In an unstable economy, mortgage lending is becoming one of the key factors determining the financial condition of both households and businesses. Understanding the relationship between mortgages, inflation and general economic conditions is important for forecasting financial risks and ensuring the sustainability of the real estate market.
How do mortgage loans affect economic stability and what mechanisms lead to price changes?
The standard cycle, when everything eventually goes to the consumer.
Many people strive to improve their living conditions (the demographic factor plays an important role in this). Often, wages and savings are not enough to purchase housing, so you have to apply for a mortgage (housing loans).
If the economy begins to experience disruptions, for example, due to a shortage of goods and excess money, this can lead to price increases, which is a manifestation of inflation (or, conversely, deflation may occur first).
Inflation, in turn, requires the Central Bank to increase the discount rate interest rate. An increase in the interest rate makes loans more expensive for both individuals and the real sector of the economy (enterprises and organizations), including people who have applied for a mortgage.
In such conditions, it becomes more difficult for the real sector to do business, as their costs increase due to high credit rates. This forces companies to save money, including reducing the number of employees and reducing wages. For many people, wages are the most important source of funds to repay mortgages. As a result, the number of insolvent borrowers increases, which leads to an increase in the toxicity of banks' assets and increases the risks of non-repayment of these loans.
On average, the volume of mortgage loans, including financing of the secondary housing market, accounts for about 50% of banks' assets in some countries, while the rest of the portfolio includes loans to the real sector and interbank loans. Thus, the share of mortgage loans has a significant impact on the total volume of loans.
Therefore, the real estate segment in the economy is a sensitive factor of its stability.