A Tale of Two Housing Markets

This is an audio transcript of the Unhedged podcast episode: ‘A Tale of Two Housing Markets’

Ethan Wu
They say home is where the heart is. Well, I say home is where monetary policy transmission is.

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When interest rates rise, mortgage rates rise, that’s supposed to put pressure on the housing market and slow the economy. But what if that doesn’t happen? Today on the show, a tale of two housing markets over here in the US and across the pond. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter and renter Ethan Wu here in the New York studio, (Katie laughs) joined today by homeowner Katie Martin.

Katie Martin
Hey, Ethan, how you goin’?

Ethan Wu
Katie, how does it feel to build equity? I don’t know what that feels like.

Katie Martin
It feels really weird because unless I want to move house and move somewhere much smaller, it makes no difference to my life, the fact that my house price has, like, tripled in the past (laughter) like, 12 years or something. It’s odd.

Ethan Wu
Well, as I mentioned at the top, housing is a really important asset. It’s kind of what makes the economy swing up and swing down. But the swings have been very different over here in the US and over on your side of the pond, Katie. US housing prices are going back up despite interest rates being as high as they’ve been in decades. But in the UK they’re going down. What’s going on, Katie? I really don’t understand your (inaudible) system, to be honest.

Katie Martin
We don’t understand (laughter) yours. Yours is weird, not ours. So over here, house prices have now been falling for five months in a row, the fastest annual pace of declines since 2009, which you may remember was not a vintage time for house price performance. (Laughter).

Ethan Wu
No, not at all.

Katie Martin
Prices down 4.6 per cent in August, year on year. That’s according to Halifax. So house prices are definitely turning lower in the UK. And ultimately, Ethan, it’s all about me.

Ethan Wu
Yes.

Katie Martin
It might be worth thinking about my experience here, which informs why a lot of this is happening. So I’m now fixed on a mortgage where I pay a rate of 1.5 per cent, but not like you funny Americans, who have mortgages for, like, 30 years or, you know, whatever it is. Very odd. Ours roll over every sort of two, five years, something like that. So when I come to roll over my mortgage and get a new one in May, it’s gonna charge me a lot more than 1.5 per cent and that’s gonna really hurt. And so interest rates are really, they’re really starting to pinch at the housing market here. Now, you know, one thing about all this is the typical UK house price is now £280,000, and that’s down £14,000 on a year ago. But it’s still well above where we were pre-pandemic. So, you know, house prices may be coming down, but they’re still extremely elevated. It’s not like there’s bargains out there for people who’ve got a bit of money down the back of the sofa. But it just goes to show you that, you know, your experience is very different to ours and that policymakers here, central bankers here in the UK, are really held back from being able to be super aggressive on raising interest rates because they know that otherwise, muggins over here, Katie, is gonna be very poor and have nowhere to live. And that’s gonna be a pattern that’s repeated in thousands and thousands of households across the country.

Ethan Wu
I’m glad you mentioned the central bank, because I think that’s a really critical part of the US story too. But unlike in the UK where you guys have had falling housing prices, we’ve had rising housing prices.

Katie Martin
How do you manage this? What are you doing?

Ethan Wu
It is staggering. When the rate increase cycle kicked off housing prices were falling for a while, but since February, they’ve been rising again. And if you look at, you know, a one- or two-year chart of US average national housing prices, all the declines are gone. We’re right back at the peak. And, you know, I think part of the story is that difference between our 30-year fixed rate mortgages and your guys’ two- to five-year rolling mortgages. And the reason for that is in the US, we’re seeing this broad phenomenon of rate lock-in. You take out a 30-year mortgage, it’s got a two or 3 per cent interest rate on it. There’s tens of billions of people that are locked in around 3 per cent.

Katie Martin
And the new rate is what? Like, if you were to buy a house tomorrow?

Ethan Wu
Seven per cent?

Katie Martin
Yeah, I know. I get it. (Laughter)

Ethan Wu
Right. So it’s going up four percentage points. It’s, and so you are strongly incentivised. And again, this is an asset where a lot of Americans have the majority of their wealth locked up. You are strongly incentivised to not move, to do anything but move, even if it makes sense, even if your family is grown and you want a bigger house, or maybe you get divorced and you and your now-divorced partner are like, well, you know, let’s just stay together. Even if we’re separated, it’s worth it. Let’s maintain this 3 per cent.

Katie Martin
That always works really well. Yeah. Yeah.

Ethan Wu
(Laughter) So you were seeing that rate lock, and the effect of that is to take supply off of the market, right, to further constrain the amount of homes available for sale ‘cause no one wants to give up that mortgage. And what that means is if there’s not a lot of supply and there’s some level of steady demand, you’re gonna have prices go back up.

