The Economist - USA (2022-05-14)

66 Finance&economics TheEconomistMay14th 2022

lendingstandardsinresponsetotheco­

vid­19pandemicturbochargedborrowing.

In Sweden tax breaks for homeowners

have further fuelled the rush to secure

mortgages, while adysfunctional rental

market,characterisedbyoverpriced(and

illegal)subletting,haspushedmoreten­

antsintohomeownership.Allthisputs

Nordicbanksina trickyposition.InNor­

wayandSwedenhousingloansmakeup

morethana thirdofbanks’totalassets.In

Denmarktheyaccountfornearly50%of

lenders’books.Sharpfallsinhouseprices

couldtriggerlosses.

Homeanddry

BycontrastwiththeNordics,wherehome

ownershiphasbeenfuelledbythegrowth

ofmortgagemarkets,manyhouseholdsin

central and eastern European countries

boughthomeswithouttakingondebtin

the1990sbecausepropertywassocheap.

InLithuaniaandRomaniamorethanfour­

fifthsofhouseholdsareoutrightowners.

Mortgage­freehouseholdsarealso more

prevalent in southern Europe, notably

SpainandItaly,whereinheritanceorfam­

ilysupportisa commonroutetohomeow­

nership.Germans,fortheirpart,aremore

likelytorentthanowntheirhomes.Rate

riseswillconsequentlyhavelessdirectim­

pactonprices.

The structure of mortgage debt—the

secondfactor—alsomatters.Risinginter­

estrateswillbefeltalmostinstantlyby

borrowersonvariablerates,whichfluctu­

atewithchangesinpolicyrates;forthose

onfixedrates,thepainwillbedelayed.In

Americamortgageratestendtobefixedfor

twoorthreedecades.InCanadanearlyhalf

ofhomeloanshaveratesthataresetfor

fiveormoreyears.Bycontrastlendingin

Finlandisalmostentirelypricedatfloat­

ingrates.InAustraliaaroundfour­fifthsof

mortgagesaretiedtovariablerates.

Justlookingattheproportionofbor­

rowersonfixedversusvariableratescan

mislead, however. In some countries

mortgageratesmayoftenbefixed,butfora

periodthatistooshorttoprotectborrow­

ersfromtheinterest­ratestorm.InNew

Zealandfixed­ratemortgagesmakeupthe

bulk ofexisting loans,but nearlythree­

fifthsarefixedforlessthana year.InBrit­

ainnearlyhalfthefixed­ratestockisforup

totwoyears.

Resiliencetorisingrateswillalsode­

pendonthequantumofdebttakenonby

households—ourthirdfactor.Highindeb­

tednesscameintosharpfocusduringthe

globalfinancialcrisis.Aspropertyprices

fell,householdswithtoweringmortgage

repayments relative to their incomes

foundthemselvessqueezed.Todayhouse­

holds are richer—but many aresaddled

withmoredebtthanever.WhileCanadi­

ansaddedC$3.6trn($2.8trn)totheircom­

binedpileofsavingsduringthepandemic,

buoying their net wealth to a record

C$15.9trnattheendof2021,theirravenous

appetiteforhomeshaspushedhousehold

debtto137%ofincome.Theshareofnew

mortgages withextreme loan­to­income

ratios (ie, exceeding4.5) hasalso risen,

promptingCanada’scentralbanktoissuea

warningabouthighlevelsofindebtedness

inNovemberlastyear.

Financial regulators in Europe are

equallyworried.InFebruarytheEuropean

SystemicRiskBoard warnedofunsustain­

ablyhighmortgagedebtinDenmark,Lux­

embourg, the Netherlands, Norway and

Sweden.InAustralia,homeowners’aver­

agedebtasa shareofincomehasswollen

to150%.Inallthesecountrieshouseholds

willfaceheftiermonthlyrepaymentsjust

assoaringfoodandenergycostseatinto

theirincomes.

Allshapesandsizes

Bring this together, and some housing

marketsseemsetformorepainthanoth­

ers.PropertyinAmerica,whichborethe

bruntofthefalloutfromthesubprime­

lending crisis, appears better insulated

than many large economies. Borrowers

andlenderstherehavebecomemorecau­

tioussince2009,andfixedratesaremuch

morepopular.HousingmarketsinBritain

andFrancewillfarebetterintheshortterm

butlookexposedif ratesrisefurther.Prop­

ertyinGermanyandsouthernandeastern

Europeappears lessvulnerable. Bycon­

trast,pricesmaybemostsensitivetorate

risesinAustraliaandNewZealand,Canada

andtheNordics.

Onefloorforhousepricesisthat,in

mostcountries, demandstillvastlyout­

stripssupply.Strongjobmarkets,hordes

ofmillennialsnearinghome­buyingyears

anda shifttoremoteworkinghaveallin­

creasedthedemandformorelivingspace.

Newpropertiesremainscarce,whichwill

sustaincompetitionforhomesandhelp

keeppriceshigh.InBritaintherewere36%

fewerpropertylistingsinFebruarycom­

paredwiththestartof2020;inAmerica

therewere 62%fewer listingsinMarch

thantheyearbefore.

Nordoesthealternativetoowninga

home—renting—look particularly attrac­

tive.AcrossBritainaveragerentswere15%

higherinAprilthaninearly2020.InAmer­

icatheyrosebya fifthin2021,withbigger

risesinhotspots,suchasMiami,where

theyjumpedbyalmosthalf.Rentcontrols

causea differentsortofpain.Prospective

tenantsofsuchpropertiesinStockholm

faceanaveragewaitingtimeofnineyears.

Astheeraofultra­cheapmoneycomes

toanend,then,demandforhousingisnot

abouttocollapse.Yetonewayoranother,

rentersandhomeownerswillfaceanin­

tensifyingsqueeze.n

House of scorecards

Housing-riskindicators,selectedcountries

Sources:OECD;Hypostat;SuttleEconomics;

KnightFrank;TheEconomist

*Averageoffourindicators(1=mostexposedtointerest-raterises)

†Orlatestavailable ‡Estimate §2018

Italy(20)

Romania(19)

France(18)

Spain(=16)

Hungary(=16)

Lithuania(=14)

Germany(=14)

Britain(13)

Ireland(12)

Poland(11)

Finland(10)

UnitedStates(=8)

Denmark(=8)

Canada(7)

Luxembourg(=)

Australia(=)

Norway(4)

NewZealand(=2)

Netherlands(=2)

Sweden(1)

House-price

increase,

(Ranking out of 20*) Q4 2019-Q4 2021, %

Share of

homeowners with

a mortgage, 2019†, %

Variable-rate

mortgages as a share

of total, 2018†, %

Total outstanding

residential loans to

disposable income of

households, 2019†, %

6

10

14

2

24

15

22

18

17

22

9

31

17

26

31

28

16

46

30

28

10

1

24

24

12

9

18

31

26

11

31

40

38

39

34

32

50

67

49

43

33

75

2

36

16

97

12

7

39

100

96

15

16

28

47

81

94

18

16

69

32

13

71

64

17

28

71

101

70

33

73

70§

170

137

147

150

169

142‡

182

177