A housing crisis sent the global economy into recession between 2007 and 2009. But three countries – Australia, Canada and Sweden – weathered the storm. Even as house prices fell elsewhere, all three recorded double-digit growth. Part of that was good fortune. A commodity boom has supported the economies of Australia and Canada, for example. But smart policy helped. Each country was held up as a shining example for other crisis-stricken places, their leaders profusely praised. Mark Carney, then governor of the central bank of Canada, was dubbed by a British newspaper “the biggest baby in the banking sector”.
In the wealthy world, house prices are starting to fall after years of skyrocketing growth. And it is overheated markets, such as those in Australia, Canada and Sweden, that are facing some of the steepest declines. A mortgage frenzy fueled by rock-bottom interest rates has left every country with huge amounts of household debt. As a proportion of disposable income, this debt is 185% in Canada, 202% in Australia and 203% in Sweden. By contrast, debt levels have fallen in the countries that bore the brunt of the latest crash, including America, Ireland and Spain (see chart).
Real estate crashes and recessions that are preceded by this type of debt accumulation tend to be more severe. Excessive leverage makes people more vulnerable to job losses, interest rate hikes, and falling house prices, as America demonstrated during the Depression and the larger financial crisis. recent. With central banks now raising rates at the fastest pace in more than four decades, countries overwhelmed by mortgage debt will once again be exposed to adverse consequences.
In Australia, Canada and Sweden, house prices have more than doubled since 2007, compared to increases of 50% in Britain and 61% in America. High levels of immigration in all three countries mean that, since the turn of the millennium, population growth has exceeded the average oecd, a club mostly made up of wealthy countries. In Australia, the population has increased by a third; in Canada, one quarter; in Sweden, one-sixth. Fewer households are also pushing prices up. According to the Royal Bank of Canada, an increase in the number of people living alone or with smaller families has increased the number of households in Canada by about 30,000 per year since 2016. Nearly 30% of Canadians now live alone.
Due to soaring prices, Canadian households added a record C$190 billion ($150 billion) in new mortgage debt last year, more than double the amount in 2019. Meanwhile, Swedes took on an additional 370 billion crowns ($40 billion) of this debt. in June, compared to the same month three years earlier. Easy credit has also attracted speculators and people to search for vacation homes. One in six homeowners in Ontario, which includes Toronto, Canada’s most expensive market, now owns two or more properties. One in five Swedes owns a summer cabin.
It is therefore not surprising that the riskiness of loans has increased, despite the efforts of lenders and regulators to tighten credit standards. Australia’s financial regulator estimates that 22% of mortgages taken out in the second quarter of this year put the holder in a vulnerable financial position, based on a debt-to-income ratio of six or more. In Canada, mortgages with a debt-to-income ratio of four and a half times or more – the measure used by Canada’s central bank to assess risk – accounted for 27% of new mortgages at the start of this year. In Sweden, these loans reached more than 14% of new mortgages in 2021. Stefan Ingves, governor of the Swedish central bank, described this accumulation of debt as “like sitting on top of a volcano”.
Rising interest rates or falling real estate prices can cause the volcano to explode. Australia’s central bank predicts a 20% drop in house prices, which would be the biggest drop in four decades. Prices in Canada could dip up to 14% from their peak, according to the Royal Bank of Canada. Much of the debt in all three countries is held by wealthier households and, for now, unemployment remains relatively low. But if job losses start to pile up, as seems likely, the situation could quickly deteriorate. After the global financial crisis, Australia, Canada and Sweden were hailed as role models for countries around the world. This time around, they seem more likely to serve as a cautionary tale. ■
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