Where the coming housing crisis will hit hardest


A housing crisis pushed the global economy into recession between 2007 and 2009. Only three countries – Australia, Canada and Sweden – flew through the tumult. Even as real estate prices fell elsewhere, all three posted double-digit growth. Part of it was luck. For example, a commodity boom supported the economies of Australia and Canada. But smart policy helped. Each country was presented as a shining example to other problem areas, their officials lavishly praised. Mark Carney, then Governor of the Central Bank of Canada, was labeled “the biggest babe in banking” by a British newspaper.

In the affluent world, house prices are now falling after years of vertical growth. And it’s extremely hot markets like Australia, Canada and Sweden that are experiencing some of the sharpest declines. A mortgage addiction, fueled by very low interest rates, has saddled every country with huge amounts of house debt. As a percentage of disposable income, this type of debt is 185% in Canada, 202% in Australia and 203% in Sweden. By contrast, debt levels have fallen in countries most affected by the previous crash, including the US, Ireland and Spain (see chart).

The housing crisis and the recession are more serious than before such a build-up of debt. Excessive leverage makes people more vulnerable to job losses, interest rate hikes and falling house prices, as the US has shown during the recession and recent financial crisis. With central banks raising interest rates at their fastest pace in more than four decades, countries saddled with mortgage debt will once again face dire consequences.

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House prices in Australia, Canada and Sweden have more than doubled since 2007, compared to increases of 50% in the UK and 61% in the US. Due to high immigration in all three countries, population growth since the turn of the millennium has been higher than the average in the OECD, a club of mainly wealthy countries. In Australia, the population has increased by a third; in Canada by a quarter; Sixth place in Sweden. Shrinking houses are also driving up prices. According to the Royal Bank of Canada, the increase in the number of people living alone or a small household has led to an increase in the number of households in Canada by about 30,000 per year since 2016. About 30% of Canadians now live on their own .

Due to skyrocketing prices, Canadian households added a record $190 billion ($150 billion) in new mortgage debt last year, more than double what was in 2019. Meanwhile, Sweden took another 370 billion kroner ($40 billion) of such loans in June compared to the same month three years ago. Easy loans have also attracted speculators, leading people to look for vacation homes. One in six homeowners in Ontario — including Toronto, Canada’s most expensive market — now owns at least two properties. One in five Swedes owns a summer house.

It is therefore no surprise that lending risks have increased despite attempts by lenders and regulators to tighten credit conditions. Australia’s financial regulator estimates that 22% of mortgage holders foreclosed in the second quarter of this year were in a financially vulnerable 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 benchmark used by Canada’s central bank to assess risk – made up 27% of new mortgages earlier this year. In Sweden, such loans will account for more than 14% of new mortgage loans by 2021. Stefan Ingves, the governor of Sweden’s central bank, described this build-up of debt as “sitting on top of a volcano”.

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Rising interest rates or falling real estate prices can trigger a volcanic eruption. The Australian central bank predicted a 20% drop in house prices, the biggest drop in four decades. Prices in Canada could fall by as much as 14% from their peak, according to the Royal Bank of Canada. In all three countries, a large share of the debt is in the hands of wealthy households and unemployment is still relatively low. But as job losses pile up, the situation could quickly deteriorate. After the global financial crisis, Australia, Canada and Sweden were hailed as examples for countries around the world. This time, they serve rather as a cautionary tale.

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