Juggling Dynamite

After past housing bubble peaks in Canada and elsewhere, home prices contracted 25%+ nationally and stayed relatively flat in the following decade or so. That allowed incomes to advance on shelter costs and restore affordability over time. A similar pattern is the base case this time, as well. Much needed.

Tony Stillo, director of economics for Canada at Oxford Economics, joins BNN Bloomberg to discuss housing affordability in Canada. After the country hit a record worst level of unaffordability in Q2 of 2023, he believes that house prices will fall another 10 percent by early next year but says home ownership will likely not return to an affordable range until 2027. Here is a direct video link.

Also, see more on the spreading strain in commercial real estate and related debt in Big US Banks trying to dump commercial real estate loans–but buyers scarce as pressures mount for property markets.

US household debt has surpassed a fresh record of $17.1 trillion. $12 trillion is in mortgages (more than twice the 2006 bubble top), $1.6 trillion in auto loans, and over $1 trillion in credit card debt, all with the highest interest rates in 22 years and rising unemployment. Courtesy of Bloomberg, the chart below shows the trend in auto (black line) and credit card balances (yellow) since 2003. The discussion below lays out the economic implications well.

Ted Oakley interviews Danielle DiMartino Booth discussing current Fed policy, employment implications, and debt implications. Here is a direct video link.

Not just in America, China’s debt crisis is also compounding, see China’s largest surviving developer, sinks into crisis. Meanwhile, the year-to-date freefall in China’s export prices is shown below as softening consumer demand and inflated inventories force prices lower for the world’s second largest economy #disinflation. See China slides into deflation as consumer, factory prices drop. Also, China slips into deflation in warning sign for world economy.

Bullish sentiment roared back in the first half of 2023 on the blind belief that low unemployment numbers mean that this time is different and the sharpest monetary tightening in 40 years is not triggering a recession.

In reality, changes in unemployment lag behind changes in monetary policy by 12 to 24 months, and mainstream commentators make premature all-clear proclamations before the worst of market losses, every cycle. The chart below, courtesy of Michael Kantrowitz, evidences similar overconfidence during the 1990, 2000 and 2007 downcycles.Meanwhile, last week’s jobs data showed leading signs of employment distress with declines in the average work week (to the lowest since April 2020), temporary help, and full-time jobs, both in Canada and the US. The number of people taking on more than one job to make ends meet leapt in June and July to the highest since January 2020.

Others point to strong consumer spending as evidence that households can sustain economic growth. In reality, consumer spending as a percentage of GDP (below in blue since 1947) always soars in the run-up to recessions and typically stays in an uptrend until after the end of the recession. Gross Private Domestic Investment (GPDI) as a percentage of GDP (below in green), on the other hand, typically falls heading into recessions (marked in grey). The divergence between these two indicators year to date is entirely consistent with the onset of past recessions.  ECRI elaborates on their website here.