In the first half of 2023, mortgage rates in advanced economies climbed by
more than 2 percentage points compared to the previous year. During this
period, countries like Australia, Canada and New Zealand witnessed
substantial declines in real house prices, likely due to a high share of
adjustable-rate mortgages and home prices that have been stretched since
before the pandemic. Comparatively, home prices have fallen more than 15
percent in some advanced economies while the drop in emerging economies was
less significant. But, on net, real house prices will need to keep cooling
from the 2021 and 2022 highs to reach pre-pandemic levels.
Higher borrowing costs are likely to see the largest impact on household
debt service ratios—a measure of borrowers' loan repayment ability—in
countries where housing markets remain overvalued and average lifespans for
mortgage loans are shorter, according to our latest
Global Financial Stability Report.
Approvals and repayment
For instance, for some advanced economies such as Norway, Sweden, Denmark,
and the Netherlands with pre-existing double-digit households’
debt service ratios, borrowers’ debt servicing costs could increase by up to 1.8 percentage
points given the surge in interest rates. That would have consequences for
loan approvals and borrower repayment capabilities. But borrowers are also
less indebted, and underwriting standards have been strengthened since the
global financial crisis, tempering the risk of a surge in loan defaults.
This may have also limited instances of forced selling or foreclosures of
homes, helping to support home prices.
In the United States, the Federal Reserve’s interest rate hikes brought big
changes to the mortgage loan market, with the average rate on a 30-year
fixed mortgage recently reaching a two-decade high of 7.8 percent. For
prospective buyers, entry costs are putting homeownership further out of
reach as the required down payments have also become a prohibitive factor
because savings have shrunk since the pandemic.
Existing homeowners, deterred from purchasing new properties due to larger
monthly mortgage payments, stay put causing a reduction in supply of
existing homes. This phenomenon, known as “lock-in” effect, is particularly
evident in the United States, where long-tenured fixed-rate mortgages are
most popular. With average 30-year mortgage rates currently at 6.6 percent,
around 3 percentage points above pandemic lows, mortgage originations
remain 18 percent below last year’s levels while refinancing applications
increased 8.5 percent over the year as mortgage rates continued to ease.
Rates and refinancing
The 30-year fixed-rate mortgages accounted for 90 percent of new US home
loans at the end of last year, according to ICE Mortgage Technology. Almost
two-fifths of all US mortgages were originated in 2020 or 2021, ICE data show,
as the low interest rates during the pandemic allowed many Americans to
refinance their home loans.
Higher interest rates also raise rental costs. Many people prefer to rent
instead of buying given median house prices have been slow to adjust. In
this context, the combination of higher rates and still-scarce housing
supply creates a vicious circle that complicates central banks’ fight
against inflation. US monthly home prices continued to rise in October
compared with a year ago, with shelter contributing to one-third of the
change of consumer prices in November.
If the Fed starts rate cuts this year, as policymakers and market
participants project,
mortgage rates will continue to adjust, and pent-up housing demand could be
unleashed. A sudden increase, as the result of rapid rate cuts, could
offset any improvements in housing supply, causing prices to rebound.
