The crisis caused a slowdown in many sectors, but not investing in real estate stocks. Consumers emerged from the confinements of 2020 setting savings records and in turn the era of teleworking began. Mortgage interest rates at tempting levels helped fuel a frenzy of investment interest in real estate stocks. But all good things come to an end. Rising interest rates and red-hot inflation have made homes and mortgages less affordable. This increases the risk of a collapse of the global real estate market, especially in some countries, and threatens to worsen the current global economic recession...
What is happening with the housing market?
Demand for housing is declining as mortgage interest rates rise, making homes less affordable and driving potential buyers away from the market. There are two main reasons why mortgages have become significantly less affordable this year. High inflation has caused a sharp drop in citizens' real incomes. In turn, central banks around the world are raising interest rates at the fastest pace in decades. This has directly increased mortgage interest rates, making loans to buy a home more expensive.
Inflation has grown twice as much as salaries since 2020. Source: BBC.
These problems not only affect potential home buyers, but also current homeowners. Especially those whose mortgages are not secured long term with much lower rates. Millions of people took out cheap loans to buy homes at record prices during the pandemic boom. Now, many of them will face higher monthly payments when their loans are reset to reflect higher interest rates. To make matters worse, these higher mortgage payments come at a time when people's real incomes (that is, the amount of money they earn, adjusted for inflation) have plummeted. In the worst case, people will not be able to afford to pay their monthly mortgage bills. In such a situation, banks often seize the house and sell it to recover what is owed. And as that puts more homes on the market, often at lower or "distressed" prices, that can lead to further downward pressure on home prices.
The loan default rate has started to grow during the month of August. Source: Morningstar.
Which countries are most exposed?
In the US, most buyers rely on fixed rate mortgage loans for 30 years. Variable rate mortgages represented, on average, only 7% of loans in the last five years. By contrast, homebuyers in other countries typically have fixed loans for just one year, or have variable-rate mortgages that move in line with interest rates. Australia, Spain, the United Kingdom and Canada had the highest concentration of variable rate mortgages as a proportion of new policies in 2020, according to Fitch Ratings.
Variable rate mortgages as a percentage of new loans in 2020. Source: Fitch Ratings.
Cracks in the global real estate equity investment market have already begun to appear. They are more pessimistic about some of the more frothy markets, such as Australia and Canada, which, as we have seen before, had one of the highest concentrations of variable rate mortgages as a percentage of new policies in 2020. Both countries are experiencing a decline in double digits in the price of housing. And it is worse in Australia, where house prices in August recorded their biggest monthly decline in almost 40 years.
How would this affect the global economy?
A globally synchronized housing market crash would affect the global economy (already teetering on the brink of recession) in different ways:
- A sharp decline in house prices would significantly reduce wealth and cause a drop in consumer spending.
- A stagnation or decline in construction and property sales would directly affect global growth, as these activities are huge multipliers of economic activity around the world.
- A declining housing market would hit bank lending as it increases the risk of loan defaults, choking off the flow of capital that economies feed off of. In addition, rising interest rates would increase pressure on property developers who borrow heavily to finance their operations, making lenders increasingly concerned about developers' ability to refinance their debt. Again, if this results in loan defaults, it would affect bank lending.
- By raising mortgage payments to reflect rising interest rates, citizens' incomes would be affected, further reducing consumer spending.
Are there any investment opportunities in real estate stocks?️
As the real estate market currently stands, difficult times are ahead to contain all the factors mentioned above. We can short sell the Vanguard Real Etf (VNQ) in order to take advantage of the debacle of the American real estate market or the Vanguard Global ex-US Real Estate ETF (VNQI) for the same situation in Europe, Asia and the Pacific. If, on the other hand, we want to invest in the economies most exposed to these events that we have discussed previously, we can short sell the ETFs of the iShares MSCI from Australia (EWA), Canada (EWC), Spain (EWP) or the United Kingdom (EWU).