Around the world, interest rates are rising, mortgages are becoming death traps, and rental prices have exploded. The likely outcome for housing markets is horrific. It CAN get a lot worse.
Interest rates are simply not stopping. They’re going up on a regular basis. A lot of people are overexposed, even market professionals, as well as homebuyers. This is partly the result of absurdly low interest rates for 20 years too long. It’s also the result of unrestrained borrowing, with lenders not seriously managing risk for themselves.
The property market has long been a way of economies cutting their own throats. Prices rose in accordance with massive hype in the media and lower rates. The sub-primes catastrophe wiped out the US middle class in the market. Corporate buyers bought the houses, and started charging ever-increasing rents.
The higher rents took vast amounts of money out of the rest of the Main Street economy. The increased rents also totally trashed the lower income brackets. In the middle brackets, the rents also increased, with many people treading water.
About two or three years ago, just before the pandemic, Pew Research found that most Americans couldn’t afford a $400 hit to their monthly budget. After the pandemic, rents began to accelerate upwards. Even NY public housing is in big trouble with rental payments. In the much-overheated Australian market, the story is the same with mortgages and getting ugly, without the $400 problem. In the UK, it’s a crisis.
So much money got put into the housing markets that it committed the entire global economy to prices which have been going nuts for well over a decade. Those prices are actual credit. If the prices go down enough, they lose a lot of money for lenders. The market won’t be buying too enthusiastically into a market in free fall.
The situation is this:
- Lenders lose money.
- Buyers lose money and their homes.
- Sellers lose margins for selling to manage their own money.
- Everybody is overcommitted.
This is a true “nobody wins” situation. The market may dig itself out eventually. The central banks may persuade themselves that people who’ve lost money want to buy in or buy back in. The people paying for it may be a lot harder to convince.
The really weird bit about housing
The Millennials and Gen Z were already priced out of the market. Getting back to those prices won’t help them at all. There is something inherently suicidal about this. An economy which thinks that people who can’t afford housing, health, food, and education can make any sort of contribution is simply insane.
Economically, people in this position also can’t be productive. They definitely can’t be as productive as previous generations. Skills, incomes, and cash to spend are the basis of productivity.
Now the weird bit – In the past property markets weren’t at all frenetic. They were pretty sedate, earning income for people who owned a few properties. These people far preferred the income to the property flipping madness. They also borrowed sensibly under clear, straightforward borrowing rules.
This mindset kept rents and house prices reasonably stable. People could afford the basics. You can’t say that now. The entire Western world is subject to self-inflicted economic chaos.
Part of the problem is deregulation. Lack of regulation and lax taxation mean that prices can go anywhere. Lenders aren’t at all well-regulated, making risks higher for some investors. Money launderers, those wonderful assets to humanity, have also got in to the property market, blowing up prices and keeping everyone else out of the market to some extent.
The solution
Regulate. Rents can be regulated. Germany has a rental regulation system which is apparently OK with renters and landlords.
Proper lending practices. Lenders should do due diligence to avoid train wrecks for themselves and borrowers.
Taxation. Tax should be a major disincentive to property speculation.
Credit education. Credit management should be taught in schools.
Housing sanity. Housing should be available for anyone who needs it. You could create a simple database of housing availability to keep people off the streets.
“Use it or lose it”. Unoccupied investment properties take up a lot of space in cities worldwide. You could even regulate to ensure nobody has more residential properties than say two or three to increase supply in the market.
The choice is this – Provide housing or crash the global credit market and the global economy.
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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.
