Since the pandemic, an upward rally has boosted property prices in many countries, especially in developed economies. Low interest rates and the limited supply of real estate – also due to the suspension of construction work due to restrictive measures – created favorable conditions for this phenomenon.
Then, as the International Monetary Fund notes, prices began to decline. Decline began late last year in many countries, while in others the pace of growth has slowed.
“The deterioration was more pronounced in advanced economies with indications that property valuations had been ‘stretched’ before and during the pandemic,” notes IMF economist Nina Biljanovska.
With central banks raising interest rates to tame inflation, the average mortgage rate in advanced economies reached 6.8% at the end of 2022, more than double from early last year.
As the IMF predicts, if borrowing costs continue to rise or remain elevated for longer, demand and property prices are likely to weaken further.
The relevant IMF Chart shows that countries with high levels of household debt and a large percentage of borrowing carried out at floating interest rates are more exposed to higher mortgage installments, resulting in a greater risk of default. Canada, Australia, Luxembourg, Norway and Sweden are most at risk, data shows.
The IMF Chart uses five different criteria to assess the level of risk to property markets in the different countries it examines.
1. Criterion 1 concerns household debt as a percentage of gross disposable income.
2. Criterion 2 examines the share of debt issued at floating rate.
3. Criterion 3 captures the percentage of households that have a mortgage.
4. Criterion 4 concerns the cumulative real increase in real estate prices.
5. Criterion 5 captures the overall change in interest rate policy.
The best performances are recorded by Slovenia and Slovakia. Also, the risks in the real estate markets of Spain, Ireland, France, Belgium, Poland and Germany appear to be limited – for now.
