The level of risk in Australia's housing market is the second-highest in the developed world, the International Monetary Fund has warned.
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.
Elevated risks in the housing market
The IMF has identified the countries with the highest-risk housing markets by applying five risk indicators to dozens of developed economies.
You can see the results in the colour-coded table.
The table has five columns (labelled C1 to C5) and a sixth column that provides the total score. The five risk indicators are:
- C1: Households' outstanding debt as a percentage of gross disposable income
- C2: Share of debt outstanding at variable interest rate
- C3: Share of households owning home with a mortgage
- C4: Cumulative real house price growth
- C5: Cumulative policy rate changes
The table shows 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.
"Economies with elevated house prices and high levels of household debt issued at floating rates are particularly vulnerable to any ensuing financial sector stress."
Both of those statements describe Australia's situation.
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.
"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.
"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.
It said an ongoing fall in house prices would be unlikely to lead to a financial crisis like the 2007-08 Global Financial Crisis, because banks' underwriting standards in many advanced economies were better today than 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.
A global economic slowdown is on the horizon
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.
Treasurer Jim Chalmers told RN Breakfast on Wednesday 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," he said.
"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."
Mr Chalmers said it was still possible for Australia to avoid a recession — as it did with the 2008 Global Financial Crisis — but the economy will slow considerably in the coming months, which will be factored into next month's budget.
"The Treasury and the Reserve Bank are not currently expecting a recession here at home, but the economy will slow," he said.
"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.
"We need to lay the foundations for future growth in our economy at the same time as we try and make ourselves more resilient to these sorts of international shocks."
Mr Chalmers is travelling to Washington DC to meet with G20 finance ministers and the IMF this week before returning to finalise next month's federal budget.
Have house prices hit a low point?
CoreLogic figures from March showed the first national rise in home prices for 11 months, with Sydney leading the gains.
With the Reserve Bank leaving interest rates on hold in April, and economists believing the cash rate is nearing its peak, it has prompted economists to consider softening their forecasts about house prices.
"Our forecast for a national decline in home prices from peak to trough of [around] 15 per cent now looks a little pessimistic in light of the March result, but we retain it for now," CBA head of Australian economics, Gareth Aird, said ahead of the RBA's latest meeting.
That view was also shared by AMP deputy chief economist Diana Mousina, who said house prices are likely to dip.
"Our view that home prices would fall by 15 to 20 per cent peak-to-trough (prices are down by 8.5 per cent since their high) may be too pessimistic given the stabilisation in home prices over the past two months," she said last week.
"But we still see some near-term downside for home prices as the full impact of RBA rate hikes is likely to see some additional selling and the increase in interest rates has led to a 27 per cent decline in borrowing capacity," she said.
However, despite some economists seeing the CoreLogic data as proof that house prices may have bottomed, Marcel Thieliant from Capital Economics is sceptical.
Mr Thieliant said he was not convinced the March figures were proof of a sustained rebound in prices, and expected they would continue to decline.
"Affordability is set to become the most stretched since the early 1990s and if the unemployment rate rises as rapidly as we anticipate, house prices will almost certainly start to fall again," he said.
Mr Thieliant said his current forecasts suggested house prices would fall by 7 per cent from their recent March level, which would imply a 15 per cent decline from their peak last year.
"Our forecasts imply that the share of income required to pay the mortgage on a median-priced [home] will fall to around 35 per cent by 2025, which would still be well above its long-term average of 30.5 per cent. Accordingly, the risks are tilted towards even larger falls in house prices."
He said it was very likely that any future recovery in house prices would be "subdued by historical standards".
"With housing affordability as stretched as it is now, prices may rebound by even less from the current downturn," he said.
"We've pencilled in a subdued 2.5 per cent rise in the first 12 months of the coming housing rebound."
