Who escapes the great mortgage reset?

US mortgage rates hit 6 percent this week, the highest level in 14 years, adding to fears about the housing market. But Americans live in a socialist paradise. Homeowners are protected from rising interest rates through 30-year, government-backed fixed agreements. When rates drop, the mortgage can be refinanced, securing cheaper payments. When rates increase, pain is not transmitted.

Most of the world lacks this isolation. Refinancing to a higher rate is an increasingly bleak prospect for individuals and businesses alike.

Fitch warned that borrowers in the UK, Spain and Australia are particularly exposed, with a high proportion of mortgages following central bank rates or with short-term fixed deals about to expire.

This sounds like bad news for banks. But the consensus is otherwise: Spreads will improve as lenders raise rates for borrowers while passing the crumbs on to depositors. And this happy situation is supposed to last because the system has become more secure since the financial crisis.

Alastair Ryan, an analyst at Bank of America, noted that in the last serious UK housing recession back in 1989, about 58 percent of first-time buyers borrowed at loan-to-value ratios of 95 percent or more. . Last year it was only allowed to borrow at that level at 0.2 percent.

Despite sky-high prices in the interim, houses in Britain are selling at lower multiples of income than they were 33 years ago. Back then, homeowners used their homes as ATMs, with home equity withdrawal equal to 6 percent of household income after taxes. This phenomenon has vanished; people make advance payments instead.

This lending conservatism, much of it enforced by regulators, may be dire for the prospects of young people hoping to buy a home, but it certainly bolsters banks’ balance sheets.

To provide added reassurance, regulators subject banks to annual stress tests to gauge their ability to withstand an economic shock, which they generally pass.

But the real world never matches the forecasts. The latest UK stress test in 2021 envisioned an unemployment rate of 12 per cent with low inflation. The opposite has happened.

Markets have consistently underestimated the level and persistence of inflation and the strength of the central bank medicine needed to cure it. At the same time energy and grocery bills rise, mortgage costs will also rise for more and more homeowners and homeowners. This may not cause a financial crisis, but it’s not hard to see it causing a housing bust.

On the corporate front, many of the largest borrowers have taken advantage of the era of cheap money to extend the maturity dates of their debt. High inflation reduces the value of that debt over time.

But this ignores large sections of the corporate world that are either too small or too weak to tap the markets for this cheap long-term financing.

The Financial Times this week described some of the companies with bond yields trade at more than 10 percentage points above government debt. They include familiar names like Bed Bath & Beyond and WeWork. Some of this debt is due in the next 12 months. Much more is due in 2024 and 2025.

It’s a worrying time for anyone who doesn’t have the luxury of an American mortgage.

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