Katie Martin
Yeah. Yeah. It has a really real impact, if you see what I mean, on people’s finances. You know, when the UK government bond market went bananas about a year ago and yields on government bonds went through the roof, the average person on the street didn’t really care about the ins and outs of the inflation-linked . . . 

Ethan Wu
Yeah.

Katie Martin
 . . . gilts market, but they did, you know, look at their bank account and say, wait, wait, wait a minute, (Ethan laughs) how much is my mortgage gonna be and how much is my rent gonna be? Because the other thing that’s happening not just in London, it’s across Europe, so you look, Paris, Berlin, anywhere. The FT’s been writing a lot about this recently. People are frozen out of mortgages because they’re just too expensive now. If you’re looking to take out a new mortgage and buy a new house. So what do they do? They rent.

Ethan Wu
Right.

Katie Martin
And what is there not enough of? Houses. So guess what’s happening to people’s rent? It’s just going absolutely through the roof, you know, right across Europe. And so it really does leave a mark.

Ethan Wu
And this is another weird dissimilarity on kind of both sides of the Atlantic, is that in the US, we are finally coming to what seems like the end of the rental increase period. We’ve seen a boom in apartment construction. It’s the highest on record as far as I understand. The records go back to the ‘70s, the most apartment construction we’ve ever really seen nationwide. Rents in some metros are starting to fall for the first time in God knows how long after this massive pandemic rent increase. It’s a very weird dissimilarity. And to be honest, I don’t know if we fully understand what’s going on in that market just yet. There are experts that dispute the statistics and say it’s exaggerated and there are kind of technical factors distorting the market. But fact of the matter is, rents are coming down in the US and apartment construction is booming just as our housing market, you know, prices keep creeping back up. It’s a hard picture to really square and make sense of.

Katie Martin
I mean where would you rather be a central bank governor?

Ethan Wu
That really is the question. And I mean, it’s a fun quirk of us financial journalists that we see all issues through the eyes of the governor of the central bank. (Katie laughs) So, Katie, we have this picture of, you know, falling prices in the UK, rising prices in the US. But let’s just talk a little more broadly about the systems, right? I think we can see some pros and cons here. I mean, maybe let’s get into that a little bit, starting with your side of the pond. What does the system look like to you after, you know, the rate increase experience we’ve been through?

Katie Martin
Well, I think the kind of lessons to take away from this is that the UK mortgage market, the way that it’s structured, just like everything else in every other bit of finance everywhere, is entirely predicated on the idea that interest rates are going to be nice and low and inflation is going to be nice and low. And look, that worked for 40 years or something. It doesn’t work anymore. We’re in this situation where you cannot take for granted that you’ve got inflation back in its box. And so you do just have this horrible scenario where people’s very real cost of housing themselves is very much the vagaries of how inflation works. And nobody understands what that is and the risk of your rent jacking up or next time you roll over your mortgage, if the cost tripling is really real. So it just shows how sensitive the whole system now is and people’s livelihoods are to, you know, stupid stuff like inflation that we can’t control.

Ethan Wu
Yeah, and it’s really quite shocking how different that picture is from the picture in the US where most homeowners are shielded from the effects of higher interest rates by our 30-year fixed rate system, right? If you look at mortgage payments as a share of disposable income, it’s low and it’s not really rising, right? That is a shocking fact and again, totally different than the UK. But that is a real genuine benefit to those homeowners and I don’t wanna downplay that because that’s for real. On the flip side, though, it creates a tremendous amount of rigidity . . . 

Katie Martin
Yeah.

Ethan Wu
. . . in this market. There are tens of millions of people who will not sell their houses, even if it actually would make sense if not for the rate environment. And as I think, you know, folks know, a generation of young people in the US have been locked out of the housing market, partially because we have a system and it’s both this 30-year fixed rate mortgage system. It’s also the huge subsidy we give to mortgage interest and a variety of other, you know, legal and financial barriers. People are incentivised to keep house prices going up and to the right and not ever down, because that’s where the majority of their wealth is tied up. And that creates a pretty powerful interest group against more house construction, against lowering barriers to entry to the housing market. You know, it’s been widely noted that the starter home is no longer built in America. It’s a market that provides tremendous stability for a certain class of people and locks another class of people out.

Katie Martin
Yeah, I mean, the systems are very different, but either way, the result appears to be the same, is that if you don’t come from money, you don’t happen to have the bank of mum and dad able to give you a big wedge of cash to get you started in life, it’s really, really difficult to buy a home now.

Ethan Wu
Yeah, I’ve been calling up the bank of mum and dad to see if we can get some quantitative easing started because bank account’s running a little dry.

