South Forest Hill Residences.Many hot property markets cooled overnight. In addition to raging inflation, volatile stock markets and brutal wars, the world economy now faces another threat: the end of the housing boom.Please Visit: South Forest Hill Residences to Get Your VVIP Registration Today!
With central banks around the world rapidly raising interest rates, the soaring cost of borrowing means that those who are already struggling to buy homes have finally reached their limits. This is reflected in the overnight cooling of the once-hot residential real estate market in many countries, from Canada to the United States to New Zealand.
This has sharply reversed the surge in house prices in recent years, thanks to ultra-low mortgage interest rates and government stimulus measures, as well as the COVID-19 epidemic that has made telecommuting widespread and increased demand for living space among home buyers. According to an analysis of economic research, the price-to-rent ratio and price-to-income ratio of 19 OECD member countries are higher than those before the 2008 financial crisis, indicating that house prices have deviated from fundamentals.
For many policymakers seeking to contain the fastest inflation in decades, curbing the house price bubble is a key part of their goal. But at a time when markets are uneasy about the prospect of a global recession, a slowdown in the property market could have a knock-on effect, exacerbating the downturn.
Falling house prices will erode household wealth, undermine consumer confidence and may stifle future growth. Animal spirits usually languish when assets depreciate and loan repayment costs increase. Real estate construction and sales play a huge multiplier effect in global economic activities.
“the danger is the simultaneous reversal of the business and financial cycles, which could lead to a longer-lasting recession,” said Rob Subbaraman, head of global market research at Nomura Holdings (3.685,-0.01,-0.14%). “A decade of quantitative easing has fuelled a bubble in the housing market, which may soon go downhill as house prices reach their limits and repayments are likely to rise sharply.”
As the risk of non-performing loans increases, this will curb bank lending, stifling the new credit on which the economy depends. In the US and Western Europe, the housing crash that triggered the financial crisis plagued the banking system, governments and consumers for years.
To be sure, there is little chance of a repeat of the 2008 crash. Banks have raised the threshold for lending, household savings are still high and there is still a housing shortage in many countries. The labour market is also strong and can serve as an important buffer.
“the fall in house prices will have a direct impact on consumer spending and the economy as a whole, as real estate usually accounts for a large part of household wealth,” said Tuuli McCully, head of Asia Pacific economics at Fengye Bank. “however, given that household balance sheets in many major markets are still healthy, I am not particularly worried about the risks associated with house prices and the world economy.”
When global monetary policy tightens at the same time, the risk of a sharp fall in prices is significantly greater. More than 50 central banks have raised interest rates by at least 50 basis points at once this year, and further increases are expected in the future. In the United States, the Federal Reserve raised its main interest rate by 75 basis points last week for the first time since 1994.