Central banks have significantly raised interest rates over the past two years to combat post-pandemic inflation. But why are some countries feeling the impact of higher rates and others not? The answer lies, in part, in the differences in the characteristics of the mortgage and real estate markets, according to the International Monetary Fund (IMF). And therefore, he argues, “continuing to tighten or keep interest rates high for longer could represent a big risk.”
In the chapter “Feeling the pinch? Tracing the effects of monetary policy through housing markets” from the World Economic Outlook, which will be published on April 16, analysts sought to investigate the effects of monetary policy across countries and over time through housing, since, unlike the As predicted, global growth remained largely stable, with the slowdown only materializing in a few places.
Housing directly impacts monetary policy
“Housing is an important transmission channel for monetary policy. Mortgages are the biggest liability for families, with housing being often the only significant form of wealth. The real estate sector also represents a large portion of consumption, investment, employment and consumer prices in most economies”, they begin by saying.
The article therefore seeks empirical evidence to assert that monetary policy “has greater effects” in countries with more variable mortgages, where households, and particularly homebuyers, are more indebted; where housing supply is more limited and house prices are overvalued.
The study reveals, for example, that the percentage of fixed-rate mortgages can range from close to zero in South Africa to more than 95% in Mexico or the USA. Portugal appears in 4th place in the ranking, being one of the countries where the percentage of fixed rate mortgages is lowest. The country was also therefore more exposed to the rise in interest rates with which central banks have tried to reduce inflation, which in the case of Europe resulted in the sharpest escalation in the history of the European Central Bank (ECB), for example.
Continuing to tighten interest rates could be “expensive”
Analysts believe that recent changes in the mortgage and housing markets “may have limited the drag of higher interest rates to date in several countries,” arguing that a “deep, country-specific understanding of housing is important to help calibrate and adjust monetary policy.”
The IMF reminds us that most central banks have made significant progress towards their inflation objective, and that “continuing to tighten or keep interest rates high for longer could pose a major risk now.”
“In countries where monetary policy transmission is strong, monitoring developments in the housing market and changes in household debt service can help identify the first signs of excessive tightening. In cases where the transmission of monetary policy is weak, more vigorous early measures can be taken when signs of overheating and inflationary pressures appear”, suggest IMF experts.
“While fixed-rate mortgages have indeed become more common in many countries, fixation periods are often short. Over time, and as these mortgage rates are reset, monetary policy transmission may suddenly become more effective and thus depress consumption, especially where households are heavily in debt. The longer rates are kept high, the more likely families are to feel the pinch, even when until now they have been relatively protected,” they conclude.
