Rising housing interest rates have raised concerns for the International Monetary Fund (IMF), which has warned that this could weaken the demand for houses and lead to a drop in home prices.
Nina Biljanovska, an IMF economist, wrote in a recent blog post that countries with high household debts and housing costs are "particularly vulnerable to monetary policy tightening."
"House prices surged during the pandemic, but the impact of tightening monetary policy varies across economies," Biljanovska said in a recent tweet, linking to her blog post titled "How Falling Home Prices Could Strain Financial Markets as Interest Rates Rise."
In the post, she pointed out that the pandemic-driven surge in housing prices, particularly in advanced economies, has started to reverse in recent months. Some countries have experienced a slowdown in price gains or even a decline. Central banks raised rates to combat inflationary pressures.
The average mortgage rate in advanced economies rose to 6.8 percent in late 2022, more than doubling from the beginning of the previous year. If borrowing costs continue rising or remain elevated for an extended period, Biljanovska predicted housing demand and prices would likely drop further.
Although comparisons have been made to the global financial crisis over a decade ago, Biljanovska believes a financial crisis triggered solely by falling home prices is unlikely. Nevertheless, a sharp drop in housing prices could dampen economic prospects. Biljanovska emphasized the need to closely monitor vulnerabilities in the coming years with the possibility of policymaker intervention. She noted that banks are better capitalized now than in the pre-financial crisis period, and underwriting standards in many advanced economies are more stringent. However, the average household debt-to-income ratio across countries remains similar to the levels seen in 2007.
According to the IMF, the impact of home prices on economies is significant since housing markets shape economic conditions and growth. Home pricing changes can influence consumer spending, investment, wealth distribution and overall economic stability.