IMF Warns Global Real Estate Markets Are At Risk of A Steep Correction

Global real estate prices have uncharacteristically surged during the recession. It didn’t come without consequence, warned the International Monetary Fund (IMF), this week. The agency’s regular Financial Stability Report said global home prices are now stretched. Stimulus policies backstopped the market, creating moral hazards. Buyers now have a “can’t lose” feeling, pushing them to pay risky premiums for property. As a result, the agency now sees a significant downside in a worst-case scenario. Their model shows the worst-case scenario has double the downside compared to pre-pandemic.

Home Prices Have Been Soaring Across The World

Home prices across the globe have been rising during the recession, which is odd, to say the least. They found soaring home prices and record sales in advanced and emerging economies. The agency attributes this to supply asymmetries, low rates, and rising disposable income. These factors have combined to drive demand (and prices!) much higher.

Typically housing correction risks are due to loose lending, and a recessionary shock. They say this isn’t the case this time. Banks are in a much better position than they were during the Global Financial Crisis in 2008. Forbearance policies have also pushed delinquencies lower, skewing price growth to the upside. This gave homeowners a significant equity windfall, sometimes exceeding their household income.

Rapidly Rising Home Prices Across The Globe IS The Risk

Rapidly rising home prices and lofty gains are the risks. A boost to home equity gives some people a cushion to weather a storm, but also a euphoric high. Lenders eliminating the risk of default and high price growth created moral hazards. The thinking has shifted to, “if they can backstop prices now, they’ll always do it!”

The IMF warns this moral hazard is creating a risk of people believing any price is justified. “Sustained periods of rapid growth in house prices can create the expectation that such prices will continue to rise in the future, potentially leading to excessive risk-taking and rising vulnerabilities in housing markets,” wrote the agency. 

People now think the risk of paying more later will always be greater than the risk of losing. This can lead to paying premiums that don’t make sense in practical terms. This can get out of hand pretty fast.

Global Home Prices Have “Significant” Downside Risk Now

Just how bad is the downside risk? “Significant,” said the agency when discussing its worst-case scenarios. In the latest report, the IMF said advanced economies can see a 14% drop in prices on average (rolling back 17% of gains). This is up from the 6% drop in the worst-case scenario pre-pandemic. The timeline for the bottom would be three years after the peak.

Downside Risks For Home Prices In Advanced Economies Rises

The current probability density of home price movements in advanced economies, compared to pre-pandemic risk. 

Source: The IMF.  

The IMF elaborated, the downside risk is relative to the country’s fundamental misalignment. Countries with a low disconnect from fundamentals would see smaller declines, if any. Those with large disconnects would be overrepresented, and see greater drops. One also assumes the effectiveness of policy support plays a role. An inefficient market can only be extended so long before it spills over into other issues.

Market Inefficiencies May Begin To Spill Over And Undermine The Recovery

Speaking of market inefficiencies, why can’t they just prop up prices to infinity? Well, another risk stated in the IMF report is the impact on inflation. If high home prices trickle into rents, this drives inflation higher. Shelter costs are the largest component of the inflation basket. Everyone needs shelter, including all of the producers and service people. As their costs rise, so do the input costs of goods and services.

The higher cost of living, especially inflation not captured by CPI, becomes a big drag. As the cost of living rises, more capital is diverted from spending into essentials. Since one person’s spending is another person’s income, it can undermine recovery. A slower recovery (or double-dip recession) would end up impacting home prices anyway.

Remember, global home prices are rising, but not to the same extent everywhere. Canada and Germany’s home prices made much sharper gains than other G7 countries. This would leave them at a much greater degree of a correction risk. The same can also be said about cities. Earlier this year the IMF warned Toronto and Hamilton housing is much more disconnected than Calgary or Montreal. Montreal wouldn’t need nearly as large of a correction to get back to fundamental values.

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  • Sadie 3 years ago

    Canada needs a North-Amero to compete with the euro. Once have free movement, they won’t be able to depend so much on housing. They’re basically leaning on the fact Canadians can move in easily, but can’t leave the country with any ease.

    • FOMO 3 years ago

      Free movement? That’s crazy talk. Tax units come in, but they don’t get to leave. That’s the Canada way.

  • Barrett 3 years ago

    Since you’re on a global real estate kick, is there any chance you can do a cross comparison on absolute numbers for population growth? Canada leans on the fact the rate is high, but it’s a country that’s half (or a tenth!) of the size of country’s it’s being compared to.

    Of course it’s going to rise more. That doesn’t justify home prices rise to the same cost as other countries.

    • FOMO 3 years ago

      We all know the population issue is a grift. Practically no population growth, a buttload of completions, and rents increased with rising vacancies. This is a bubble on a bubble, just loading into a bubble wand to encapsulate it in a bigger bubble.

  • RW 3 years ago

    I don’t get the point of these agencies. They warn, rich countries ignore them. Poor countries get penalized for not listening to them.

    They’ve been warning Canada was disconnected at 10% in Toronto. Now the disconnect is more than 30%, and they’re turning blue in the face trying to convince policymakers to change their direction on this. Still, nothing. How much does Canada pay to ignore all of these orgs?

    • Trevor 3 years ago

      Canada is just a second vote for the Queen in most international orgs. It’s industry is tax revenue.

    • M W 3 years ago

      I uh…hate to tell you this, but Canada doesn’t answer to the IMF. All they do is give advice- Canada doesn’t have to listen.

      • RW 3 years ago

        No s**t. I didn’t say they did. I said Canada is ignoring unbiased advice because it’s a one-trick pony.

        • M W 3 years ago

          Can you show me where you said that? Seems like what you said is you asked how much Canada pays to ignore these agencies. Don’t see anything about a one-trick pony or unbiased advice.

          Maybe it’s in your head?

  • Norm Prydz 3 years ago

    Rising global bond yields are going to whip this market into shape regardless of whether it wants to. Would love to see the BOC try yield curve control, and lose the loonie entirely. That’s the point we’re at, where it would be better to scrap the currency than try and fix the system they’re using.

    • sn 3 years ago

      BTC for the win!

    • Paul 3 years ago

      Yup rising bond yields were
      always going to happen. They have been unnaturally screwy for the last three years and it’s temporary. I always see people post the BOC won’t raise rates. That may be so but the banks actually set your mortgage and Heloc. Try convincing them to take a hit on their margin because you can’t pay the interest.

      • JCH 3 years ago

        QE forever to prop up bond prices, and a $0.25 loonie here we come! Because the inflation we think we’re seeing is just our imagination — no reason to raise rates ever.
        Time to buy other currencies, but what? Not sure who has a strong independent currency and also not so insane policies. Would have thought Switzerland or Norway, but both countries have lots of debt too I think.

  • Fred 3 years ago

    In Canada we are not worry ,
    Because Bank of Canada is supporting housing market with printing money

    • Paul 3 years ago

      Might want to check your spelling. You should be worried.

  • waldo 3 years ago

    Emperor Justinian would never allow for such a thing to happen.

  • D 3 years ago

    Median home price in Canada is greater than all US states except for DC, California and Hawaii. Imagine that, Canada must have some booming industries and happy people /s

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