The missing figure: How do bonds affect housing prices? - Walla! Of money

Investing in long-term bonds becomes more attractive than investing in real estate (Photo: ShutterStock)

The interest rate was raised in Canada six times a year between October 2021 and October 2022, the last time in October by 0.5% - to 3.75%.

Small business confidence in Canada has fallen to near all-time lows.

It is possible that the interest rate hikes are nearing the end, but the high interest rate is already oppressing economic activity.

The cost of repaying mortgages increases rapidly and harms the repayment capacity of the apartment buyers.

This means that Canada is going into an economic slowdown, it is possible to learn that the economy may even go in the direction of a recession.

We learn this from the Canadian government bond yield curve. The curve has inverted, inverted - that is, the short-term yield is higher than the long-term yield, one of the indicators known to economists for a recession or slowdown.

Please note, the two-year yield is about 3.97% and it is decreasing to 3.01% for the ten-year bond yield, at the time of writing these lines. House prices in Canada have fallen - from the peak they reached - by 17.5% as it was during the global economic crisis of 2008-2009, according to the assessment of the Reuters news agency.

The mortgage cost of 5% burdens the borrowers.

During the Corona period, house prices increased by about fifty percent, which means that the expected decrease will still leave house prices higher than they were before the outbreak of the virus.

There will be more interest rate hikes, the Bank of Canada clearly says that it intends to tame inflation.

Toronto, Canada.

A decrease in apartment prices in the shadow of fears of a recession (Photo: ShutterStock)

crooked reality

The yield curve in the world usually rises from a low short-term yield to an increasingly high long-term yield, but it is natural for the curve to rise along the timeline, since the risk increases as the number of years to repay the loan is longer, longer is more dangerous.

When the curve inverts, investors vote with their feet, They say to themselves, the state of the markets is dangerous, the economy may run into problems, perhaps a recession, therefore one should not be tempted by higher short-term yields, it is better to invest in longer bonds, albeit with a lower yield, but guaranteeing a certain yield, over many years.

The curve also indicates that it is better to invest in long-term bonds, even with a low yield, than real investments, whether in housing or business.

The risk is greater in real investments than the security provided by government bonds over many years.

The Canadian Ministry of Finance now predicts growth of only 0.3% in 2023 after 3.3% this year.

According to the Oxford Economics firm, real estate prices are in the 12th.

In another Anglo-Saxon country there is an inversion of the yield curve.

In the UK, the two-year bond yield is 3.26% and the ten-year yield is lower, 3.15%. The immediate meaning is that the UK is heading towards a recession or at least an economic slowdown. House prices will fall in 2023, according to a Reuters survey.

The beginning of the decline in house prices began in October this year for the first time in 28 months.

In September house prices were already unchanged compared to August when house prices reached their peak.

In the year leading up to September 2022, house prices in the UK rose by 9.5% after increasing at an annual rate of 13.1% until August, which means that the annual rate of increase has actually decreased.

It is estimated that the decrease next year 2023 will be 4.7% due to a decrease in the purchasing power of the public after the increase in house prices of 6.3% this year.

According to a website dealing with real estate in Great Britain, Rightmove, about 72% of first-time home buyers intend to reduce their spending on buying a home.

The sale of houses in September was 32% lower compared to September last year.

The International Monetary Fund predicts a crash in the rate of growth next year, to a minimal increase of only 0.3% after growth of 3.3% this year.

The Organization for Economic Cooperation and Development, the OECD, predicts that in 2024 the British economy will barely grow, maybe 0.2%.

At the beginning of November, the Central Bank of England raised the interest rate by 0.75% to 3%, it is determined to reduce inflation to 2% which is going to reach 11% towards the end of this year.

The markets predict that interest rates in the UK will continue to rise towards 4.75% towards the second half of 2023.

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London: Housing is still getting more expensive, but there are already signs of a "decline in the increase" (Photo: ShutterStock)

Troubles of New Zealanders

New Zealand is another country in the British Commonwealth.

The ten-year bond's yield is 4.2%, lower than the two-year bond's yield of 4.69%, which means once again an inversion of the yield curve indicating a decrease in the rate of growth and a potential decrease in the prices of apartments and houses.

The Central Bank of New Zealand is raising the interest rate mercilessly, in the last increase nine days ago, the ninth increase in a row, another 0.75% to 4.25% and the expectation in the markets is that the interest rate will continue to rise to 5.5% and some claim to 5.75%.

