Neighborhood Watch! - We Have Reached Stage 3 of 4
When interest rates rise, it puts pressure on things that require borrowing (leverage) and there is nothing bigger in that category than 'housing'.
Housing is been on fire, with record single year growth rates, which puts it 'at risk' for a correction, but Capital Economics' group chief economist Neil Shearing says don't expect 2008-like housing-price drops.
Mortgage applications are down, new home sales are down, and housing starts are down while we also see listing prices starting to drop for the first time since 2018.
How do we council our clients? We help them understand the cycles.
As we've discussed here, and shown in prior charts - the problem with housing in the last major recession was a debt bubble of low down payment and variable interest rate products that were then challenged by a major recession that reduced employment and the ability to service the debt. A perfect storm as those who couldn't make payments had no incentive to keep the houses which had negative equity - owners walked away - this flood of houses on the market drove prices down into a spiral.
You can share with consumers that In a housing 'downturn' there are four stages:
The same is true for a housing 'upturn' there are the same four stages. It is Stage 4 of the downturn that marks the bottom from which the new 'upturn' is born.
The key per Neil Shearing: "That doesn't mean we should expect the same scale of price falls in the fourth stage as were seen around the global financial crisis. The macro backdrop and market dynamics are different to the mid-2000s, and the outlook today varies between economies," said Shearing. So, what are his predictions? The biggest housing price falls will hit the most overvalued markets -- 20% in Canada and New Zealand, followed by 15% in Australia and 10% to 15% in Sweden. But the U.K. will see smaller drops of 5% to 10% and in the U.S. see the lowest of them all with an expected about a 5% drop, said Shearing.