A new report from the Swiss Re Institute states a record high in housing prices accompanied by inflated household debt has created an increasingly challenging market. Insurers are warned to carefully manage their business and investment risk exposure.
Surging interest rates are making new house purchases less affordable and increasing mortgage servicing costs, triggering near-term price corrections. Strong household balance sheets and fixed-rate mortgages have provided some buffers, though budgets are being squeezed by inflation too.
In June, the Fannie Mae Home Purchase Sentiment Index in the US fell to its second-lowest reading in a decade. Prices and down-payments for first-time buyers in the US are so high relative to income that Fed Chair Jerome Powell said house prices will need a “reset”.
In Europe, generous unemployment benefits ensure existing and potential borrowers to a larger degree but may nonetheless fall short. Private sector debt-service-ratios in advanced markets may rise by more than 1% by 2025, the highest in over a decade, the Bank of International Settlements estimates.
Since the pandemic, affordability has deteriorated so much that policymakers may welcome corrections to improve financial and social stability. Though housing price corrections are predicted to have real economic spillover effects.
For insurers, Swiss Re warns that cooling housing markets mean less demand for property insurance and construction-related lines such as engineering and surety. Should construction cost inflation persist, there could be unexpectedly high claims in long-tail contracts.
Ultimately, the report warns that loss ratios will increase should the gap or lag between price and premium grow larger. For sellers of mortgage insurance to banks, rising debt servicing difficulties and defaults could also cause higher claims. Losses could be substantial if collateral value such as house prices, crashes. Insurers with real estate exposure as an alternative asset class may find prices are interest rate sensitive, such as due to strategic defaults or central bank selling of mortgage-backed securities.
