Economic policymakers around the world are raising interest rates to try to tame the rising cost of living. Jerome Powell, Chairman of the Federal Reserve, reiterate my commitment that policy in a speech yesterday. He warned against giving up inflation “soon” and promised to “continue until the job is done”.
But both rising rates and high inflation can have very different real-world effects depending on who you are and where you live. For example, gas prices are much more important to commuters. Higher interest rates cost people who rely on credit cards to pay their bills, while they can actually be good news for retirees living on savings.
In today’s newsletter, I want to explore a striking example of those differences: the housing market on both sides of the Atlantic. In the UK, rising interest rates are threatening to force some people out of their homes. In the United States, in some cases, they prevent people from moving.
Two countries, two endings
At the start of this year, the typical homebuyer in the US was able to get a mortgage at an interest rate of just over 3%, a historic low. Today, buyers can expect to pay more than double that amount — over 6.5% on average, the highest rate in more than a decade. Specifically, for someone buying a $300,000 home with a 20% down payment, that’s the difference between a $1,000 monthly mortgage payment and a $1,500 down payment. dollars.
However, if you own a home in the United States, chances are your monthly payment doesn’t increase at all. That’s because the majority of homes in this country are purchased with 30-year fixed-rate mortgages. If you fixed your interest rate at 3% last year, your monthly payment will stay the same for the next three decades, no matter what happens to interest rates, home prices, or overall inflation.
In the UK, mortgage rates are also rising rapidly. But the impact of higher rates seems very different. That’s because most mortgages there have a fixed rate of only two to five years. (Others have variable-rate mortgages, which automatically change whenever the Bank of England raises or lowers interest rates.) Like my colleague, Eshe Nelson recent reportMillions of Britons expect their interest rates to skyrocket next year. Certainly, some of them will not be able to afford the higher payments and will be forced to leave their homes.
You rise and loser
Without a doubt, for most US home owners, the stability their fixed-rate mortgages offer is a huge boon right now, protecting them a lot. effective way from both high inflation and rising mortgage rates.
But not everyone is ahead. In the US, you cannot bring a mortgage with you when you move into a new home. As a result, homeowners who may have been planning to move in the next few years – for example, in exchange for a larger home, or downsizing after the kids go to college – now have an incentive. strong to stay and hold on. with their low interest rates.
As a result, there are fewer homes for sale, which keeps home prices high even as the housing market has slowed due to other measures. That means anyone hoping to buy a first home now faces a fourfold difficulty: There aren’t many homes to buy. Available homes are expensive. Rising interest rates are reducing the power of buyers. And if they don’t buy, then they have to keep paying rent – rent is also going up.
As Roman Sustek, an economist at Queen Mary University of London, told me, “In America, you’re going to have winners — these are people with existing loans — and you’re going to have losers. In the end, the new borrowers. In the UK, everyone is going to be a loser.
These complex dynamics also have implications for the broader economy. The popularity of fixed-rate mortgages in the US means the Fed can raise rates aggressively without worrying that millions will lose their homes. But it also lessens the impact of that rate hike: If U.S. homeowners are faced with a sudden spike in the cost of their housing, they’re likely to pull back on their home purchases. other regions (which has already begun to happen in the UK). Instead, more Americans could keep spending, which could help keep inflation higher for longer.
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