Analysts weigh in on how central banks could react to housing market slowdowns
As housing markets across the globe show signs of slowing, could central banks begin holding off on hiking interest rates?
This was the question explored by Evercore ISI analysts in Krishna Guha and Peter Williams of Evercore ISI to a report penned to clients.
Guha and Williams’ analysis focused on the concept of mortgage dominance, describing a scenario where central banks hit pause on rate hikes aimed at achieving “medium-term price stability” due to fear of its impact on mortgage borrowers and the housing market.
According to a Bloomberg report, the pair noted how central banks may be inclined to impose such policies in economies “with high levels of variable rate mortgages and short-term fixed rate mortgages or which saw house prices surge during the pandemic.”
Ground zero for mortgage dominance
Guha and Williams called the UK “ground zero” for the mortgage dominance question as the Bank of England’s aggressive monetary tightening could bring “income shock” to about four million households that have floating rate loans or short-term fixed rates set to reset over the course of 2023.
Both analysts said the Bank of England hasn’t yet eased on its fight against inflation, although it’s clear that a “massive income shock” would be “objectively daunting” for the millions of households that stand to be affected.
A similar observation was made by Jim Reid at Deutsche Bank, who noted that the Bank of England’s nervousness about house prices was indicative of “an era of mortgage dominance.”
“[Rather] than being in an era of fiscal dominance we might actually be in an era of mortgage dominance,” said Reid. “Will extremely high global house prices and the risk that their fall could destabilise economies eventually influence other central banks like the Fed and ultimately loosen their commitment to the inflation fight? It’s going to be an interesting couple of years ahead for global housing.”
Other countries found to be vulnerable to increasing interest rates due to variable rate loans and sizeable debts include Australia, Spain and Canada, reported Bloomberg, citing data from Fitch Ratings.
