It may drag down the world's currencies.
A housing-market downturn may drag some of the world’s major currencies down with it.
Bank of America Corp. strategists led by Howard Du said in a note Wednesday that the run-up in real estate prices has increased debt levels in some countries and left many homeowners exposed to higher interest rates on floating-rate mortgages. The use of such loans is notable in Canada, New Zealand, Australia and Scandinavian countries.
That means higher rates will ripple more rapidly through their economies by driving up consumers’ bills. So central banks there may not need to tighten monetary policy as aggressively as others to achieve the same ends, the strategists said. And if policy makers keep pace with those abroad, a severe recession could result.
Either outcome would have negative implications for those countries’ currencies, since lower rates would give traders an incentive to shift money elsewhere for higher returns.
“High housing risks have negative FX implications, in our view: less tightening to achieve the same outcome in real terms is FX-negative on relative monetary policy grounds,” they wrote. “Delivering the same amount of hikes in a more leveraged economy could trigger a greater growth slowdown, which is also FX-negative.”
The warning comes after the Federal Reserve’s rate hikes have pushed the dollar up strongly this year against its major counterparts, including those Bank of America sees as vulnerable to the housing market. Of those, the Canadian dollar has fared best, slipping less than 4% this year. The Australian and New Zealand dollars are down 5.7% and 10.3%, respectively.
The Norwegian krone has declined 11% and the Swedish krona 15%.