IMF Ranks Canada as Riskiest Economy for Mortgage Defaults Amidst High Household Debt and Inflated Home Prices
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According to a research note from the International Monetary Fund (IMF), Canada has been ranked as the riskiest advanced economy in the world for mortgage defaults. The combination of high household debt, inflated home prices, and a significant portion of floating-rate loans contributes to the increased risk. The presence of these factors amplifies the potential for mortgage default, as countries with high levels of household debt and a large share of borrowing issued at floating rates are more exposed to higher mortgage payments. Other countries with similar characteristics, such as Australia, Luxembourg, Norway, Sweden, and the Netherlands, also face substantial risk, although their economies are not as large as Canada's.
The article highlights the impact of higher interest rates on the global housing market frenzy. In 2020, real estate prices surged due to low rates and limited supply. The low rates expanded credit capacity and encouraged borrowing, attracting investors and overleveraged homebuyers. However, as interest rates started to normalize and stimulus measures were withdrawn, home prices began to decline. Falling home prices increase the risk of defaults since it becomes more challenging to sell a property in a timely manner and maintain profitability.
The IMF suggests that price declines in countries where housing prices grew rapidly prior to the tightening of monetary policy could improve affordability. The IMF bases its assessment of Canada's mortgage default risk on the adherence of Canadian banks to global standards. Canadian banks have extended mortgage repayment terms beyond the maximum allowed, preventing delinquencies but also reinforcing high home prices. As a result, Canada's reputation for conservative bank practices has been diminished, and experts warn of the increased moral hazard that could potentially lead to a financial crisis.
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