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Under the frenzy of interest rate hikes, lending rates are rising rapidly, housing affordability is deteriorating, and the once-hot real estate markets in Canada, the United States and New Zealand are not as expected. The analysis shows that with the rise of interest rates, the possibility of a chain reaction in the asset sector is also increasing, and the potential crisis in the real estate industry related to leverage is of particular concern at present.
Prices in 19 OECD countries are now higher than they were before the 2008 financial crisis, suggesting that prices have deviated from fundamentals, according to a Bloomberg report on Wednesday. And as concerns about the prospect of a global recession intensify, a slowdown in the housing market could have a knock-on effect and deepen the recession.
The report also points out that real estate markets such as New Zealand, the Czech Republic, Australia and Canada are among the most frothy in the world and are particularly vulnerable to falling house prices. Portugal, an euro-zone country, also faces huge risks, while Austria, Germany and the Netherlands also look frothy. In Asia, the South Korean housing market also looks fragile. The report highlights the risks of household credit relative to nominal GDP, the growth rate of household debt and the rate of rise in house prices.
Rob Subbaraman, head of global market research at Nomura Holdings, said the danger is that both real estate and financial markets are in a downward cycle, which could lead to a longer-lasting recession. More than a decade of quantitative easing has created a bubble in the housing market, but with debt service ratios rising sharply and affordability falling, it will soon turn to the other side (the bubble burst).
As the risk of bad debts increases, it will hinder bank lending and curb the flow of credit. In the US and Western Europe, the real estate crash that triggered the financial crisis has plagued the banking system, governments and consumers for years.
It is true that household savings and labour markets are still strong and a 2008-style crash is unlikely, but when monetary policy is tightened at the same time, the risk of a sharp fall in prices is clearly greater. This year, more than 50 central banks have raised interest rates by 50 basis points at a time, and further increases are expected.
Goldman Sachs points out that the rapid deterioration in housing affordability and the sharp decline in home sales suggest that a hard landing is a real risk (especially in New Zealand, Canada and Australia).
Central banks have also issued warnings. High levels of mortgage debt are of particular concern because interest rates are rising and more borrowers are unable to pay their bills, the Bank of Canada said in its annual review of the financial system this month. The Fed of New Zealand’s semi-annual financial stability report also pointed out that the overall threat to the financial system is limited, but a “sharp” fall in house prices is possible, which could lead to a contraction in consumer spending.