“High-interest rates threatening household financial stability, IMF study finds
THE prolonged maintenance of high-interest rates poses a growing risk for households, increasing the probability of financial strain even among those who have thus far enjoyed relative stability, a new study done by the IMF says.
Housing heavily influences monetary policy, since mortgages often constitute the largest financial liability for households. Real estate, in turn, profoundly influences consumption, investment, employment, and consumer prices across economies.
The IMF, in a chapter from its just-released World Economic Outlook survey, titled ‘Feeling the pinch? Tracing the effects of monetary policy through housing markets’, says the impact of monetary policy varies significantly depending on housing characteristics.
In countries with a low proportion of fixed-rate mortgages, such as Canada and Japan, changes in policy rates can swiftly affect homeowners’ monthly payments.
“This is driven mainly by a declining share of fixed-rate mortgages, an increase in debt, and more constrained housing supply,” the IMF said.
Conversely, households with fixed-rate mortgages, such as Hungary, Ireland, Portugal, and the United States, may not immediately feel the effects of policy rate adjustments.
Mortgage and real estate markets have undergone several shifts since the global financial crisis and the pandemic. At the beginning of the recent hiking cycle and after a long period of low-interest rates, mortgage interest payments were historically low, the average maturity was long, and the average share of fixed-rate mortgages was high in many countries.
Additionally, because of the pandemic many people moved away from cities to areas where there was less demand for housing, which may have minimised the impact of how monetary policy affects housing in some countries.
“Our findings suggest that a deep, country-specific understanding of housing channels is important to help calibrate and adjust monetary policy,” the IMF said in its report.
“In countries where the housing channels are strong, monitoring housing market developments and changes in household debt service can help identify early signs of overtightening. Where monetary policy transmission is weak, more forceful early action can be taken when signs of overheating and inflationary pressures first emerge,” it continued.
As central banks navigate toward achieving their inflation targets the IMF says a “cautious approach” must be taken towards monetary policy.
It reasoned that while the prevalence of fixed-rate mortgages may provide temporary shelter, the resetting of mortgage rates over time could heighten the impact of monetary policy on household consumption, particularly in heavily indebted households.
Moreover, it said the effectiveness of monetary policy is amplified in nations where mortgages surpass home values or where household debt is high relative to GDP. In such scenarios, changes in mortgage rates affect a larger proportion of households, especially those with higher debt-to-asset ratios.
“Most central banks have made significant progress toward their inflation target. It could follow from the discussion that if transmission is weak, erring on the side of too much tightening is always less costly. However overtightening, or leaving rates higher for longer, could nevertheless be a greater risk now,” the IMF said.
It added that while fixed-rate mortgages have indeed become more common in many countries, fixation periods are often short.
“Over time, and as rates on these mortgages reset, monetary policy transmission could suddenly become more effective and so depress consumption, especially where households are heavily indebted,” it said.