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Analysis: Safe as houses? Rising rates test foundations of property boom

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  • Credit-fueled boom faces testing
  • Mortgage rates rise as central banks fight inflation
  • Buyers and owners under pressure

May 30 (Reuters)-In the remote suburbs of Toronto, just a few months ago, a typical three-bedroom home got 40 offers on the night of the bid, well above the asking price. It would have been. Finding a home buyer is now difficult.

Tim Keung, CEO of local agency Tim SoldReal Estate, said:

“Many buyers … are on the sidelines waiting for this major fix.”

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They are not alone. The decade-long boom in home prices from the United States to Europe and Asia faces the first real challenges as borrowing costs rise and high inflation eats up household budgets.

Beyond Toronto, home prices have already fallen in some of the most acclaimed locations, including China, New Zealand and parts of Australia.

Growth has slowed in Singapore and South Korea, and volume has declined in the United States and Poland.

Lenders and regulators in the most developed countries have warned that soaring home prices can now stagnate or fall. In some cases, it can be as low as a quarter. read more

Each market is different, but almost all have one thing in common. That is, borrowing costs skyrocket as central banks around the world raise interest rates to combat inflation.

According to mortgages, the average interest rate on US 30-year fixed rate mortgages is a barometer in other parts of the world, jumping from just 2.7% in late 2020 to 5.5% now, the highest level since 2008. It has become. Bankers Association.

This is below the level prevalent in the 2000s, but the pace of change in fixed and variable rates is burdening buyers and owners who are already suffering from high living costs.

This could raise money with cheap credits over the last decade, grow even bigger during a pandemic, and stab a real estate bubble where some people have saved more and searched for larger homes.

Joerg Utecht, CEO of German mortgage broker Interhyp, said:

The Swiss bank UBS ranks Frankfurt, Germany as the city with the highest bubble risk, followed by Toronto, Hong Kong, and Munich, Germany, based on factors such as price, income, and rent relationships. ..

Similarly, German bank LBBW estimates that housing prices in Europe’s largest economy have risen 20% to 25% since 2015, more than justified supply and demand. In other words, if the borrowing cost returns to the state at that time, it may fall by that amount.

According to Interhyp, German borrowers paid only 1% on fixed-rate mortgages over the last decade, rising to 2.5%, the highest level since 2014, to 3% by the end of the year. May reach.

Economists surveyed by Reuters have already begun to lower expectations of rising home prices in Germany over the next two years. read more

Price-to-income ratio of major economies (2015 = 100)

Feel the heat

Floating rate mortgage homeowners are also beginning to feel the heat.

In Poland, where such lending is common and the central bank raised interest rates from 0.1% to 5.25% in October and is currently curbing double-digit inflation, the government intervenes to help borrowers through payment leave. doing. read more

In the northern town of Rotmanka, 31-year-old office worker Maciej Kawka has seen monthly mortgage payments on his small flat rise after borrowing a mortgage in 2018. He currently pays 1,650 zloty ($ 384.62) a month. However, taking into account the two recent central bank rate hikes, payments are expected to rise to 1,800-1,900 zloty, further squeezing his finances, which is also being squeezed by soaring energy and food prices. I am.

“Our budget will be much tighter. There are no holidays and nothing goes beyond our daily lives,” said Kauka, who lives with his wife and daughter. “But I don’t know what will happen if (the rate) keeps rising.”

Elsewhere, homeowners have fixed their current rates and are afraid of further spikes.

Dennis Willeke, a 35-year-old firefighter, has secured a fixed rate of 2.15% for the next 10 years in a house where he lives with his wife and two children in the town of Neukirchenvruin in western Germany.

“We’re in a hurry to refinance because I think it’s still going up,” he said.

In New Zealand, American Lee Stewart and his wife are worried about repeated crashes of real estate in 2007-09. At this time, millions of homes were regained in the United States alone, and the couple was at a loss.

Stewart fixed his mortgage costs for three years, surprised by the rise in interest rates that began in New Zealand earlier than most other countries.

“Small changes in that percentage make a big difference … for those who have a pretty big loan,” said a 40-year-old.

But analysts do not expect repeated collapses that caused the global financial crisis 15 years ago.

First, the share of floating rate loans has shrunk to just 10% of all US mortgage applications and 20% of all Eurozone household debt in just 10 years.

Second, with the exception of China, most countries are still facing housing shortages, exacerbated by labor and material shortages, with the aftereffects of the blockade during the pandemic.Those countries include the United States Germany When UK.. read more

This has been seen to set a lower limit on the price.

But Canada and New Zealand show how fast it can change as higher rates cool demand.

Brad Goetz, an agent at Right at Home Realty in Canada, said: “Before this, it was like,’Hey, there are four walls, a kitchen and a bathroom. We’re fine.'”

Average 30-year mortgage fixed rate

($ 1 = 4.2900 zloty)

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Francesco Kanepa in Frankfurt, Julie Gordon in Ottawa, Alan Charlish in Warsaw, Lucy Kramer in Wellington, Wayne Cole in Sydney, Chen Lin in Singapore, Thunsik Yu in Seoul, Anne Karaunen in Helsinki, Report by Simon Johnson of Stockholm Edited by Susan Fenton

Our criteria: Thomson Reuters trusts the principles.

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