Foundational economics tells us that price is determined through the interaction of demand and supply. As mortgage rates have risen, demand for housing has indeed dropped. But there has also been a corresponding reduction in the cyclical supply, or number of properties available for sale, providing some balance to markets.
Many homeowners have locked in substantially lower rates on existing mortgages, and are thus unwilling to move house and give up these rates. In the US for example, around 95% of homeowners are on a long term fixed mortgage, with an average interest rate of 3.5%, well below the prevailing rate of 7.5% for new mortgages.
Furthermore, there has not yet been a mass of forced sales which would put downward pressure on prices. Household balance sheets are relatively healthy due to excess savings. During Covid-19, many households were able to save due to reduced recreational spending, stipends from governments, and pauses on loan repayments. Apart from the US, households have not spent these savings yet, which can act as a buffer against rising debt service costs.
Tight labour markets – the double-edged sword of the global economy – have also played their part in ensuring that there has not been a significant rise in forced sales. Unemployment rates have remained at or below pre-Covid averages. As of August this year, the US had a unemployment rate of 3.8%, South Korea 2.4%, and Australia 3.7%; each below their respective pre-Covid average. As a consequence, many households can continue servicing their monthly mortgage payments. According to the Bank of Korea, in South Korea only 0.3% of mortgages are delinquent – up from an all-time low of 0.2% through 2021 to 2022 but still much lower than the two-decade high of 1.9%.
Tight supply also helps to explain the resilience seen in pricing to date, due to not only cyclical factors but also structural factors. Strict zoning laws and high construction costs are just some of the factors which have limited residential construction over the past decades. In Canada, the Canada Mortgage and Housing Corporation has said that 3.5 million homes need to be built by 2030; at current rates, only 2.3 million additional homes will be built in this period. This fundamental issue of low structural housing supply has the potential to be exasperated even further given the rising cost of construction.
Looking towards the future, the good news is that central banks appear to be largely done with rate hikes. Reduced transactions, excess household savings, and tight labour markets have all helped prevent volatility in house prices, but these factors can quickly reverse.
The current message from the major central banks is that rates will need to remain “higher for longer”; in economies such as the UK, where mortgages are often a fixed rate for two to five years, this may simply delay the impact on higher mortgage rates. Nearly 1.4 million mortgages will come to the end of their fixed rate period this year, and an additional 1.2 million will end in 2024.
Uncertainty in the sales markets has served to boost rental markets across the globe. Prime rents grew by 2.6% across 30 global cities in the first half of 2023. This trend is also evident in mainstream markets; Sydney has seen rents increase almost 20% year-on-year according to the New South Wales Department of Communities & Justice. For both prime and mainstream markets, prospective purchasers choose to rent instead amidst limited supply.
Despite economic uncertainty, global housing markets have fared surprisingly well due to low cyclical and structural supply, excess household savings, and tight labour markets. The storm isn’t over yet however. The combination of higher monthly mortgage payments, dwindling excess savings, and ‘sticky’ inflation, means that some households may suffer from stretched affordability and struggle to meet their monthly mortgage payments. Labour markets are beginning to turn and unemployment rates have risen from recent lows. But whilst global markets face significant economic headwinds, housing markets have, so far, proven resilient.
(source:"The resilience of global residential markets"Savills)
