the States, then yes, house prices are now even in real terms, higher than they were at the top in two thousand and six. Uh. And demand has been very aggressive and there is now clear sign of a turn. You've seen new house sales falling from a high level each month for several months now.

Measures of housing sentiments have got very much weaker. Uh. And that's also you've got to throw in the very serious displacements caused by the pandemic. Lots of areas are much more appealing than they were three years ago, very suddenly, and others are much less appealing. It's those sudden breaks

that markets can have a difficulty dealing with across the world. Um, the UK has long had I don't need to tell you that's a bad habit of when in doubt inflates the stock market, and that leads to always the risk of in Britain, of that a housing market can bring the rest of the economy down. It's a it's a very housing sensitive economy. Um. The great imponderable UH is China. We know for years now that the Chinese authorities are

scared of a Minsky moment or a Lehman moment. You know Minsky for those uninitiated, is the idea is that the economist who came up with the idea that at a certain point confidence in debt can be lost, and that's when you have a crisis. For scale of what's happened after Lehman Brothers in twoth has and eight um, there is an an imaginably large amount of money that

has been borrowed for the state in China. There are many property developers in very serious trouble UM and the investment is falling there even as fixed assets in other fictity investment is improving. It's plainly very much of an Achilles heel for the Chinese property sector. For sorry, for

the Chinese economy. My best guess is that China is still in enough control that it can manage a very slow period of growth, possibly even a recession without a blow up, without a major crisis for the rest of the world having become as dependent as we have on Chinese growth, that's still quite an alarming prospect. I mean, there's probably a few things so that we should pick

up on. But just going back to going back to the US, I mean, and it came up earlier in the program as well, that you know, we had the economy go south during COVID in a kind of dramatic way, and then we've had the sort of interesting mixed up pattern of the recovery, a different kind of recovery than we've had before UM and that has caused its own problems with supply chains and everything else that we've talked

a lot about in stephonomics. But actually house prices had just carried on defying gravity for quite for most of that period. Talk us through you know a little bit of you know why that happened, where you think there's most vulnerability with all real estates. Critical thing about real estate is that it's leveraged, which is another reason why we should really care about it from the point of

view of financial crises. So it's based based on borrow money. Yes, exactly if if if if rich people use their money to to bet on stocks that go up and then come down again. Yeah, there are some wealth effects. But so what if lots of people borrow money and their house price goes down and they can't support repay the loan. That's very e series. That's a different question altogether. UM, you do still see prices is rising very sharply in

the US. That's partly because supply was actually somewhat limited during the earlier stages of COVID, and because UM finance became exceptionally cheap thanks to the thanks to the Fed's monetary policy, which I think everybody now agrees stayed too easy for too long with the benefit of hindsight, and that did mean that a lot of people started looking

for for housing. The fact that the supply was relatively limited, and that there was also the desire of some who were living in cities to find somewhere else to move meant that you really did have a perfect positive storm from the point of view people who wanted to sell houses. UM. You could make the argument in terms of how day injurious that is now UM mortgage rates are you know, have have had probably the biggest upward shock they've ever had,

bearing in mind how low they started. Yes, it's true. Americans tend to have long term fixed mortgages. Many of them were hoping to use their house as an a t M, however, which isn't going to happen for a long time at this point. And many were probably hoping to refinance lower, which isn't going to happen. So there are still very great concerns there. And actually we should

just say, I mean roughly how much. I mean they're now back thirty year rates back to what around six percent or something, So the change at the start from

the start of the year is pretty dramatic. Its Fortunately, you know that the actual interest rates cost you need to pay now compared taking out a mortgage six months ago has multiplied several times over, so for people who are thinking about their kind of monthly costs, even though even though the sort of six percent doesn't seem that much historically, it's a huge difference in your monthly payment if you were rather over extending yourself potentially, yes, and

and and if a year ago you were doing the math and thought that you were going to be paying two. Then the whole proposition is transformed. And that is a bigger shock, um than you know, there was ever he suffered at any point during the seventies that kind of speed of increase in in debt debt costs from a low base. I mean. Moving on to commercial property, I think that's where there is the really great concern because

two things. One supply is extreme. Um. I don't know when you were started in Manhattan, but there are now something like half a dozen buildings taller than the Empire State. There's forests of new skyscrapers going up. Very beautiful views from the higher floors of the Bloomberg Building. UM, very hard to imagine. It strike me as optimistic even before

the pandemic. At this point, you know, I go to work in the morning and I actually sit down in the subway because so many fewer people are actually going to work in an office, which is which, which is nice, but you know, the and I then move into you know, a central business district with vastly more capacity than had before that that is really terrifying. Putting those things together. The you know, your average real estate developer in this city.

These are guys who probably don't have thirty year financing. They're probably they probably are trying to to borrow over shorter terms and needing to roll over um. So the one positive, the one reason we're not needn't be too concerned about it, is that a lot of the money for these guys ultimately comes from pension funds and endowments and the kind of people who can afford to wait out a storm that they've got a long term time horizon.

