Mr. André Perrissel, Chairman of the WPBC Board of Directors, shares his views on the paradigm shift in the real estate market.
The Western housing market has been sustained for years with very low mortgage rates. The sharp rise in the cost of credit since the beginning of 2022 is a paradigm shift.
– In the United States, transactions fell sharply in 2022 due to the rise in real estate rates, the vast majority of which are variable, of the order of 6 to 7%, which is becoming a deterrent for many buyers. Year-over-year, sales volume decreased 22.6 percent (4.58 million existing homes sold in February 2023 versus 5.92 million in February 2022, annualized). The median price of existing homes sold, decreased with 0.2 percent in February to $363,000 and was the first annualized decline since February 2012.
– In the UK or Spain, real estate rates are very much linked to the banks’ deposit rates which are based on short-term variable rates that penalize borrowers with more expensive repayments.
– In Sweden, households are among the most indebted in Europe, at 180% of their disposable income. Until 2016, they had no obligation to repay their loan. The banks only required the payment of interest. Since 2018, households that borrow 4.5 times their gross annual income must depreciate 3% of their credit per year, then 2%, until their loan is only 50% of the value of their property. The sudden rise in interest rates is a game changer. Because the Swedes borrow at variable rates for a rate that fluctuates every three months. Sweden has now entered a recession, with gross domestic product down 0.5 per cent in the fourth quarter, the worst drop in Europe.
– In France the mortgage rates for property are based on fixed rates, with 20 years or more. The impact is less severe with rates still low. Real interest rates are negative since they are still below inflation, so they remain a support for investment. Difficulties of access to credit penalize the real estate market the most: mainly the usury rate and the constraints imposed by the HCSF (High Council of Financial Stability), for example a rate of effort limited to 35%, are imposed on banks since last year.
Overall, we are seeing a decline in volumes and prices in the Western real estate market as a result of the rise in credit costs. I personally do not believe in a long and severe crisis; prices have risen a lot in the last few years, so there is an inherent consolidation in the difficult economic situation. This adjustment could eventually boost transactions and support the market.
André Perrissel
@APerrissel
