Central banks start to lose control of interest rates, and housing markets feel the pain

US 10-year interest rates are the world’s benchmark “risk-free” market. And as the chart shows, their yield has risen from 3.25% on 4 June to peak at 4.88% on Friday. Prices move inversely to yield. So that means prices have fallen 50% in 4 months.

The picture is even worse if one goes back to 9 March 2020, when the yield bottomed at just 0.39%. That gives a mind-boggling fall of 1151% over the past 43 months.

US yields aren’t alone in feeling the pain as the chart shows. German 10-year yields bottomed at an extraordinary -0.75% on 8 March 2020, and hit a high of 2.99% on Friday.

Even Japanese yields are now moving up, as discussed before. They bottomed at -0.29% on 1 September 2019, and by Friday had reached 0.81%.

If/when they break the 1% barrier, who knows what will happen next, given that Japan’s debt is now 263% of GDP?

The issue is that US and global interest rates are finally moving back to more normal levels. As the chart shows for the US 10-year yield:

  • Real US 10-year interest rates have averaged 1.8% plus inflation since 1948
  • But the Fed’s stimulus meant they crashed to -6% in June last year
  • Now they are rapidly returning to more “normal” levels
  • They are already back in positive territory at 0.6% and seem set to move higher

But to date, investors have largely ignored these outsize moves.

The reason is simple – a whole generation of traders has been brought up to believe that central banks can somehow control the global economy and, with it, global interest rates.

But in reality, this is an absurd idea. How could 7 men and women based in Washington DC, or 26 men and women based in Frankfurt, control a world economy containing 8bn people simply by raising or lowering interest rates?

The answer, of course, is that they couldn’t. And so instead they have tried to control it by using their power, along with that of the other major central banks, to print money. They have printed $73tn since they began this new policy, as the chart shows.

But now, markets seem to be telling us that we have reached the end of the road for this “fantastic” experiment.


The size and scale of this move in the world’s benchmark “risk-free rate” is already sending shockwaves through the global economy.

Housing markets may well be a major casualty as interest rates return to being market-led:

  • People buying a house tend to focus on the monthly payment
  • If rates are low, they may well pay more for the home – especially if they expect rates to remain low
  • But today, US housing affordability has gone negative for the first time since 1985, as Ed Yardeni’s chart shows based on National Association of Realtors data

It is based on a mortgage rate of 6.92% and a monthly payment of $2177. Only families earning $105k could therefore qualify for a mortgage.

Today, rates have risen further, to 7.49%. So affordability will have reduced even more when the next survey appears.

Unsurprisingly, as the Investing.com chart shows based on Mortgage Bankers Association data, mortgage applications have already dropped back to 1995 levels.

The US housing market is now effectively “frozen”:

  • Nobody with a median income of less than $105k can get a mortgage
  • And those with earlier 3% mortgages can’t afford to move and see their monthly payment double.


Of course, the downturn is not confined to the USA. German mortgage rates have risen 400% since their 2021 low of 0.8%. They are now at 4.1% and still rising.

And as Merryn Somerset Webb’s Bloomberg podcast confirms, the UK house price bubble is facing a similar collapse.

This is a tragedy for the people who have bought houses during the bubble, and now likely face a major loss when they come to sell. It is also very bad news for the economy.

We warned of these risks in the Financial Times last year. And as we saw with the Silicon Valley Bank collapse in March, commercial real estate is facing similar problems.

Unfortunately, most companies, investors and policymakers are in denial about the likely impact of today’s return to market-led interest rates. Many have only lived in a world where rates were always zero.

The risk is that the full impact of today’s housing market downturn is therefore set to come as a major shock to many people.