Bank of America Merrill Lynch economists say Canada, Australia and New Zealand are heading for 'an unwinding'...
A 'painful' unwinding
"Canada, Australia and New Zealand have all faced commodity shocks that have hampered growth and left the economy highly dependent on housing activity. Despite mounting financial stability risks, central banks in these regions are stuck with low rates to stimulate growth."
BoA / ML lay out 3 scenarios for how each country's housing boom will play out ... labelling the scenarios the bad, worse and worst. All will require a painful unwinding of record debts accumulated by households.
Bad:
- Successful implementation of mortgage and housing policies (i.e. tightening sales to offshore buyers)
- Avoid a housing crash
- But household debt stays high, weighing on economic growth
- Central banks maintain accommodative monetary policies (referring to the RBA, BoC and RBNZ)
- BoA / ML make special mention of Australia - household debt levels are highest of the 3
Worse:
- An aggressive tightening of housing policy
- Reduces demand sharply and therefore a fall in prices & sales
- Makes house prices cheaper
- But cuts economic growth
- May lead then to a renewed loosening of monetary policy
- Again, BoA / ML single out Australia, as there is a surge of housing supply set to come on line
Worst:
- No tightening of housing policy
- Eventual financial stability risks and concerns on growing unaffordability finally prompts government action
- Results in a more serious price correction and potential housing crash
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A useful summary from BoA / ML. Its not too much different from the sort of warnings we have had (in Australia at least) for a long, long time now (over a decade). The warners have made reasonable theoretical points but have been appallingly wrong on timing for, well, more than a decade. Maybe BoA / ML will have more luck.
For currency implications - an economic slowdown as a result of the unwinding will be a bearish influence.
