House price growth will grind to halt if interest rates are hiked, warns UBS

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Interest rate rises risk bringing house price growth to a shuddering halt and causing turmoil in government finances around the world, reports by the International Monetary Fund and UBS have warned.

In its study which covered 25 major cities across the world, UBS found that the risks of a bubble had increased over the past year and that increases to interest rates would rapidly dampen frothy global property markets.

It said: “Housing markets have become even more dependent on very low interest rates, so that tightening of lending standards could bring price appreciation to an abrupt halt in most markets.”

UBS said Frankfurt, Toronto, and Hong Kong showed the biggest bubble risk, although London’s housing market “remains in overvalued territory”.

It came as the International Monetary Fund (IMF) warned in a separate report that Covid debt mountains have made the global economy more vulnerable to a sudden spike in interest rates.

The international body’s latest Fiscal Monitor showed that global debt in 2020 jumped by 14pc to a record high $226 trillion (£165 trillion), of which $88 trillion is now shouldered by governments.

But the IMF report, which reinforced Chancellor Rishi Sunak’s arguments for fiscal restraint following the pandemic, called the vast debts “sources of vulnerability”.

It warned: “There is the risk of a sudden rise in interest rates in advanced economies. This would put pressure on financing conditions, which would have an especially detrimental effect on highly indebted and financially fragile countries.”

Britain racked up a deficit of almost £330bn in the 12 months to March and borrowing is set to top £200bn in the current financial year amid lingering pandemic support for the economy.

Mr Sunak is likely to unveil new fiscal rules limiting day to day borrowing and putting debt on a downward path in the Budget later this month.

The organisation said a credible framework was likely to be needed to stave off rising interest rate bills.

Vitor Gaspar, director of the IMF's fiscal affairs division, said: “A strong message from the fiscal monitor is that fiscal credibility pays off. Countries that have credible fiscal frameworks benefit from better and cheaper access to bond markets. That's a precious asset to have in uncertain and difficult times like Covid-19.”

The Office for Budget Responsibility has warned that a 1pc rise in interest rates and inflation could add £25bn to the UK’s debt interest bill by 2025.

The nation’s benchmark cost of borrowing for 10 years has almost doubled to 1.13pc since the beginning of August amid concerns that the Bank of England could be forced to raise interest rates to stave off inflation.

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