Wednesday, June 7, 2023

‘Jingle mail’ redux? | Financial Times

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We wrote on Wednesday about the era of “mortgage dominance”, and how fears home loans were starting to hem in central banks — at least in some countries. It’s a topic we think is about to go Taylor Swift-big very soon.

Lo and behold, a new report on “the risk of mortgage defaults in a global housing downturn” has landed in our inbox, courtesy of Goldman Sachs economist Yulia Zhestkova.

The report mostly focuses on how rising mortgage rates, under-pressure property prices and delinquencies might lay out in the English-speaking major G10 economies. A bit Anglosphere-centric, but there are some token Scandinavian references [Ed: we get it, you’re from Norway] and it makes sense to limit the universe of analysis to make it at least vaguely digestible.

Goldman’s main conclusion will not surprise any FTAV readers. While the US is somewhat protected by the prevalence of long-term fixed rate mortgages, and Australia and New Zealand are vulnerable to payment shocks, the UK looks the diciest (but at least not doomed):

Overall, we see a relatively greater risk of a meaningful rise in mortgage delinquency rates in the UK. This reflects the shorter duration of UK mortgages, our more negative economic outlook, and the bigger sensitivity of default rates to downturns. However, even in the UK, our European economists expect that the skew of the payments shock towards wealthier households — which have accumulated significant excess savings during the pandemic — should mitigate the economic effects of the surge in UK mortgage rates.

Goldman Sachs focuses on four risks:
— The shock from rising interest rates
— The danger from rising unemployment
— Whether households default on loans because of negative equity
— The overall quality of mortgage underwriting

On the last risk factor, Goldman has some good news. It reckons that mortgage credit quality is “robust”, thanks to lasting memories from the global financial crisis, stricter regulations and regular stress tests of bank loan books.

Zhestkova is also optimistic that strategic defaults by underwater mortgage holders is a minimal risk. While house prices are declining (and have been for some time in places like New Zealand), a 10 per cent fall in home prices tends to increase mortgage delinquencies by less than 10 basis points in Australia, New Zealand, Canada and the UK. Even in the US — where there isn’t full recourse to anything but the home in question — “jingle mail” isn’t actually a big factor.

But the impact of soaring interest rates is going to bite bigly in economies with a lot of mortgage debt, and especially in those countries where most households borrow through floating-rate home loans.

In Australia and New Zealand, over half of all mortgages will reset to higher rates in 2023, and in the UK about 40 per cent will, according to Goldman Sachs. Norwegians, look away now.

In Norway, people are at least more sheltered by strong welfare net should unemployment start to rise markedly. Other countries are not so lucky.

The Goldman Sachs report estimates that a 1 per cent rise in a country’s unemployment rate tends to lift the mortgage delinquency rate by as much as 20 bps in the UK. Elsewhere it is not quite as acute, but income shocks tend to have a “persistent” impact, Goldman notes.

This is (thankfully) not another 2008. But given the recent ramp-up in house prices in many countries, the scale of the interest rate shock and what is likely to be an economic downturn in many places, property doesn’t feel safe as houses right now.



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