- Moody’s credit rating agency warns of a potential 10% decline in UK house prices due to high inflation and a recent hike in interest rates.
- The global housing market is also in decline, with house prices dropping in Sweden, Australia, and the United States.
- In times of turmoil in the real estate market, more stable securities like gold and other precious metals can diversify investment portfolios and minimize risks.
In a sobering forecast, credit ratings agency Moody’s has recently warned of a potential 10% decline in UK house prices over the next two years. The correction was triggered by persistently high inflation and a recent spike in lending rates. If this downturn materializes, it will be the most significant since the 2008 global financial crisis.
Many economists expect a fall in house prices this year as the Bank of England continues to hike interest rates to combat rising double-digit inflation. Mortgage lenders have raised interest rates significantly – from below 3% a year ago to above 5%. Inflation rates also increased by 7.8% in 2023, compared to a 2.1% rise the year before.
What does this mean for the global economy and, specifically, the U.S. real estate market?
In reality, house prices across the globe are witnessing a decline. In particular, houses in Stockholm are selling for 20% less than their peak, Sydney prices have decreased by almost 14% over the year, and in San Francisco, they are down by 15%.
The global housing market downturn can be attributed to the end of the era of near-zero interest rates. As mortgage rates rise, the cost of borrowing increases, thereby reducing the pool of potential buyers and consequently leading to lower housing prices. Recently, the Bank of England raised rates from 0.1% in late 2021 to 4% today. Meanwhile, U.S. average long-term mortgage rates are now above 6%. A year ago, they were below 4%.
Caught Between Falling Prices and Rising Rates: A Conundrum for U.S. Homebuyers
The economic ties between the UK and the U.S. run deep and are multifaceted, encompassing everything from trade and foreign direct investment to international finance. Both nations have substantial investments in each other’s economies. For instance, real estate investment trusts (REITs) and other property-based securities often hold international portfolios. If the UK’s real estate market takes a significant hit, the impact could reverberate through these financial instruments and upset the balance of the American market.
For potential homeowners in the U.S., the situation is a double-edged sword. On the one hand, falling house prices could make homes more affordable. However, rising mortgage rates may still create an insurmountable barrier for many. Higher mortgage rates mean higher monthly payments, which can disqualify prospective buyers who fail to meet lenders’ affordability criteria. Additionally, those who can technically afford a home might be deterred by the prospect of locking in a high-interest rate, especially with the uncertainty of potential further economic instability.
Diversifying with Precious Metals amid Real Estate Instability
For decades, real estate was hailed as the gold standard of safe investments, a tangible asset that seemingly always appreciated over time. However, the once-reliable market has recently been plagued by a downturn that is shaking the core belief of many seasoned investors. This sudden change is causing panic in the industry, prompting investors to look for alternative safe-haven investments.
Gold has not only been a symbol of wealth and power through the ages, but it has also served as an effective hedge against inflation. In 2020, gold prices rose significantly, marking a 28% increase in September since the start of the year. The trends underline the resilience and potential of gold as an investment. Including gold in an investment portfolio isn’t merely a buffer against economic volatility – it’s a strategic move towards diversification and greater financial security.