Global housing markets face a potentially significant downturn as rising interest rates, high valuations, and squeezed real incomes start to bite. Risks look especially acute in some markets, where they are already starting to crystallise.

The biggest shift in recent months has been the steep rise in global interest rates, including mortgages. US mortgage rates are now approaching 7% – the highest level since 2002 – up from 3.2% less than a year ago. In the eurozone and UK, we estimate mortgage rates have more than doubled since April and May based on recent movements in swaps (Chart 1). 

Chart 1: mortgage rates are surging

Abrupt rises in mortgage rates have strong negative impacts on markets and could inflict a confidence shock on a generation of borrowers conditioned to expect low rates to last indefinitely. 

Prices and activity are starting to stumble in several key markets. In the US, the Case-Shiller measure of house prices fell month-on-month in July for the first time since 2012, which is a huge shift of momentum after two years of sharp monthly increases. Meanwhile, mortgage applications have collapsed by a third since the start of this year and are now well below pre-pandemic levels (Chart 2).

Chart 2: US house prices are starting to drop