How Falling Home Prices Could Strain Financial Markets as Interest Rates Rise

IMF Blog, May 31, 2023

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The pandemic propelled housing prices to record levels in many countries, especially advanced economies, amid low interest rates and tight property supplies.
Prices started falling late last year in many countries, while others saw the pace of gains slow.
The deterioration was more pronounced in advanced economies with signs of stretched valuations before and during the pandemic.

With central banks raising interest rates to contain inflation, the average mortgage rate reached 6.8 percent in advanced economies in late 2022, more than doubling from the start of last year.
If borrowing costs keep rising or remain elevated for longer, demand and prices are likely to weaken further.

Countries with high levels of household debt and a large share of borrowing issued at floating rates are more exposed to higher mortgage payments and face a higher risk of defaults.
According to Organisation for Economic Co-operation and Development data, Canada, Australia, Norway, and Sweden are at greatest risk.
The average household debt-to-income ratio across countries is about the same as in 2007, driven mainly by households in economies that managed to escape the brunt of the global financial crisis and have since run up substantial borrowing.

In most cases, while it is unlikely that falling home prices will spark a financial crisis, a sharp drop in house prices could dim the economic outlook.
Banks are better capitalized than before the global financial crisis, and underwriting standards in many advanced economies are tighter today than before the crisis.

The build-up of vulnerabilities warrants close monitoring in coming years—and possibly even intervention by policymakers.
Falling prices in countries where housing prices grew rapidly could improve affordability, an upside noted in the World Economic Outlook published in April.

How Falling Home Prices Could Strain Financial Markets as Interest Rates Rise — Nina Biljanovska, May 31, 2023