This article is more than 1 year old

This article is more than 1 year old

A growing number of homes in the US and China are teetering on the brink of a price slump that would drag their economies into a recession, the International Monetary Fund has warned.

Using the latest evidence from global housing markets, the Washington-based organisation said there was a clear increase in the risk of a housing price collapse in both countries after years of ultra-low interest rates and loose lending by financial institutions.

Ahead of its annual meeting next week, the IMF’s research showed a strong connection between falling house prices and declines in activity across the economy between 1990 and 2017, illustrating the power of housing markets to trigger wider slumps in GDP growth.

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It follows similar concerns from US economists that the global recovery has been running out of steam since 2008 and slowdowns in the US and Chinese economies are likely to undermine worldwide growth. Recent falls in housing activity and relatively high long-term borrowing rates have also been seen as signals of a recession, possibly as soon as next year, in the US.

Blackrock, the world’s largest fund manager, told investors thattraders were becoming increasingly worried about the potential for a recession in the US.

Christine Lagarde, head of the IMF, said this week that rising trade tensions, concerns about Brexit and tougher financial conditions as central banks raised interest rates had “increasingly unsettled” the global economy over recent months.

Lagarde indicated that the IMF, which acts as lender of last resort to financially-distressed nations, was likely to downgrade its forecast for world growth in 2019 and 2020.

UK house prices have already flatlined and were predicted to fall later this year by the Office for Budget Responsibility, with Brexit seen as the main reason for buyers to sit on their hands.

Facebook Twitter Pinterest The IMF head, Christine Lagarde, has said it was likely to lower its predictions for world economic growth. Photograph: Xinhua/Rex

In an extract from the Global Financial Stability Report, the IMF said risks to the US housing market were similar to the levels seen in 2002/03, before the outset of the sub-prime mortgage crisis.

Borrowers at the bottom of the income scale then proved vulnerable to rising interest rates, which pushed the cost of monthly mortgage payments beyond their means and forced them to default.

Without stricter rules on lending, the IMF said the US economy would increasingly be at risk of a house price slump, resulting in a shock to economic activity.

“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 report said.

“These macro-financial links arise from the many roles housing plays for households, small firms, and financial intermediaries, as a consumption good, long-term investment, store of wealth, and collateral for lending, among others.

“In this context, the rapid increase in house prices in many countries in recent years has raised some concerns about the possibility of a decline and its potential consequences.”

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Optimistic growth forecasts for the US this year and next rely on the Federal Reserve maintaining interest rates near 2%, or even cutting them should the economy slow down. Officials at the Fed have paused further increases following fears that it could choke off demand for homes and provoke panic selling.

“Since late 2016, US house prices at risk appear to have deteriorated gradually due to overvaluation concerns and high credit growth, but they have been partly offset by still-easy financial conditions,” the IMF report said.

“In China, after 2010, high credit-to-GDP gaps and tightening of financial conditions contributed to increased downside risks. Since 2016, house price overvaluation has also contributed to the deterioration of house prices at risk,” it added.