Economies across the world face a constellation of risks that put the global financial system in a riskier position than at any point since the COVID-19 crisis of 2020, according to a new report Tuesday from the International Monetary Fund.
“The global economic outlook has deteriorated meaningfully,” since April, the IMF’s Global Financial Stability Report said. “A number of downside risks have crystallized, including higher than-anticipated inflationary pressures, a worse-than-expected slowdown in China on the back of COVID-19 outbreaks and lockdowns, and additional spillovers from Russia’s invasion of Ukraine.”
The IMF’s “growth-at-risk” measure shows the severity of downside risks to the global economy at any given time. As the chart above, from Tuesday’s report, shows, downside risks to the economy are higher today than at most points since the 2008 financial crisis.
One area of particular concern for IMF researchers is the global housing market, which it argues is at a potential “tipping point” after pandemic-era stimulus policies helped home prices surge by 20% or more in some economies, leading to 20-year lows in housing affordability.
The fund warned that rising interest rates, tighter lending standards and other efforts aimed at reducing inflation could “lead to a sharp decline in house prices,” especially in emerging markets and other jurisdictions where variable-rate mortgages predominate.
“The pass through of monetary policy tightening and higher interest rates in the mortgage markets has already been swift in the United States, with the average fixed-rate 30-year mortgage hitting highs last seen in 2008,” the report said.
Economists at the IMF estimate that in a severe economic downturn, real estate prices could fall by 25% in emerging markets and more than 10% in advanced economies like the U.S.
Interest rates are rising in almost every economy in the world as policymakers try to tame inflation, with exceptions of a few areas like China, where leaders there are attempting to deal with the impact of an already unwinding real estate sector.
China’s real estate market has been in decline for more than a year after Beijing introduced new regulations that significantly restricted access to credit to the property development sector, which prevented developers from borrowing to mask cash shortages and led to some being unable to complete projects that homebuyers had already paid for.
The IMF noted that China’s residential real estate market is dominated by a model whereby prospective homeowners take out a mortgage to pay for the construction of unbuilt homes, and that such “presales” represented about 90% of total home sales in recent years.
“As access to market financing becomes increasingly difficult and presale receipts plummet, property developers face self-reinforcing liquidity pressure, which in turn diminishes their ability to compete ongoing construction,” the report said.
This dynamic could potentially lead to more boycotts of mortgage payments in China, spark financial distress and the need for government bailouts.
Fragile real estate markets are just one potential vector for financial contagion sparked by rising rates and tighter financial conditions, the IMF said.
The fund warned of a general lack of liquidity in markets, especially for government debt, calling the decline in willing purchasers of such debt a potential “shock amplifier” in the event of a significant market disturbance.
The report pointed to recent volatility in the markets for U.K. government debt
and the British pound
as an example of how “sudden price moves combined with forced selling and deleveraging dynamics can lead to disorderly conditions that could threaten broader market functioning and stability.”