Recovery? Crisis? Where you stand on the state of housing markets depends on where you sit

Housing prices are rising in several countries, even those with high levels of household debt and large proportions of floating rate mortgages
However, the persistence of acute vulnerabilities means global property markets will continue to emit mixed signals and perception depends on one’s stake

Nicholas Spiro

Published: 5:00pm, 7 Aug 2023

Why you can trust SCMP

What constitutes an improvement or a deterioration is often in the eye of the beholder. This is especially true in property markets. Since the beginning of this year, conflicting signals about the state of global housing markets have accentuated varied interpretations of the performance and outlook for residential real estate.

Evidence that housing markets are more resilient to the dramatic rise in interest rates than anticipated has become stronger. As Goldman Sachs noted in a report published in May, property markets are showing “signs of stabilising, with prices levelling out more quickly and at a higher level than would normally be expected given the rapid rise in mortgage rates”.

Not only are prices stabilising, they are rising again in several countries, even in ones deemed vulnerable because of their high levels of household debt and high proportions of floating rate mortgages.

In Australia – where variable rate mortgages account for about 70 per cent of outstanding loans – home values have increased for five straight months, reducing the fall in prices since the April 2022 peak to just 5 per cent, according to data from CoreLogic.

In Canada, another market with a high share of variable rate mortgages, prices began rising in April in the face of further rate increases by the Bank of Canada, which last month singled out the resilience of the housing market as a source of persistent inflationary pressure.

Even in New Zealand and South Korea, where prices have fallen much more sharply than in other markets, home values have bottomed out. In parts of Auckland and the greater Wellington area, as well as in Seoul, they are starting to rise.

The Seochon neighbourhood in Seoul, with traditional Korean houses along its alleys. Home prices in South Korea fell last year and have remained depressed since. Credit: Wansuk Kim

Key factors that differentiate the current slump from previous downturns – the absence of an overhang of inventory, stronger household balance sheets, much tighter regulation, well-capitalised banking sectors and a higher percentage of mortgage-free homeowners – bode well for the recovery. “The conditions for a sharper rebound in prices once the recovery takes hold are there,” said Liam Bailey, global head of research at Knight Frank.

However, there is also evidence suggesting many housing markets remain acutely vulnerable. For starters, the sharp rise in mortgage costs has yet to be passed on to many borrowers.

According to the think tank Resolution Foundation, three-fifths of the rise in annual mortgage repayments in Britain has yet to be passed on to households as they continue to move onto new, more expensive fixed-rate deals. This is expected to deliver a “rolling living standards hit to millions of households”.

The mortgage crunch in Australia is more imminent. According to the nation’s central bank, two-thirds of the 35 per cent of mortgages on fixed-rate terms – which amount to 23 per cent of total mortgage debt – expire this year. More worryingly, the peak of the resetting period or “mortgage cliff” – when 800,000 borrowers transition from fixed-rate deals at 2 per cent to variable-rate ones at 6 per cent or higher – is in the second half of this year.

A view of the city centre from the Sydney Tower Eye observation deck. Australia’s housing market is facing a ‘mortgage cliff’ in which hundreds of thousands of homeowners on fixed-rate mortgages are set to move to variable rates and face much higher payments. Photo: Reuters

Second, mortgage rates are still rising in many countries, particularly in Britain, where the average price of a two-year fixed-rate deal has shot up to 6.8 per cent. Although the UK is something of an outlier because of its higher level of inflation, uncertainty over the direction of interest rates – especially how long they are likely to remain at high levels – is weighing on sentiment worldwide.

Bond investors are already pricing in rate cuts in many countries, a factor that has contributed to the rebound in house prices in some markets. However, some central banks that paused their tightening campaigns have resumed rate increases because of persistent inflationary pressures.

The volatility in debt markets, which is particularly acute in Hong Kong because of the currency peg with the US dollar, shows that pressure on mortgage rates has yet to run its course.

Yet, it is the third interpretation that is the most convincing. The faster-than-expected stabilisation in house prices exacerbates the deterioration in affordability, particularly since the price declines pale in comparison to the dramatic increases in home values in the past decade, especially since the eruption of the Covid-19 pandemic.

Even in New Zealand, where the peak-to-trough fall in prices has been the sharpest, average home values in June were a staggering NZ$183,000 (US$110,000) higher than in March 2020, according to CoreLogic.

More worryingly, rental prices have gone through the roof since the pandemic began, compounding the deterioration in affordability. Even for prime properties, affordability has become increasingly stretched.

Don’t expect Hong Kong property prices to recover any time soon

Rents for luxury homes in Singapore, London and Sydney rose at annualised rates of 31.5 per cent, 16.9 per cent and 11.7 per cent respectively in the first quarter of this year, according to data from Knight Frank. “The housing crisis is felt most acutely in rental markets,” Bailey said.

Even in the United States, the anomalous 30-year fixed-rate mortgage – which has shielded most homeowners with mortgages from the rise in rates – encourages would-be sellers to stay put. This is contributing to severe supply constraints, keeping prices high and eroding affordability.

Depending on whether one is a homeowner without a mortgage, a borrower needing to refinance or a renter or first-time buyer, the current state of housing markets is perceived quite differently. If there is any consensus, it is that global property markets will continue to emit mixed signals.

Nicholas Spiro is a partner at Lauressa Advisory

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