2024-01-14 18:13:17
normal
Investors face high borrowing costs
January 14, 2024
22:13 pm
Prepared by: Hisham Mukhana
Real estate prices in the UAE recorded the highest increase among 32 countries in the world in 2023, according to the International Monetary Fund. According to the Fund, real estate prices in the Emirates grew by 10.39% during 2023, followed by Mexico (4.72%), and Israel came in third place, where real estate prices grew by 3.1%, and in fourth place came Portugal, where prices rose by 2.42%, and came fifth. Thailand with a growth rate of 1.54%.
The Fund indicated that the UAE ranked sixth among the list of the top ten countries in which real estate prices witnessed the largest increase since the pre-pandemic level, with a growth rate of 14.15%.
According to a note by the fund on its website, despite the sensitivity of the residential real estate sector to rising interest rates, house prices are still above their historical averages, and in advanced economies, including most European Union countries, as well as Africa and the Middle East, they are now higher by 10% to 25% of pre-pandemic levels, according to the International Monetary Fund.
The Fund points out that the high interest fever applied by global central banks to tame inflation, in addition to the scarcity of supply, quickly transmitted to residential mortgage markets, hindering affordability for current and potential home buyers, and limiting purchases in some areas.
In the first half of 2023, mortgage rates in advanced economies rose by more than 2 percentage points compared to the previous year. During this period, countries such as Australia, Canada and New Zealand saw significant declines in real house prices, likely due to the rise in adjustable rate mortgages and housing prices that have been expanding since before the pandemic. In comparison, house prices fell by more than 15% in some advanced economies, while the decline in emerging economies was less significant.
Debt service and repayment
According to the IMF, higher borrowing costs are likely to have the greatest impact on household debt service ratios, a measure of borrowers’ ability to repay their loans, in countries where housing markets remain overvalued with shorter average lifespans for mortgage loans, according to the IMF’s latest report. International report on global financial stability.
For example, borrowers’ debt servicing costs in countries such as Norway, Sweden, Denmark and the Netherlands, which have double-digit household debt service ratios, might increase by up to 1.8 percentage points due to significantly higher interest rates there. This will have consequences for loan approvals and the repayment capabilities of the borrower.
But on the other hand, borrowers have become less indebted, as underwriting standards have been strengthened since the global financial crisis, which are guidelines set by banks and lending institutions to determine whether the borrower deserves credit, which led to alleviating the risk of high loan default rates, which helped support prices. Homes.
Real estate loans
In the United States, Federal Reserve interest rate hikes have brought regarding major changes in the mortgage lending market, with the average interest rate on a 30-year fixed mortgage, the most popular, recently reaching its highest level in two decades, at 7.8%. . For potential buyers, down costs are putting homeownership out of reach, with required down payments becoming a burden and savings shrinking since the pandemic.
Existing homeowners, who have been reluctant to purchase new properties due to large monthly mortgage payments, are mostly staying put, causing a decline in the supply of existing homes. With average 30-year mortgage interest rates now at 6.6%, regarding 3 percentage points above pandemic lows, mortgage originations remain 18% below year-ago levels, while refinancing applications have increased by 8.5%. Throughout the year, mortgage rates continue to decline.
Rates and refinancing
Relatedly, the combination of higher interest rates and a still-scarce housing supply creates a vicious circle that complicates central banks’ battle once morest inflation. Monthly home prices in the United States continued to rise last October compared to the same period in 2022.
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