Juggling Dynamite

Canada led the world in the most egregiously inflated home prices in the past few years, but New Zealand, Australia and Sweden were other top-risk contenders. Now high debt levels are having similar demand and price-depressing impacts in many countries all at once. See Sweden is facing its ‘day of reckoning’ as house prices plummet:

“We do expect [house prices] to drop a few more percentage points … So it could go from 20% to 25% perhaps, but if that happens that would mean that it’s pretty much the pandemic uptick that is being reversed,” Magnusson told CNBC.

Sweden isn’t the only European country experiencing a plunging property market post-pandemic, with some economists forecasting a similar downturn of between 20% and 25% in Germany.

As spending retracts under the weight of debt and evaporating home equity, commodity demand and global GDP are on the chopping block. The World Bank just lowered its 2023 global GDP growth forecast to 1.7% from 3%. Lumber (below since 1998), down more than 75% from the 2021 manic peak, sees the forest through the trees (sorry, I couldn’t help it 🙂 ) and is leading other commodities to follow.

The scam of high-frequency trading (HFT) has been an insult to fairness and free markets for more than a decade. A few have been allowed to scalp fat profits at the expense of the rest, and reasonable people know it is completely indefensible. Finally, the SEC has proposed some reforms that are opposed by the extremely well-funded HFT lobby.

Since the SEC posted its proposed market structure reforms for public feedback, Joe Saluzzi has been busy plowing through all 1,600 pages of them to make sense of it all for us. In this video, we hear his assessment. Here is a direct video link.

In the first quarter of 2021, residential ‘investment’ in Canada (real estate commissions, construction of homes, significant renovations, and ownership transfer costs) comprised some 9% of Canada’s GDP, while business investment plunged. US residential investment peaked at 6.7% in 2006 before that epic bubble burst. We have noted repeatedly that Canada’s exuberance in real estate was an unsustainable malinvestment that undermined our future productivity and growth while increasing household debt and vulnerability to recession.

Since 2022, a rapid normalization in interest rates after years of ultra-low has understandably zapped ability and appetite to buy grossly inflated housing. Prices (in red below) are finally following buying activity lower (in black as a percentage of GDP since 1980), and history suggests that prices should follow for years.

A 2018 Bank of International Settlements (BIS) study found that contracting real estate investment typically brings a recession within two years and falling property prices for an average of 4 years.

As pointed out by Better Dwelling, the last two major Canadian real estate bubbles in the early 1980s and early 1990s saw average and worse outcomes:

The early ’80s bubble saw residential investment peak in Q2 ’81, and home prices a quarter after. The correction lasted peak to trough for nearly 4 years, close to the average.

The ’90s real estate bubble saw residential investment peak in Q4 1989. Real home prices followed two quarters later, before a correction in ’96. Nearly 7 years of sliding prices until the market returned to growth.