The International Monetary Fund (IMF) has warned that rising interest rates in the United States could trigger overpriced assets – such as Australian property – to “unwind in a disorderly manner”.
The IMF’s warning comes as global stock and property markets have surged despite the pandemic’s crippling economic damage.
House prices in Australia have grown at breakneck speed despite the recession, dipping briefly in mid-2020 before posting several months of consecutive growth.
Global stock markets have also grown by double digits.
However, IMF chief economist Gita Gopinath on Tuesday warned the global recovery would be derailed by a ‘divergent’ pace of recovery and rapidly rising interest rates.
“Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways,” she wrote in an IMF blog post on Tuesday to mark the release of the latest World Economic Outlook.
“This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.”
The global economic recovery faces “high uncertainty” and is threatened by the “dangerous”, “divergent” pace of recovery that will see developing countries’ living standards fall lower than pre-pandemic levels, Gopinath said.
AMP Capital chief economist Shane Oliver told Yahoo Finance that dramatically rising interest rates would cause “debt servicing problems, people to default on their loans, recession potentially and then house price declines”.
But the Reserve Bank of Australia has signalled repeatedly that it is unlikely to raise interest rates until 2024, though some pundits believe it could happen sooner.
Australian dwelling values posted its fastest rate of growth in 32 years in the month of March, with CoreLogic figures revealing median standalone house prices in Sydney alone rising by $51,000 in the space of a month.
RBA governor Philip Lowe yesterday acknowledged that home values had strengthened, in part due to strong demand from first-home buyers, and signalled lending standards would be on a short leash.
“Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained,” he said on Tuesday.
CoreLogic said that tighter credit policies would “likely have an immediate dampening effect on housing activity”.
But the prudential watchdog’s chair, Wayne Byres, has indicated it is not within the regulatory body’s remit to contain house prices.
“Housing is a big part of the balance sheet of the banking system and making sure that it is a stable part of the balance sheet of the banking system is important,” Byres told the House of Representatives Standing Committee on Economics.
“But I just want to be really clear that it is not our job, and has never been our job, to solve the problem of rising house prices.”
The IMF is predicting global economic growth of 6 per cent in 2021 and 4.4 per cent in 2022, figures that have been revised up from its October 2020 predictions.
“Unprecedented policy response” would see COVID-19 leave fewer scars than the global financial crisis of 2008-9, IMF also said.