Monday, 30 July 2007

UK, Denmark and NZ most exposed to house price and interest rate shocks

Fitch Ratings said in a special report published today that the UK, Denmark and New Zealand exhibit the greatest macroeconomic vulnerability to a combination of weakening property prices and rising interest rates.

"Given record levels of household debt, rising interest rates and after several years of strong house price inflation in many countries, Fitch has assessed a range of indicators of household balance sheet vulnerabilities and house price valuation measures," said Brian Coulton, Head of Global Economics & Europe, in Fitch's Sovereign team. "For overall vulnerability, New Zealand ranks first, Denmark second and the UK third as the most exposed countries. Japan, Germany and Italy are the least vulnerable."

Fitch has ranked countries by the degree of estimated house price overvaluation and household balance sheet exposure to interest rate risk, compiling an overall index of vulnerability for 16 advanced industrialised economies. A range of financial indicators have been used to estimate these exposures, discussed in detail in the report.

On the house price front, France is the most exposed country to housing overvaluation, followed by UK, Denmark and New Zealand, which all exhibit the highest (i.e. most vulnerable) rankings, reflecting rapid house price growth including relative to incomes and rents. The US, Spain and, to a lesser extent, Ireland, show lower risk on this front although housing supply dynamics - not captured in the exercise - undoubtedly play an important role in current and prospective house price movements.

With regard to balance sheet exposure, the Nordic countries and Australia and New Zealand have the highest ranks. Norway is the most exposed to household debt vulnerability followed by New Zealand, Australia, Denmark, Finland and then Sweden. However, on this score, the UK fares somewhat better thanks to lower debt and interest service ratios and overall household net worth. France also scores much better on balance sheet risk, sharply reducing its overall vulnerability.

Again, the US and Spain fare relatively well but this may be misleading to the extent that both countries currently have high overall household debt service ratios (i.e. including interest and principal repayments), an indicator that has not been captured in the study due to data limitations. Moreover, both Spain and the US have arguably experienced the largest interest rate "shocks" among countries in the sample as real policy rates have moved rapidly into positive territory in the last couple of years.

The full report, "House Prices and Household Debt – Where are the Risks?" is available on the agency's public website,

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