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Aussie housing market risk level 2nd highest globally: IMF

By Zarah Torrazo
14 April 2023 | 14 minute read
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The level of risk in Australia’s housing market is the second-highest among developed countries, the International Monetary Fund (IMF) has warned.

In its World Economic Outlook update for April, the global financial agency cautioned that economies with higher house prices and household debt are “particularly vulnerable” to any stresses in the financial sector. 

Economies with high levels of household debt and a large share of debt issued at floating rates are more exposed to higher mortgage payments, with a greater risk of experiencing a wave of defaults,” the IMF added.


Concerningly, both of those statements described the current state of affairs in the Land Down Under. 

The IMF noted that Australian households hold some of the highest levels of debt among developed countries, carrying the riskiest level of outstanding debt as a percentage of gross disposable income.

To identify the countries with the highest-risk housing markets, the IMF used five risk indicators, including the percentage of households’ outstanding debt compared to their gross disposable income; the share of debt outstanding at variable interest rates; the share of households owning a home with a mortgage; the cumulative real house price growth; and the cumulative policy rate changes.

In its final tally, Australia ranked as having the second-highest level of housing market risk among 27 developed economies, after Canada. It is followed by Luxembourg, Norway, Sweden, and the Netherlands. 

Altogether, those six countries are the only ones to score a deep red” indicator, signalling the highest possible level of housing market risk.

The IMF explained that in some economies, house prices went up quickly during the pandemic, making it harder for people to afford them. However, household debt levels were not too high until recently when interest rates started to rise. 

During the COVID-19 pandemic, real house prices rose to record levels in many countries — especially among advanced economies — reflecting a combination of ample policy support and limited numbers of available properties on the market,” the IMF said.

In the second quarter of 2022, however, quarterly real house prices fell, with about two-thirds of economies experiencing negative growth and the remainder positive but slower growth,” the report stated. 

It further predicted that in these countries, the gradual decline in property prices could make it easier for people to afford homes.

If mortgage rates continue to rise, demand for borrowing and house prices are likely to weaken further.”

On the positive side, the agency stated that a continued decrease in housing prices would unlikely result in a financial crisis like the one experienced in the 2007–08 Global Financial Crisis (GFC) due to banks’ underwriting standards having improved in many advanced economies today compared to the standards they had back then.

However, the average household debt-to-income ratio across countries in 2022 was on par with that 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,” it noted.

Global economy entering ‘perilous’ times

The IMF also noted that house prices and household debt are not the only economic factors at elevated risk, warning that the global outlook for the world economy was getting murkier on current economic conditions.

Recent turmoil in the global financial sector, stemming from the collapse of Silicon Valley Bank and Signature Bank in the US, and the bailout of Credit Suisse by UBS, has prompted the IMF to revise its forecast for global output growth by 10 basis points to 2.8 per cent, with its medium-term global outlook for growth the lowest it has been in more than 30 years.

IMF cautioned that the global economy was “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner”.

With the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened,” the IMF report states.

Australia’s economy is set to slow significantly this year according to the IMF’s forecasts, which sees the local economy expanding by just 1.6 per cent and by 1.7 per cent in 2024.

Treasurer Jim Chalmers weighed in on the IMF’s predictions, acknowledging that Australia would not be spared from the global economic downturn and its impacts despite low unemployment figures and wages growth slowly increasing.

The Treasury does expect our own economy to slow considerably later this year because of that combination of a slowing global economy and the impact of higher interest rates here at home as well. 

So we’ve got some advantages, we’re optimistic about the future, but we need to be realistic about these global conditions and what it means for us.”

While Mr Chalmers is optimistic that it is still possible for Australia to avoid a recession as it did in the 2008 GFC, he said there will be a significant deceleration in the economy in the coming months, which will be considered in next month’s budget. 

“The Treasury and the Reserve Bank are not currently expecting a recession here at home, but the economy will slow.

“That’s why this budget is so important in a little under four weeks’ time, because what we need to do is provide some responsible cost-of-living relief without adding to inflation,” he stated.


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