Using a range of risk indicators, the IMF says Australian households with mortgages are at greater risk of defaulting on mortgage repayments due to higher levels of household debt, rising interest rates contributing to higher mortgage rates, and elevated house prices.
The IMF also warns that economies with higher house prices and household debt are particularly vulnerable to any stresses in the financial sector, although it notes that banks are better capitalised than they were during the global financial crisis.
However, the IMF's warning comes as some economists say the recent significant declines in Australia's property prices may have ended and the local housing market could rebound from here. The IMF has identified the countries with the highest-risk housing markets by applying five risk indicators to dozens of developed economies.
Australia has the second-highest level of housing market risk among the world's 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 (in the sixth and final column), signalling the highest possible level of housing market risk. “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 said.
The IMF report also notes that Australian households are among the most indebted in the developed world, carrying the riskiest level of outstanding debt as a percentage of gross disposable income.
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.
Among advanced economies, the deterioration in the housing market was more pronounced in those that showed signs of overvaluation before and during the pandemic. If mortgage rates continue to rise, demand for borrowing and house prices are likely to weaken further. The IMF said in economies in which house prices increased rapidly and affordability declined during the pandemic, but household debt levels remained moderate up to the recent onset of monetary tightening, a more gradual decline in property prices was expected, and that could improve housing affordability in those countries.
House prices and household debt are not the only economic factors at risk. The IMF has also warned the global outlook for the world economy was getting cloudier, on current economic conditions. It has downgraded its outlook for global economic growth in 2023 to 2.8 per cent (down 0.1 percentage points from its January forecasts), with its medium-term global outlook for growth the lowest it has been in more than 30 years.
It warns that high inflation has not yet been tamed, despite aggressive rate hikes globally, including by the Reserve Bank of Australia. Australia's economy is set to slow significantly this year according to the IMF's forecasts, which expects the local economy to grow by just 1.6 per cent, and by 1.7 per cent in 2024.
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 warn of a 15 per cent chance of another financial shock coming from the banking crisis, which would cause a global recession.
