Homeowners in these countries face the greatest risk of defaults: IMF

• The IMF says falling home prices could pressure financial markets as interest rates rise. 
• Canada and Australia topped the its list of countries with high housing market risks.
• The average mortgage rate in advanced economies hit 6.8% in late 2022, more than double from the start of that year. 

Economies where household debt is high are vulnerable to the impact of further interest rate hikes by central banks still in the process of trying to tame hot inflation, according to the International Monetary Fund.

The IMF in a blog post this week recounted that home prices worldwide jumped to record peaks during the COVID pandemic, but those booms have since reversed course, or price appreciation has slowed. In advanced economies, the deterioration has been more pronounced because of stretched valuations before and during the pandemic. 

The IMF said falling home prices could pressure financial markets as interest rates rise. The average mortgage rate in advanced economies hit 6.8% in late 2022, more than double from the start of that year. 

“Now, if borrowing costs keep rising or remain elevated for longer, demand and prices are likely to weaken further,” wrote Nina Biljanovska, an economist at the IMF’s research department.  

Canada and Australia topped the financial institution’s list of countries with high levels of household debt and a large share of borrowing issued at floating rates that are now more vulnerable to higher mortgage payments and greater risk of defaults.

Luxembourg, Norway, Sweden, and the Netherlands were also ranked high, with the US just under those countries. 

While headline inflation rates worldwide have come off peak levels, central banks, including the Federal Reserve, are still away from their inflation targets even after pushing up interest rates.

In March, the Organisation for Economic Co-operation and Development said inflationary pressures will require many central banks to “maintain high policy rates well into 2024.”

The Federal Reserve, the Bank of Canada, and the Reserve Bank of Australia are each scheduled to hold monetary policy meetings in the first half of June. Canada’s first-quarter growth of 3.1% annualized was faster than anticipated, lifting the odds that the central bank will raise its benchmark rate on June 7.

In the US, the Fed has aggressively pushed up interest rates from zero percent to 5%-5.25% since March 2022. Mortgage rates have shot up since then. The popular 30-year fixed mortgage reached a seven-month high of 6.9% in the week ended May 26, according to the Mortgage Bankers Association. 

Federal Reserve officials have recently suggested they may hold off on raising rates in June, but resume rate increases later, The Wall Street Journal reported.