Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Inflation + falling house prices = ?

Many countries are experiencing an apparent anomaly: inflation + falling house prices. IMF-2023: “Global housing markets are retreating after years of steady gains”. “Two-thirds of the economies for which the OECD tracks housing prices saw declines for their most recent quarter of available data.”

Some examples: Australia, Canada, Denmark, Ireland, Netherlands, New Zealand, Sweden, UK, and USA.

Many articles argue that we are approaching a recession. I doubt that. The proxy world war between Russia and Ukraine is (still) preventing a global recession. Increased military expenditure by governments exceeds decreased consumption. Also see my 2022 blog: Inflation? Recession? Both?

Hence, the combination of the 2021-2023 inflation surge and the falling house price index is most of all an anomaly. A 2023 IMF blog views Central Banks as the culprit for falling house prices: house prices are continuing to fall because borrowing costs are rising. In my view, that analysis is valid.

“Property markets should enjoy greater stability when central banks slow or pause their campaign of raising interest rates to tame inflation” Note: emphasis in quote by LO.

Excerpt from a March 2023 IMF blog: House Prices Continue to Fall as Borrowing Costs Rise

My blog of yesterday explained that Central Banks do not have toolkit for supply-side inflation. Their default response (ie, raising interest rates) is (only) effective for the common demand-side inflation (ie, consumer demand exceeds supply). Hence, Central Banks are adding fuel to the fire.

For many years, Central Banks were worried about increased residential mortgages following increased residential housing prices (eg, DNB-2011). In their CB view, a real-estate bubble was in the making. For many years, I’ve argued the same, only to be proven “wrong” each and every year.

Albert Einstein once said: “In the midst of every crisis lies great opportunity”. Quite possibly, Central Banks view falling house prices during rising inflation as an opportunity amidst a disaster (source). Also see Brookings-2017: “Sometimes the world needs a crisis: Turning challenges into opportunities”.

If my view is correct then Central Banks are using inflation for deleveraging the residential housing sector. Their timing is debatable but it’s (highly) overdue. Several decades ago, a total debt-to-annual income ratio of 4x was viewed as high. Recently, it was even 10x (eg, my 2022 blog).

Hence, inflation + falling house prices = forced deleveraging by Central Banks ?

House of the Rising Sun by The Animals (1964)
band, lyrics, video, Wiki-band, Wiki-traditional folk song, Wiki-1964 version

There is a house in New Orleans
They call the Rising Sun
And it’s been the ruin of many a poor boy
And God, I know I’m one

Note: all markings (bolditalicunderlining) by LO unless in quotes or stated otherwise.


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