Mortgages May Force Central Banks To Back Off

I am dating myself by sharing with you that my first mortgage carried an interest rate of 12%. Our hands were shaking when we signed the loan documents; my wife and I both hated being in debt, and the monthly payments were not going to be easy to keep up with. Anxiety was high; fortunately, falling interest rates eventually allowed us to refinance our loan and keep our budget in balance.

Today, many homeowners around the world are enduring high anxiety. Interest rates are going up, making home loan payments harder to handle. The impact that this could have on consumers and the real estate sector could be enough to get central banks to slow down or stop their tightening campaigns.

Home ownership is both a symbol of and a contributor to economic success. Families who reach that stage have worked hard, and take pride in having a place of their own. And as any homeowner knows, furnishing, maintaining and occasionally remodeling a home is a major element of consumer spending. High levels of home ownership are also associated with a range of positive social outcomes.

Houses are expensive, though, meaning that most purchasers have to borrow a substantial fraction of the purchase price. The lower the interest rate, the easier it is for a borrower to handle the payments. Prior to this year, a long interval of very low interest rates had spurred demand for houses, generating outsized increases in their values.

The cost of shelter is a substantial portion of consumer price indexes around the world. Calculations of this component vary from place to place, but all are keyed off rents, mortgage payments, or some combination of the two. Rising house prices lift both of these elements, and have therefore become one of the largest contributors to recent inflation.