IMF: Recessions and housing slumps worse when preceded by debt buildup

Recessions and housing slumps are worse when preceded by a buildup of household debt, says the IMF.

An analysis of effects of household debt in the aftermath of housing market downturns also showed that monetary easing can mitigate “excessive contractions” during such slumps, the IMF said in a chapter of its World Economic Outlook report yesterday.

In the five years before 2007, the ratio of household debt to income in advanced economies rose by an average of 39 percentage points to 138%, the IMF said in its report. In Denmark, Iceland, Ireland, the Netherlands and Norway, debt peaked at more than 200% of household income.

“Housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted,” said the report.

“Government policies can help prevent prolonged contractions in economic activity by addressing the problem of excessive household debt.”

The IMF said macroeconomic policies are crucial during “episodes of household deleveraging”.

Monetary easing in economies where mortgages normally have variable interest rates can reduce mortgage payments and avert household defaults, according to the report.

“There are really very stark facts about the US housing market,” said Daniel Leigh, an IMF senior economist.

“About 2.5 million properties are in foreclosure. The banks have taken back keys. This is even worse than that because another 1.5 million households are delinquent.”

In another section of the report, the IMF said that “given weak global activity and heightened downside risks to the near-term outlook, commodity exporters may be in for a downturn.”