The brick dance is over for now. But to see the plus sign again in the real estate market, we will have to wait for the central banks to finish the battle against inflation. This is the message coming from both European and US real estate lists, both under the pressure of "high rates as long as necessary" as the mantra in vogue in both Frankfurt and Washington predicts. Not to mention China, caught in a construction crisis that is strongly impacting the Dragon's economy. But the Chinese crisis has peculiar characteristics that have their roots in the Dragon's model of capitalist development. The slowdown that has affected both the Old Continent and the USA, grappling with the most ferocious tightening of the cost of money in the last forty years, is another thing. To the point that, albeit with different characteristics and methods, the effects of slowdown in the brick market they are also starting to make themselves felt in the financial world. And there are those, especially in the USA, who fear repercussions on the regional banking system, the true heart of the real American economy. Or, even, the replay of the 2007/08 crisis, a prospect forcefully rejected by both the Treasury and the Fed. The consideration remains that, wherever you look at it, the Bad rates is threatening the health of the industry.
Home: high rates, the market slows down
Our little tour can only start from the Bel Paese. In Italy the increase in rates (10 increases in the last 14 months) has translated into an increase of up to 75% for the installments of old variable rate mortgages. According to Fabi, those who paid an installment of 500 euros a month now have to pay 875. Fixed rate mortgages rise to over 6%. The result is one sharp fall in sales fell by 16% after -8,3% in the previous quarter, data collected by the Revenue Agency for the residential sector. A decline which, according to Istat, has not yet been passed on to prices, rising by an average of 2%.
It is not the case of the France which, after the geometric rise in prices in the Paris area, recorded a drop below the considerable figure of ten thousand euros per square meter for the capital. Despite the wait for the Olympics which should have supported investments, real estate sales fell by 25 percent in the quarter. Things are no better in Germany where building permits report a drop of 26%. in the other Eurozone countries: since the beginning of 2023, activity has been in the red in 13 out of 14 markets. But the average decline is around 6%, a relatively sustainable figure. “We are aware of this highly uncomfortable situation – Christine Lagarde said in this regard on the occasion of the latest rate increase – but our task is to lower inflation, not to support individual sectors of the economy”. Madame Lagarde's tranquility is due to the confidence that, unlike what happened in 2008/09, there is no risk of contagion for the banking sector, which is much more solid and less exposed to the winds of a possible crisis coming from the USA.
But, another negative effect, the price crisis it has caused a stagnation in new initiatives almost everywhere, worsening the "hunger" for new quality homes. It happens in Italy, Milan in the lead (where it builds only in the luxury segment) but also in Germany. The opening editorial of this morning's Handelsblatt is dedicated to the "social hardship" of a growing number of Germans who are giving up on the goal of getting a house they cannot afford.
Prices also dropped sharply in UK waiting for the new rate increase (from 0,1% to 5,25% in 18 months) scheduled for next Thursday. The number of mortgages (which went from 2,4% monthly to 6,75) fell by a good third compared to 2022 while insolvencies rose by 29%. The result is a decline in transactions (-5,9%) in a market with particular characteristics. In Great Britain, unlike in Europe, fixed rate mortgages are discussed several times (every five years on average) during the life of a loan with the result that every month one hundred thousand families or so have to review their threshold of expense. This also contributed to extinguishing the desire for bricks and mortar: transactions are 17% lower than in 2020, before the outbreak of Covid. And they will remain at low levels for a while longer according to the Bank of England. But the owners have nothing to complain about: the level of brick prices is still a good 17% above the prices of 2020. According to Paul Cheshire of the London School of Economics "over the last 25 years the price of houses in England and Wales it has risen two and a half times more than disposable income”.
Home market in crisis also in the USA: in addition to rates, home working weighs heavily
In short, the brick and mortar crisis has slowed down a key sector for growth but has not yet had dramatic side effects (except for the super bonus effect on our national public accounts). But the USA? Overseas the effect of rate rise was combined with the phenomenon of home working which had dramatic implications.
The most sensational case concerns WeWork, the company that offered shared workplaces in the heart of big cities. The stock was worth up to $47,3 billion before sinking under the blows of Covid 19 and the work-from-home boom. Until falling to 6 million dollars on September 300th. The company thus announced that it will try to renegotiate its rental contracts (777 in 39 countries) and its debts, which amount to 13 billion dollars. It makes its wayhypothesis of failure, which would be a real nightmare for owners who don't have many alternatives. Not even in New York where Mayor Eric Adams, faced with the risk of entire blocks being deserted, wanted it urge citizens to return to their jobs of a time "because they won't think about staying in pajamas all their lives". But the same major has so far not been able to bring all municipal employees back to the office.
USA: the crisis spreads from homes to regional banks
So far the crisis in the office and shopping center market is being transmitted to the regional banks, the heart of the economic system. According to the Wal Street Journal, if the residential market is also taken into account, the institutions boast a total exposure of 3.600 billion dollars, a figure that evokes the dramatic memory of the subprime crisis of 2007/08. But this time the picture seems very different, despite the sharp rise in rates (a ten-year bond at Fannie Mae exceeds 7%) and the decline in sales in an extremely varied market: San Francisco collapses, now labeled as the city of the homeless, Florida is still advancing. And it continues escape from New York where the average rent for a one-bedroom apartment is $3.980 per month.
In summary, the US market is currently suffering in the face of high rates. There are approximately 1,1 million homes for sale, the lowest figure since 1999. The average price is 425 thousand dollars. The number of houses under construction is more significant, increasing unlike in Europe. In July, 714 thousand construction sites were active. And to testify to the vitality of the market, despite the Fed, it is enough to say that among the new major investors is a certain Warren Buffett who at 94 years old doesn't need to buy a new house.