But not all of it does. And you know, we'd rather not all of us sacrifice a bit of our pension to deal with real estate. So cook from for my money, commercial real estate is probably the single greatest

cause for concern. What I'm taking from from what you're saying is that if we do see property triggering something really significant for the economy, it's going to look and feel very different from what we saw before the global financial crisis, which was very much tied up into what had happened to those to the to the lower end housing market, with the assets attached to that sort of subprime market having somehow infiltrated not just the US financial

system but the global financial system. This seems like the sort of the complete opposite that you've got. It's actually it's the it's a bit of real estate that probably affects people least in their day to day um and that's potentially the biggest trigger point. And indeed it could be the other side of the world's property market that this time is going to affect us. So let's just

maybe come back to what you said about China. You know, famously US subprime kind of set off this global sort of financial explosion in the two thousand and seven eight? Are we about to see China's property market now do the same to the rest of the world. I mean, how how serious do you see that threat? I do see it as serious? Um uh. I mean, as ever, when you're making comparisons to two thousands and seven, it's like making comparisons to Hitler when you're talking about politics.

Um do I am I predicting that it's going to be as bad as that? No, not necessarily. Is it conceptually something similar that could be very bad? Yes, you do have which you didn't have in the States. You have had several years of the Chinese authorities trying to deal with the issue. The reason the big property developers got into trouble last year is because China was trying to rain them in um. But yes, that that has been an important engine of China's growth. In China's growth

has been vital to the rest of the world. So it's it's a difference, it's it's rooted in the same ultimate problem that everybody needs property, that it tends to be a leveraged investment, and that when it goes, when things go wrong, it's a really serious issue. But you're right, then, I don't think they're going to make the same mistakes as the US. Did you know seven? The US hasn't made the same mistakes as in No. Seven or eight.

They have at least made new mistakes. But the theories whether how big, how serious the new mistake will be, And as we heard earlier, actually it's not been it's been the lower income people that have actually been locked out of many of the new mortgages. But that also suggests that maybe there's a bit more tolerance in the property market, the sort of residential property market, because it's not people who are right on living hand to mouth

who are who are dealing with these higher rates. You and I, who have spent so long looking at the global economy and the global nacial system in various ways. You look at property and it just seems of all the assets that we have uniquely divisive between generations, between lower and higher income, that it sets up these problems for young people not being able to afford to get

in the housing ladder. It's very lumpy as an asset, it's extremely passy to buy and sell, how very prone to booms and bust, and it's not a productive place to invest when you think about the broader economy. Much better to have money invested in a in in creating jobs and a going concern a company, rather than just tied up in a in a lump of bricks and mortar. So why have we ended up having so much of the world's wealth tied up in such a bad place.

It's very good, very profound question. I would say partly it's because you can borrow easily to do it, and people will always that you've if you've got a house as security for a loan, you can borrow much more easily and much more cheaply than in many other ways. So that's a big part of it. I think you're right that the sense of status that comes with it the sense that's not necessarily economically rational that you want to have a house, that you want to have your

parts on housing ladder. That's a phrase that the British use all the time. Is very is very central. UM. What worries me most in terms of what you were just saying, is that there is a there is indeed a very serious generational issue to this. UM. Younger people like in their twenties and early thirties, in my experience, really wants to own real estate because in part they can't and they feel they're missing out, and you know

they are. I've got plenty of friends in their early thirties starting families still renting UM, and that doesn't that feels at a psychological level, that doesn't feel comfortable. UM. The way the housing market has developed, certainly the two countries I know best, the UK and the US, there is really a very nasty, sharp generational evidem which intensifies the sense of inequality, of the sense of injustice that we all know is poisoning much of the developed West

at present. UM. So I suppose, coming back to your question, that's that's how I would answered it. Partly, it's what we can all borrow for and it's always easier to buy something if you can borrow, but it's also that you do need it, and that it comes with this immense psychologically important sense of status. And it matters to people that if you if you, if you are renting in your thirties, you feel somewhat more of a of a rootless person, less of a stake somehow or other

than if you've already got a house and a mortgage. UM. Whether that's sensible, whether that's economically rational, is probably a topic you could spend another entire podcast on, But there's no question people feel uncomfortable not having having property by a certain age, and in the current situation where they

can't UM that leads to very serious tensions. And whether or not we see a big boom and bust in the property market in the next year or so, it certainly feels like something we're setting up problems for the future. John Author's thank you very much, thank you. Well, that's it for this episode of Stephonomics. We'll be back in the autumn. They look out for bonus episodes if I meet anyone exciting on my travels, and do be sure to check out the Bloomberg news website Bloomberg UK in Britain.

For more economic news and views on the global economy, you should also follow at economics on Twitter. So This episode was produced by Magnus Hendrickson and Sammer Sadi. Special thanks also to Maria Paulo, Michelis Dorris, John Lle Marte, Gilda de Carli Blake, Maple's, John Author's and Nera Sharp. Mike Sasso is the executive producer of Stephanomics. M