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Global housing crisis threatens

BSP has maintained its record low two percent key interest rates since November 2020 to help recerse the pandemic-induced economic crisis



Global stocks are spiraling downward, food and oil prices are shooting up, and central banks across the world are raising interest rates, which are all omens of a looming worldwide recession.

In the Philippines, inflation accelerated 4.9 percent year-on-year in April, higher than the March print of four percent and faster than the state’s target of between two and four percent, data from the Philippine Statistics Authority (PSA) showed.

Yet, the Bangko Sentral ng Pilipinas (BSP) is anticipated to announce a key rate hike after today’s Monetary Board meeting.

The BSP has maintained its record low two percent key interest rates since November 2020 to help reverse the pandemic-induced economic crisis.

A new report by Fitch Ratings identified Australia, Spain, the UK and Canada as the housing markets that are most exposed to rising interest rates using metrics, including the share of variable rate residential loans and borrowers’ debt-to-income ratios (DTI).

Raising interest rates is the best defense of central banks worldwide to combat the biggest inflation spike in decades to avoid exposure to financial stocks, Fitch Ratings indicated.

Rising private debts

“While this assesses the vulnerability to one variable, in practice, changing incomes would also affect DTI, for example, if inflation eroded real incomes or rising rates depressed economic growth, pressuring salaries,” the report said, noting that altering household incomes would impact the ratio.

At the onset, the domestic real estate sector is experiencing a significant boom, buoyed by a solid economic recovery. The average construction cost for a residential unit was P12,128 per square meters (sqm) in the first quarter of 2021, while condominiums recorded the highest average cost of P20,258 per sqm.

Across the Pacific, homes in America and the UK are selling at a record pace. Indeed, house prices in Canada jumped 26 percent since the start of the Covid-19 pandemic, while in New Zealand, the average home sells at $640,000, or 46 percent higher than the 2019 level.

The market has erroneously thought home prices to be exempted from an upswing in the consumer price index, with home buyers benefiting from ultra-low interest rates.

But the brewing central bank interest rate hikes, triggered by the global runaway inflation, could add pressure to the housing market. However, economists are optimistic this would not result in a global property crash similar to 2008.

Data from Australia showed at least one-third of its households have a mortgage and are likely to be hit by higher payments from the interest rate hike.

However, the Reserve Bank of Australia said it would take two or three years before the change in rates is felt, with around 40 percent of borrowers enjoying “fixed-rate” loans where the interest rate is only adjusted every three years.

Nicholas Mapa, a senior economist at ING, said the financial sector expects the BSP to announce a policy rate hike today after the country posted a better-than-expected 8.3 percent gross domestic product (GDP) growth in the first quarter.