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All right, Katie Martin, good luck with rolling over your mortgage next year.

Katie Martin
I appreciate that. Good luck talking to the toughest bank manager in town: (Ethan laughs) your mother.

Ethan Wu
She listens to the show, by the way.

Katie Martin
Hello, Ethan’s mum. Give him hell.

Ethan Wu
We’ll be back in a moment with Long/Short. Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Katie, do you have a long?

Katie Martin
I have a long this week. I’m gonna be long Turkey. So foreign investors have just kept a very large distance from Turkish assets for a really long time. But they’re really starting to nibble again. They’re snapping up bank bonds, there was a baby goods retailer listed on the stock exchange. There was lots of foreign interest in buying that. My excellent colleague Adam Samson has been writing about this from Ankara. And a lot of this is because there’s been a real change of heart and the president has started sending out a message that interest rates are going to have to be high to keep down inflation. This is a total 180 from the position he’s held for a really long time where he’s been really opposed to high interest rates. Suddenly, foreign investors are taking an interest again. It’s gonna be a long journey back for some of them. But if you’re brave, you know that it makes a lot of sense. So I’m gonna say long Turkey.

Ethan Wu
Yeah. Erdogan’s been like the ultimate contrarian on this, where . . . 

Katie Martin
(Laughter) Ultimate, yes.

Ethan Wu
Low interest rates actually decrease inflation.

Katie Martin
Look, let’s not make too much fuss about what he said in the past. Let’s just roll with (Ethan laughs) what he’s saying now. Yes, he has said that the high interest rates are, and I quote, “the mother and father of all evil”. (Ethan laughs) He has said that there is a sinister lobby that’s been working to keep interest rates high.

Ethan Wu
Right.

Katie Martin
The fact that there’s been a change of heart on this, however it’s presented, is really encouraging for foreign investors.

Ethan Wu
That much is for sure. I was shocked to see that headline, frankly.

Katie Martin
(Laughter) Yeah, me too.

Ethan Wu
But yeah, very welcome, very welcome. All right, Katie, I am sure FT readers’ opinions on Canada, which I feel like are ungenerous and libellous against the great country, our great neighbour to the north. This all came about because there was a very nice op-ed recently in the FT called “Why isn’t Canada an economic giant?” Pretty straightforward piece, goes into some of the productivity data. But there were, like, 600 comments on this post and I was, like, why? And then, you know, you go into the comment section. Here’s what one reader had to say about Canada: “It’s an enormously overrated country that has been growing GDP purely through immigration population growth, with terrible weather, a pompous population who believes themselves better than others, notably superpower US. Laughable and delusional, limiting their ability to be introspective and improve and led by a weak and economically ineffective government.

Katie Martin
So not a fan then, is that what you’re saying?

Ethan Wu
Not a fan. Not a fan. And whatever opinion you have of like Justin Trudeau or whatever, Canada’s a nice place. Can we just agree on that? It’s like a nice place to be. Montreal’s a cool, world-class city. Like, it’s not that bad, really.

Katie Martin
I’m enjoying your flex though that you are short FT readers. I can’t wait ‘til the boss hears this. (Both laugh) This is a, it’s a strong flex.

Ethan Wu
To be more specific, Katie, I think I’m really short one FT reader called globetrekker. It’s really more personal than anything. But I don’t want to say I’m short all FT readers, because we did get a very nice email about our discussion of the Greek cheeses you ate on your vacation.

Katie Martin
We did receive a decent volume of cheese-based correspondence to me last week, and I think our friend Demetrius was right that the cheese I consumed, I’m gonna try and pronounce it, was xinomizithra. See.

Ethan Wu
(Laughter) That’s quite heroic. I . . . 

Katie Martin
If I’ve got it wrong, I’m really sorry. It was very nice. It’s just that I ate too much of it. No more cheese.

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Ethan Wu
Demetrius said he likes our mispronunciations of things.

Katie Martin
Cool. He’s in the right place. (Laughter) Let’s hope he continues to tune in.

Ethan Wu
All right, Katie will be back with you next Tuesday to mispronounce more words and listeners, we’ll be back in your feed on Thursday with another episode of Unhedged. Catch you then.

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Hey, if you have not rated the show five stars on Apple Podcasts, Spotify, wherever you listen, we’d really appreciate you doing so. Katie, have you rated yet? I don’t know if you have.

Katie Martin
I have, no, I didn’t know that was a thing.

Ethan Wu
Come on, Katie.

Katie Martin
That’s my fault.

Ethan Wu
Don’t be like Katie. Rate five stars. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie and Jess Truglia. FT Premium subscribers can get the Unhedged newsletter for free; a 90-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.