United Kingdom, Denmark, New Zealand: facing a crisis of their own?
The United States is not the only country suffering the fallout from excessive levels of debt and the end of a real estate boom - others may be in even worse shape. The economies of the United Kingdom, Denmark and New Zealand face the greatest risk from a combination of weakening real estate prices and rising interest rates, according to a report by Fitch Ratings.
“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,” Brian Coulton, head of Global Economics & Europe in Fitch’s Sovereign team, said. “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 exposure to interest rate risk, compiling an overall index of vulnerability for 16 advanced industrialized economies. A range of financial indicators have been used to estimate these exposures.
On the house price front, France is the most exposed country to housing overvaluation, followed by the UK, Denmark and New Zealand, which all display the greatest vulnerability, reflecting rapid house price growth relative to incomes and rents. The US, Spain and, to a lesser extent, Ireland, show lower risk on this front, although housing supply dynamics, which was not covered in the study, 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.
The United States and Spain: suffering the biggest interest rate "shocks"
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.
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