Housing markets are cooling but unlikely to end in a bust.
There were only a few good things that came out of the pandemic. One of them was historically low interest rates that helped those looking to borrow. Homeowners across markets were able to lock in cheap mortgages at attractive prices.
Those factors, combined with a new normal of working from home, drove a home-buying frenzy. Residential real estate prices in much of the world rose sharply, recording gains of up to 40% from their pre-pandemic levels in high-income countries last year.
But good times don’t always last. Prospective home buyers have come to realize this over the course of 2023. The housing market in many nations has been turned on its head by high mortgage rates, falling property prices, and stretched affordability.
Borrowers looking to secure new mortgages or refinance existing ones are seeing a sizeable increase in payments on the back of aggressive central bank tightening and the ensuing rise in longer-term interest rates. The jump in interest costs hurts families in almost all economies; however, the hit to household balance sheets varies across markets.
The key differentiators are the share of fixed vs. floating rate mortgages and the amount of debt held by homeowners. Among the major advanced economies, Australia, Canada, and the U.K. have witnessed the biggest rise in effective mortgage rates for new loans since 2022. Short-term or variable mortgages are the norm in these countries.