House prices are expected to drop from their peak by 18% after rising by 40% during the Corona period.

This year prices are falling by 11.5% and next year they will continue to fall by another 6%, according to the RBNZ central bank.

Overall, home prices are down 20% from their peak in November 2021. The rise in the unemployment rate could worsen the situation.

Clearly saying that the central bank of New Zealand is aiming for a recession in order to eradicate inflation which is at 7.2%, a thirty year high.

The recession in New Zealand is already around the corner - in the second half of the year 2023 and the year 2024. Also in February next year, the interest rate will rise another 0.75%, says the governor, who expressed regret for the necessary damage to the housing industry.

According to the estimate, apartment prices are 16% higher than equilibrium.

buildings in Tel Aviv.

A strange situation in the local real estate market: demand is falling, but the price is rising (Photo: Reuven Castro)

An alternative to real estate

In Israel as well, the yield curve fluctuates between inverting and inverting, after a series of interest rate hikes, most recently by 0.5% to a level of 3.25% and I predict that it will continue to rise towards 5% even if the Bank of Israel is not aware of this.

The yield of the nominal bond with a fixed interest to mature in about two years was this week about 3.4% higher than that of April 2032 of 3.3%.

The inversion of the curve may become stronger with any further increase in the interest rate. The investing public can come to the conclusion that the investment in the housing industry will not yield capital gains as which has been the case in recent years, as the inversion of the curve becomes stronger.

For this reason, some investors are already abandoning the housing market for investment in favor of safer investments in the form of long-term government bonds, perhaps a lower yield than they were used to for 15 years, but a safe income in the form of government bonds, as is the case in the world.

The boom period is behind us, the market sometimes takes nine months to internalize the change in the capital and real estate market. Apartment prices have increased in the last fifteen years by 100.4%, which is a nominal annual return of 4.74%.

The increase in apartment prices in the last ten years was 86.3%, which is an annual return at an average of 6.4% per year. The government bond yield today, of which there is no certainty of maturity, for April 2032 is 3.2%, a reasonable alternative compared to investing in the real estate market which is at a point of change in trend. The Bank of Israel currently expects growth next year to be 3% after 6 % this year, in my estimation in the next update the expected growth in 2023 will decrease.

In the US, the yield curve has inverted and this has an effect on bond prices all over the world.

The yield of the ten-year bond, 3.71% compared to the 4.46% yield of the two-year bond.

Manhattan prices are sky high, but in other parts of the US the estimate for a 5%-10% drop in prices in the coming months is getting stronger (photo: shutterstock)

According to the investment bank Goldman Sachs, house prices in the US will fall between 5%-10% from the peak in June until March in 2023. Prices in the US could fall by as much as 20%, according to the Dallas branch of the Fed, which is the US central bank According to an estimate, real estate prices are about 15% higher than equilibrium. The sale of second-hand houses decreased in October by 28% compared to October last year.

In most of the world, the housing market is currently at the sharpest turning point since the economic crisis of 2008/2009. Prices have fallen and are already falling in 18 developed countries, including ongoing declines in Germany and Sweden. In Germany, the central bank expects a correction in apartment prices, whose price is higher than equilibrium by 15%-40%. In

the Netherlands, it is estimated that real estate prices are about 17% higher than a point the equivalent of the weight.

In China, apartment prices fell last year to October by 3.5%.

In China, the economy is managed in all areas, the yield curve has not inverted, it is under the control of the central bank.

House prices in Australia are expected to fall next year at a rate of 16%, double the decline that occurred after the global crisis of 2008/2009, according to a Reuters survey. The Central Bank of Australia is expected to raise interest rates to 4% at the end of June 2023 compared to 2.85% today. Houses have already fallen by 6.5% from last year's record. In Australia, the yield curve has not yet reversed due to moderation in the rate of interest rate increases, an increase of only 0.25% each time up to a 2.85% interest rate in the last increase.

The Central Bureau of Statistics indicates that starting from October 2021 there will be a decrease in the monthly rate of 2.6% in the requested amount of apartments, according to the trend data.

At the same time, hourly prices are rising sharply.

A world as upside down as the curve!

Starting today, let us examine the yield curve of the Israeli government's fixed interest nominal bond, another, non-exclusive, indicator to examine the expected trends in the real estate market in Israel - and compare it to trends abroad.

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• real estate

• Bonds

• bonds

• yield

• investments