BY TIMOTHY TAN
Millions of people who borrowed cheaply to purchase homes during the pandemic face higher payments as loans reset. The rapid cooldown in real estate — a leading source of household wealth — threatens to worsen a global economic downturn.
Higher real estate financing costs hit economies in multiple ways. Households with loans tighten their belts, while rising mortgage payments discourage would-be buyers from entering the market, dragging on property prices and development. Many people who paid record prices face loans due to reset higher just as soaring inflation and a potential recession hit— Meaning that people might not be able to keep up with their loans as interest rates shoot up.
In New Zealand, for instance, about 55% of the outstanding value of residential mortgages is either on a floating rate or on a fixed rate that needs to be renewed in the year to July 2023. In New Zealand prices rose close to 30% in 2021 alone, caused by the pandemic housing boom. Thus the central bank has hiked interest rates seven times in the past 10 months, and house prices were down 11% in July from the peak in November last year to slow down inflation.