Home prices are set for a "scary" decline following a drop in demand across nine wealthy economies so far, according to a report by "The Economist." While declines in the United States have been slight thus far, they are already significant in other markets. For example, in Canada, home costs have dropped by 9 percent since February. As inflation and recession pursue the world, a deep correction in home prices seems likely, leading real estate agents to feel pessimistic. The decline in demand exacerbates the contraction, leaving a group of people suffering from financial collapse, which could initiate a political storm.
The crisis stems from rising mortgage rates, with the 30-year mortgage rate in the United States reaching 6.92 percent, more than double last year's level and the highest since April 2002. The U.S. Federal Reserve has sharply raised borrowing costs in an attempt to curb inflation driven by several factors, including the Russian invasion of Ukraine. The purchasing power of borrowers from Stockholm to Sydney is eroding, making it challenging for new buyers to purchase homes, thus leading to a drop in demand and potentially straining the finances of current owners who may be forced to sell.
However, the reduction in home prices is unlikely to trigger a financial crash like the one that occurred in the U.S. 15 years ago, which resulted in a global financial crisis. The United States guarantees or insures two-thirds of new mortgages, and through government insurance plans, taxpayers bear the risks of defaults. As prices rise, taxpayers incur losses via the Federal Reserve, which owns a quarter of mortgage-backed securities. Existing home sales in the U.S. fell by 20 percent in August year-on-year, and "Zillow," a housing company, reported a 13 percent decrease in new listings compared to seasonal norms. Sales figures in Canada could decline by 40 percent this year. When individuals cannot move, it undermines labor market dynamics, a significant concern as companies attempt to navigate labor shortages and an energy crisis.
If prices continue to drop, homeowners might find their homes worth less than their mortgage loans, complicating matters - a problem that plagued many economies after the 2008 global financial crisis. Some other areas, such as South Korea and Nordic countries, are witnessing alarming accelerations in borrowing, with household debt nearing 100 percent of gross domestic product. They may face destabilizing losses in their banks or shadow financial companies: the head of Sweden's central bank likened this to "sitting on top of a volcano."
However, the worst housing-linked financial crisis globally remains confined to China, where issues are being contained – fortunately within its borders – amidst massive speculative excesses, mortgage hits, and individuals who have paid in advance for apartments that have yet to be constructed.
Another problem is the concentrated pain endured by a minority of homeowners; those who did not lock in interest rates are facing soaring mortgage bills. There are relatively few of these in America, where fixed-rate 30-year mortgages dominate. But four in five Swedish loans have a fixed term of two years or less, and half of all fixed-rate mortgages in New Zealand have either been or are set to be refinanced this year. When compounded with cost-of-living pressures, this indicates a growing number of households experiencing financial distress. In Australia, about one-fifth of mortgage debt is owed by households that may see surplus cash flow decline by 20 percent or more if interest rates rise as expected.
According to one estimate, two million families in Britain may find their mortgages absorbing an additional 10 percent of their income. Those unable to manage payments might be forced to offload their homes onto the market instead. This is where the political dimension comes in, as the youth in the wealthy world feel unjustly excluded from homeownership.
