The interest rate was raised in Canada six times a year between October 2021 and October 2022 and 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 to an economic slowdown, and it is possible to learn that the economy may even go in the direction of a recession. This is learned from the Canadian government bond yield curve. The curve has inverted, meaning that 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 was the case during the global economic crisis of 2008-2009, according to the Reuters news agency’s estimate. The mortgage cost of 5% burdens borrowers. During the Corona period, house prices rose by about 50%, which means that the expected decline will still leave house prices higher than they were before the outbreak of the virus. And there will be more interest rate increases – This is what the central bank of Canada clearly says, which intends to defeat inflation.
crooked reality
The yield curve in the world generally 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 and more dangerous. When the curve inverts, investors vote with their feet, telling themselves that the situation The markets are dangerous, the economy may run into problems, perhaps a recession, so you must not be tempted by higher short-term yields and it is better to invest in longer-term bonds, albeit with a lower yield, but one that guarantees a certain yield over the 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 Sweden or in 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 12.5% ​​above equilibrium in Canada.
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 decrease in 2023, according to a Reuters survey. The decline in house prices began in October this year for the first time 28 months. In the month of September, house prices were already unchanged compared to August, when house prices reached their peak. In the year preceding September 2022, house prices in the UK increased by 9.5% after an increase of 13.1% annually until August, which means that the annual rate of increase has actually decreased. The estimate That the decrease next year 2023 will be 4.7% due to a decrease in the purchasing power of the public after an increase in house prices of 6.3% this year.
According to the UK real estate website Rightmove, about 72% of first-time home buyers intend to reduce their spending on buying an apartment. House sales in September were 32% lower than in September last year. The International Monetary Fund predicts a crash in the rate of growth next year for a minimal increase of only 0.3% after growth of 3.3% this year. The Organization for Economic Cooperation and Development, which is the OECD, predicts that in 2024 the British economy will barely grow, perhaps 0.2%. At the beginning of November, the Bank of England raised the interest rate by 0.75 % to 3%, and he is determined to reduce inflation to 2% which is about 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.
Buildings in London (Photo: Reuters)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 that once again the inversion of the yield curve indicates a decrease in the rate of growth and a potential decrease in the prices of apartments and houses. New Zealand’s central bank is raising interest rates relentlessly. The last increase nine days ago, the ninth increase in a row, was another 0.75% to 4.25%, and the markets expected that the interest rate would 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, house prices have fallen by 20% from the peak of November 2021. The increase in the unemployment rate could worsen the situation. The New Zealand Governor Adrian Orr clearly says that the Central Bank of New Zealand is aiming for a recession to eradicate inflation which is at 7.2% – a 30 year high. The recession in New Zealand is already around the corner – in the second half of 2023 and 2024. Also in February of next year, the interest rate will rise by another 0.75%, according to the governor, who expressed regret for the necessary damage to the housing industry. According to an estimate, apartment prices are 16% higher than equilibrium.
An alternative to real estate
In Israel too, the yield curve oscillated between inverting and inverting after a series of interest rate hikes, and last time by 0.5% to 3.25%. And I predict that it will continue to rise towards 5%, even if the Bank of Israel is not aware of it. The yield of the nominal bond with a fixed interest to mature in about two years was about 3.4% this week, higher than that of April 2032 of 3.3%. The inversion of the curve may become stronger with any further increase in interest rates. The investing public can come to the conclusion that the investment in the housing sector will not yield capital gains, As has been the case in recent years, as the inversion of the curve gets stronger. Because of this, some investors are already abandoning the investment housing market in favor of safer investments in the form of long-term government bonds, perhaps a lower yield than they were used to over 15 years, but a safe income in the form of bonds government, as happens 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 15 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 average annual return of 6.4% per year. The government bond yield today, which is not certain to mature, 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’s current expectation is that next year’s growth 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 is 3.71% compared to the 4.46% yield of the two-year bond.
House prices in the US have fallen, according to the investment bank Goldman Sachs, between 5%-10% from the peak in June to March in 2023. Prices in the US can fall even by 20%, according to the Dallas branch of the Fed, which is the central bank of the US B. According to estimates, 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 continued declines in Germany and Sweden. In Germany, the central bank expects a correction in apartment prices, whose price is higher than equilibrium, in its estimation, by 15%-40%. In the Netherlands, it is estimated that real estate prices are about 17% higher than the equilibrium point. In China, apartment prices fell by 3.5% in the last year to October. In China, the economy is managed in all areas, the yield curve has not reversed and is under the control of the central bank.
House prices in Australia are expected to drop next year by 16% – double the drop that occurred after the global crisis of 2008/2009, according to a survey by the Reuters agency. The Central Bank of Australia is expected to raise interest rates up to 4% at the end of June 2023 compared to 2.85% today. House prices have already fallen by 6.5% from last year’s peak. In Australia, the yield curve still hasn’t turned due to moderation in the rate of interest rate increases – an increase of only 0.25% each time, up to 2.85% interest in the last increase.
Buildings in Sydney (Photo: Reuters)The Central Bureau of Statistics indicates that starting from October 2021 there is a monthly rate of 2.6% decrease 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’s examine the yield curve of the Israeli government’s nominal fixed-rate bond – another, non-exclusive, indicator to examine the expected trends in the real estate market in Israel – and compare it to trends abroad.