IMF measures downside risks of house prices for better financial stability

The rapid increase in house prices in recent years had raised the possibility of a price drop that could take toll on global economic growth, therefore calling for a measurement for “house price at risk.”

“Large house price declines can adversely affect macroeconomic performance and financial stability, as seen during the global financial crisis of 2008 and other historical episodes,” the International Monetary Fund said in its Global Financial Stability Report on Thursday.

In order to provide an early-warning indicator that can be used for financial stability surveillance, the global monetary cooperation facilitator of 189 countries highlighted a methodology to measure downside risks to house price growth.

“The house-prices-at-risk measure can be used to gauge financial stability risks and provides useful information to evaluate the need for prospective policy action,” said the report.

IMF’s measurement in the report revealed that lower house price momentum, overvaluation, excessive credit growth, and tighter financial conditions “predict heightened downside risks to house prices up to three years ahead.”

The report also found that macroprudential policy, such as setting tighter constraints on loan-to-value and debt-service-to-income ratios, lowers downside risks to house prices.

Meanwhile, the report found easier monetary policy also improves house prices at risk in the short term in advanced economies, while capital inflows simultaneously raises the likelihood of high house price growth in the short term and downside risks to house prices in the medium term.

“The measure of house prices at risk helps forecast downside risks to GDP growth over and above other simpler measures of house price imbalances, and thereby adds to early-warning models for financial crises,” said the report.