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Something strange is happening in the US and UK real estate markets. While inflation is weighing on both countries’ economies and mortgage rates are well above where they were two or three years ago, house prices in both countries are moving in opposite directions – rising in the US and falling in the UK.

Part of the explanation lies in the structure and functioning of the mortgage market and its impact on the behavior of owner-occupiers and potential buyers. FT Money explores two very different property markets.

I thought both economies had similar problems?
There are definitely common themes. Central bank interest rates in the US and UK – which influence the cost of mortgage loans – are at their highest in more than a decade. In the USA, the federal funds rate has risen to around 5.5 percent since the US Federal Reserve sought higher interest rates for the first time at the beginning of 2022. In the United Kingdom, a similar strategy by the Bank of England has seen key interest rates rise from 0.1 percent to 5.5 percent in December 2021 to 5.5 percent today.

Central bankers in both countries are trying to curb inflation, which in August stood at 3.7 percent annually in the United States and 7.8 percent in the United Kingdom.

But what about real estate prices?
In the UK, higher interest rates appear to be having an impact on lower house prices. Lender Halifax said last week that prices had fallen for the fifth month in a row and at the fastest annual pace since 2009. Prices were 4.6 per cent lower last month than in August 2022, about £14,000 off the average The value of a house deducted – although on average it is still higher than before the outbreak of the pandemic.

As interest rates began to rise, U.S. real estate prices fell for a period of time starting in June 2022. But they have been rising again since February. According to the S&P CoreLogic Case-Shiller index update, they were 45 percent above pre-pandemic levels in June – wiping out all of last year’s declines. The market is currently at its peak again.

Why the difference?
In the UK, most borrowers take out mortgages where interest rates are fixed for two, three or five years. Although a principal repayment loan typically takes between 25 and 35 years to pay off, refinancing must occur every few years after these fixed interest rates expire.

These fixed interest rates have risen sharply over the last 18 months. Average mortgage rates in the UK are 6.5 percent for a two-year loan, compared to rates below 3 percent at the end of 2021.

US mortgage borrowers who take out a 30-year loan can lock in their interest rate for the life of the loan without having to refinance if they maintain their payments.

In the UK, the need to negotiate another deal with lenders every few years means that recent rate hikes reach borrowers within a few years. However, there is no such refinancing period in the USA. Homeowners who took out a 30-year mortgage at 2 or 3 percent a few years ago are now seeing interest rates in the market above 7 percent.

This leads to the phenomenon of fixed interest rates. Homeowners are given a strong incentive not to move, even if their family outgrows their home and they need a larger home.

The result is that the inventory of homes for sale – which makes up the majority of housing supply – is shrinking, further limiting the number of homes available for sale. And while high mortgage rates have dampened demand, some buyers still appear willing to take on more expensive mortgages. Lower supply and relatively stable demand are causing prices to rise again.

For some U.S. homeowners, the lock-in effect is a huge financial benefit at a time of rising consumer prices. But it also creates significant rigidity in the market – and critics point to the difficulties it creates for young people, who continue to be excluded from the housing market due to high prices.

Ethan Wu is a New York-based financial reporter and hosts the twice-weekly podcast Unhedged.

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