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Analysis | Popping Real Estate Bubbles Will Prove Painful


Faith that interest rates would stay low forever fostered a “fool’s paradise,” according to former Bank of England boss Mervyn King. Nowhere is this more obvious than in the unraveling of the global real estate boom, which is now turning into bust as prices start to fall around the world. Fair enough: After so much speculation and overvaluation amid an undersupply of new homes, a healthy correction is exactly what a lot of societies need.

But the return to normality looks hellishly unequal amid a broader cost-of-living crisis, high inflation and a persistent lack of housing supply — and brings the risk of more social anger, as interest rates prove to be an even blunter tool on the way up than on the way down. The temptation  to soften the blow will be hard for politicians to resist.

The risk of a broader recession is flashing red in the pandemic’s frothiest housing markets. New Zealand, a bellwether for global housing euphoria that attracted Silicon Valley preppers and domestic flippers, has seen a 16% fall in property prices from their peak, while the proportion of mortgages in arrears is at a three-year high. In Sweden, a 15% fall in house prices is expected to bottom out but leave recession and higher unemployment in its wake, meaning less homebuilding.

In markets like the UK with a long history of sustained price rises, the decline has been more muted, but the pain is there beneath the surface. Prices have another 10% to fall from their 2022 peak, according to Bloomberg Intelligence’s Niraj Shah, who says those who stretched their budgets to buy during Covid-19 are in for a shock. The Bank of England estimates that around 4.5 million households have already seen increases in repayments since late 2021, with another 4 million to be hit with higher rates by the end of 2026. A typical borrower refinancing in the second half of this year could see payments rise by around £220 ($288) a month. 

The flipside of these tales of woe is that, ideally, real estate should become more affordable and give first-time buyers a fairer shake. But this isn’t happening either. Markets are gummed up, and the supply of credit is dwindling. An International Monetary Fund paper from March found that real estate looks overvalued across Europe by as much as 20%, but that rising interest rates have eroded the buying power of prospective homeowners by around 40%. Using average figures to buy a 100-square-meter (1077 square feet) dwelling, the researchers estimate that aspiring buyers face an increase of 33% in debt-service repayments compared with 2021. It’s worse in the UK, where first-time buyers haven’t had it this bad in terms of mortgage affordability since 2008.

And as with the recent inflation shocks hitting food and energy prices, lower-income households are suffering the most from increases in property costs, even among those who aren’t homeowners. With landlords trying to pass on their higher bills, tenants in London — where average rents are up 13.5% year-on-year, according to Zoopla Ltd. — say they’re scared of losing their homes. Unlike the big restructuring efforts taking place in European real estate, with companies rejigging their portfolios, often by offloading the weakest buildings, individuals caught in the housing crisis have few ways out.

Central bankers will say the medicine is working, but the option of doing nothing to protect renters and mortgage payers is going to become increasingly politically unpalatable if the promise of a soft landing — or a sudden evaporation of inflation — fails to become reality.

What should be done? The ideal solution to housing crises has always been to build more homes, but it would take half a century to clear the UK’s backlog, and at a time of high inflation the outlook for construction is getting worse, not better. It’s more likely that more short-term tools will be employed. Pressure will grow on banks — which are loudly broadcasting their impeccable financial health — to go easy on borrowers, rather than repossess. Mortgage relief is being proposed in Sweden and Ireland. Blunter instruments with a poor track record, like rent controls, may also see a comeback if politicians and central bankers fail to pacify voter ire. 

This will create new risks, from the moral hazard of bailing out the privileged to propping up the equivalent of corporate zombies whose business model only survives in low-rate environments. Ideally, measures will be targeted — and if any demographic deserves help, it’s those who aren’t yet on the property ladder. Either way, exiting a fool’s paradise will have messy consequences.

More From Bloomberg Opinion:

• Number of the Beast Won’t Savage UK Homeowners: Marcus Ashworth

• To Fix US Housing, Let Democracy and the Market Work: Editorial

• What I Learned From Buying a House in London: Matthew Brooker

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available on bloomberg.com/opinion



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