Housing markets are slowing down. The IMF advises large economies and emerging countries to be "vigilant" about the housing crisis and gauge the risks for financial stability. Downside risks to house prices remain significant in the medium term: price drops over the next three years could be around 7% in advanced economies and 19% in emerging markets.
Commenting on Europe, the agency noted that housing markets are showing increasing signs of overvaluation region-wide and gave several examples of this scenario. "Real house prices have doubled since 2015 in the Czech Republic, Hungary, Iceland, Luxembourg, the Netherlands and Portugal." Since the pandemic, the gap between house prices and incomes, and between house prices and rent, has increasingly widened.
According to the institution's accounts, the house-price-to-income ratio is now more than 30% above long-term trends while the house-price-to-income ratio "also significantly exceeds historical norms, even in northern European economies or emerging countries".
The IMF points to an overvaluation of 15%-20% in most European countries, but as bank rates rise and real income is hit by inflation, house prices have fallen recently in many markets.
Economies with a higher proportion of variable rate mortgages have seen some of the highest falls in real house prices, such as in Sweden or Romania.
Shortage of housing supply could curb price falls
Alfred Kammer, the IMF's director for Europe, advises policymakers in European countries with housing problems to "be vigilant" about the risks for financial stability by proposing supply-side solutions.
"House prices have risen considerably in several countries over the last decade, due to low-interest rates for a relatively long period with another boom during the pandemic in several countries as people moved to remote work," he said at a recent media briefing in Stockholm.
Some factors could continue to support house prices in the short term. Supply-side constraints on housing availability in the market persist, including labour shortages in construction, although a slight increase in the stock and continued high levels of disposable income help to partly offset the effect of monetary policy tightening on housing demand, thereby reducing the extent of house price adjustment.
"At the same time, in economies with a lower share of variable-rate mortgages or a longer average household debt maturity, it may take some time for the effect of the current tightening on household demand to fully materialise, as the outstanding mortgage stock will only gradually be affected by higher rates," commented the IMF in the study published in April.