I am carefully monitoring the trend in interest rates globally. According to The Wall Street Journal, the Bank of England recently “raised its key interest rate for a second consecutive meeting.”1 They shall also be reducing their balance sheet. We expect Canada, the European Central Bank, and Brazil to follow. We have not experienced this level of tightening for 18 years.
Accordingly, I shall be keeping an eye on the housing markets. The National Association of Realtors® recently released a report on housing affordability. In 2021, 100% of those who earn more than $500,000 can afford a home, while only 34% of those earning $50,000-$74,999 can afford to buy. Even among those earning $100,000-$149,999, only 63% can buy a house.2 If interest rates rise and prices climb, things could only get worse.
That is not what is likely to happen. Ultimately, when supply-chain problems abate, homebuilders will build too many houses and prices will fall. Rising interest rates will also put a brake on existing-home prices at some point. Peter Routledge, head of the Office of the Superintendent of Financial Institutions in Canada, recently suggested that prices could fall 10%-20% in some markets.3 I think that will happen sometime down the road. In the short term, there is excess demand and insufficient inventory. That condition should support prices.
Nevertheless, housing is the largest asset that most people own, and since most purchases are done on credit, housing problems generally precede others. Margin debt is also hovering slightly below $1 Trillion. A significant stock-market pullback could create solvency issues for many people.
I recommend that clients use extreme caution when buying today. The NAR® report is a great place to start when evaluating markets and social trends in housing.
1.) Fairless, T. Coles, I. Douglas, J.. "As Inflation Soars, Central Banks Scramble to Lift Rates" The Wallstreet Journal, Online | Economy, Feb. 3, 2022. https://www.wsj.com/articles/bank-of-england-raises-interest-rates-for-second-straight-meeting-11643890280?mod=Searchresults_pos3&page=1. Accessed on 02.11.2022.
2.) Financial Post Staff. "Banking watchdog warns housing prices could plunge 20% when 'speculative fever' breaks." Financial Post, Online | News/FP Economy, Feb 30, 2022. https://financialpost.com/news/economy/banking-watchdog-warns-housing-prices-could-plunge-20-when-speculative-fever-breaks. accessed on 02.11.2022.
3.) National Association of REALTORS® Research Group. "The 'Double Trouble' of the Housing Market." NAR, Online, February 2022. https://cdn.nar.realtor/sites/default/files/documents/2022-the-double-trouble-of-the-housing-market-02-07-2022.pdf. Accessed on 02.11.2022.