The real estate market is a key point to record how effective the increase in reference rates is to slow down economic activity and thus alleviate inflation, according to the International Monetary Fund (IMF).
In Mexico, the fact that fixed-rate mortgages are predominant may have cushioned the effect of intensive monetary policy, but its impact on the overvaluation of housing prices in a market that was already overvalued was evident, according to a new agency report.
The IMF had already warned of rising housing prices in the country. Mexico, along with high-income economies, leads cost growth compared to pre-pandemic levels and only in 2023 was it the second country where the greatest price increase was recorded, only behind the United Arab Emirates (bit.ly/ 4aISgKG).
In the documents that it will present at the Spring Meetings with the World Bank, the organization analyzes the real estate market and its role in the transmission of interest rate increases in economic activity.
After most central banks increased their interest rates in the last two years to stop the inflation caused by the coronavirus pandemic, but this was not reflected in a slowdown in economic activity, the organization made this analysis based on of the characteristics of the mortgage and real estate markets in each country. Housing is an important transmission channel for monetary policy. Mortgages are the largest liability for households, and housing is often their only significant form of wealth
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The IMF concluded that Monetary policy has greater effects on activity in countries where the proportion of fixed-rate mortgages is low
and also in economies where mortgages are larger compared to home values, and where household debt is high as a proportion of gross domestic product.
The characteristics of the housing market also matter: the transmission of monetary policy is stronger when housing supply is more restricted. For example, lower rates will lower borrowing costs for first-time buyers and increase demand.
Mexico is the country with the highest proportion of fixed rate mortgages among those compared by the IMF. Compared to 2011, the most recent cycle of monetary policy tightening had a strong transmission in market overvaluation.