The International Monetary Fund has ramped up concerns on risks to Australia’s economy from bulging household debt and high house prices, as it warned global asset valuations could “adjust abruptly” due to further US interest rate rises.
The IMF’s biannual global financial stability report said international financial conditions remained broadly accommodative and supportive of economic growth. But the Washington-based fund said investors would increasingly focus on how continued monetary policy tightening by central banks and the US-China trade tensions affect asset prices.
“As central banks proceed with the withdrawal of monetary accommodation, financial conditions will eventually tighten,” the IMF said on Wednesday. “Such a tightening could reveal financial vulnerabilities that have built up over the years of accommodative policies and may also expose fragilities in the financial system that have emerged since the global finance crisis.”
Among several vulnerabilities listed by the IMF, it noted house prices were high in several advanced economies, including Australia, based on price-to-income and price-to-rent ratios. “Household leverage stands out as a key area of concern, with the ratio of household debt to GDP on an upward trajectory in a number of countries, especially those that have experienced increases in house prices (notably Australia, Canada, and the Nordic countries),” the IMF noted.
“In Australia, house prices have started to reverse course in major cities and nationwide since late 2017,” the IMF said separately in a footnote in the 53-page report. Treasurer Josh Frydenberg and Reserve Bank of Australia governor Philip Lowe will discuss the global economy when they meet foreign counterparts at the biannual meetings of the IMF and World Bank in Bali late this week.
Household debt as a share of the local economy is near a record 122 per cent, well above comparable economies such as Canada, the US and Britain, where it ranges between 80 and 100 per cent. The local household debt-to-income ratio, another common measure, has spiked to almost 200 per cent, a doubling in the past 20 years.
The RBA has periodically signalled it is alert to risks from Australia’s high household debt and lofty house prices. However, the RBA and Treasurer Josh Frydenberg have both recently said a large share of mortgage debt is held by high-income households and that many Australians are months ahead in their home loan repayments.
Two-thirds of household debt is owed by the top 40 per cent of the income distribution, RBA assistant governor Michele Bullock said in a speech last month. The RBA and government are also mindful that further US interest rate increases and an appreciating US dollar might put further downward pressure on the Australian dollar, positively stimulating the domestic economy. The Australian dollar has fallen nearly 10 per cent against the greenback this year.
The Aussie dollar was trading around US71¢ on Wednesday, after falling to a 32-month low of US70.42¢ on Tuesday due to rising US government bond yields, US-China trade tensions and emerging market economy strains.
Central banks including in the US and Canada have gradually increased borrowing costs as the world economy strengthens, but the RBA has signalled it is in no rush to raise the current 1.5 per cent overnight cash rate. Dwelling prices have dropped 2.7 per cent across the country in the past 12 months, with larger price falls in Sydney (-6.1 per cent) and Melbourne (-3.4 per cent), according to Corelogic.
The reversal follows a housing market boom for the previous five years that was fuelled by ultra-low interest rates, home buyers taking on more debt and strong population growth. Some economists have warned that declining house prices could cause consumers to spend less and hurt the broader economy, but so far consumption has remained resilient.
The IMF also pointed to risks to the global economy from “stretched” US equity market valuations, low returns to investors buying riskier high-yield corporate bonds and a low pricing-in of financial market volatility in options and futures markets.
The fund said emerging market economies such as Turkey, Argentina, Indonesia and South Africa would come under more financial pressure from rising US interest rates and capital outflows. The IMF encouraged emerging economies to follow the lead of Australia by allowing their exchange rates to adjust lower in order to attract foreign investors to cheaper assets.