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Major house price corrections lead to GDP shortfall of about 6%, Moody's says

Major house price corrections lead to GDP shortfall of about 6%, Moody's says

House price corrections lead to a country's Gross Domestic Product dropping by about 6%, credit rating agency Moody's says, as the impact of falling house prices flows through to the broader economy.

Moody's says a series of 50 house price falls since 1973 in real terms, in various countries around the world, show house price falls coincide with a GDP shortfall of about 6% compared with the pre-house price peak paths. Such GDP shortfalls are typically associated with a decline in credit worthiness for an array of debt issuers.

"Corrections in housing markets can have an impact on the creditworthiness of sovereigns and other issuers through four broad channels," Moody's says.

These it lists as;

1) Lower economic activity in sectors directly related to real estate and house building spills over to the rest of the economy through supply-chain linkages;

2) Lower house values dampen households’ wealth, which has a negative impact on consumption – so called wealth effects - especially in advanced economies.

3) The decline in the value of collateral backing housing loans raises credit risk.

4) Finally, for some countries, lower house and land values dampen revenues for local or national governments, especially for those heavily relying on the housing and construction sectors.

The Moody's report comes after Reserve Bank deputy governor Grant Spencer pointed out, in a speech last week, New Zealand’s house prices, when compared to incomes or rents, are high on an international basis and very high when compared to New Zealand’s historic trend.

Spencer noted New Zealand is one of few advanced economies that hasn't suffered a major house price correction in the past 45 years.

"A correction in house prices in New Zealand could be prompted by a range of potential shocks to the economy or financial system," Spencer warned.

"Global interest rates are at record low levels and large mortgages have been ‘affordable’ at these rates. As global interest rates return to more normal levels, many mortgage borrowers could come under pressure as they are required to refinance at higher rates. Alternatively, a downturn in the global economy and financial markets could lead to a drop in national income and rising unemployment, at the same time as foreign creditors are requiring an increase in the interest rate premium charged to New Zealand borrowers."

"In such circumstances, we could see the cost of credit rising at the same time that incomes and employment were under pressure. Such stresses would be expected to cause housing demand to ease. If this occurred when new supply was coming through in volume, then prices would begin to fall. A withdrawal of speculative interest in residential property or decline in migration inflows would accentuate any such fall," said Spencer.

"With 60% of its lending in residential mortgages, the New Zealand banking system could be put under severe pressure in such scenarios. The resulting contraction in credit would amplify the impact of an adverse external shock to the domestic economy and financial system, making it more difficult to avoid a severe downturn," Spencer added.

Moody's says for every 10% fall in house prices in real terms, GDP drops by about 4% from its pre-peak path, according to its study of 50 global cases of housing market corrections since 1973.

"Property price downturns since 2006 have been linked to a larger fall in GDP. The GDP gap between pre-peak trends has increased from around 4% before 2000 to around 7% since then," says Moody's.

"Corrections can also raise the credit risk of housing loans by cutting the value of the collateral, while government sometimes adopt fiscal and monetary policy to mitigate the effect of lower house prices."

The chart below comes from Moody's.

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7 Comments

China's housing bust should be watchable then, what happens to NZ when China loses 6% of GDP? Given that they are already in the 'hard landing' scenario.

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According to Key it's just market forces, he's getting more delusional by the day.
I think probably most bubbles over history are the result of market forces, albeit market forces gone stupid.

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Agree, however as long as enough ppl are "making money" from zero work he'll get re-elected in 2017. Mostly because the ones making the money wont have a bar on Labour and its CGT whatever the sound logic behind it. On the more "positive" front I think in the next 2 years the World is going to come un-stuck and ppl will lose shed loads of $s and that will cost JK the election (that' s about the only positive thing from the world coming unstuck btw ie finally rid of the smiling cretins, Billy and Johnny boy).

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Labour have ditched capital gains tax, so no property have investors can use that excuse for wanting to stick wtih National anymore, even though it probably would have made hardly any difference to them anyway, and over the long term could have even helped the serious ones by keeping yields under control more.
I don't get why Key would want another term, he obviously thinks he's too good to be doing the job anyway, and as if he's doing us all a favour ruining, sorry running the country for us.
I'd say if you don't like it Key, do us all a favour and go and live permanently on Hawaii and spend the rest of you time taking selfies in your flash car, that's clearly what you'd rather be doing anyway.

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They have? crazy.

PS are you sure? = http://campaign.labour.org.nz/search?q=capital+gains+tax

Interesting how much of the time ppl vote with their wallet. Of course lots of ppl I work with own one or more rentals, hence a tax on their "profits" is a no go.

I dont think JK will stay in NZ, I think he'll bunk off the the USA where in parties he can display his status by saying "I ran a country" (into the ground) for X years. Even if he doesnt leave initially I think as the world declines from post-peak oil ppl will be vicious and he'll get enough of the blame that he wont want to stay in NZ, BE wont have anywhere to run to of course.

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He'll get a (cushy) job with the UN. He did scratch Helen's back for her role with UN Developments and now indicating that he'll support her again on her quest for UN Secretary General job. She'll return him a nice favour.

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People will always vote against more tax given the option. Lost current income is a vote. People will vote for future change so a better approach would be:
- remove the residential property option from the investment immigration visa
- restrict non-residents to new properties
- build more houses (government and private sector)
- introduce borrowing limits based on rents/earnings phased in over several years
- reduce accommodation supplement rate over several years

I.e. put in place measures to reduce capital gains then you won't need to tax it.

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