Cracks Appearing in Five Highly Leveraged Economies

Cracks are starting to appear in five highly leveraged economies: Canada, Australia, Norway, Sweden and New Zealand. For several years following the global financial crisis, these five countries all shared a common theme—a multi-year housing boom, fueled by low interest rates, which resulted in very elevated levels of household debt.

This boom is starting to dissipate in all five markets. House prices have largely reversed course, be it slowing appreciation or outright decline. Moreover, this is occurring even as interest rates remain at or near record lows and labor markets continue to be robust. Importantly, this is a correction that many thought could not occur given the otherwise strong economic growth backdrop in these countries. But we take a long-term view of house prices, and began highlighting affordability problems in these markets several years ago.

A Correction Unforeseen by Many

  • In Norway, house prices started to fall in April and are down 3% nationally.
  • In Sweden, the correction started in September, but has already resulted in a sharp 6% decline in just five months.
  • Australia’s house price correction is more tentative – with Sydney prices softening since early October.
  • Likewise in Canada, the pace of house price appreciation has moderated, with only Toronto experiencing outright declines.
  • In contrast, New Zealand’s housing market has been cooling for quite some time – since late 2016 – but appears to have stabilized with Auckland house prices now flat year-on-year.

In each of these markets, a change in household sentiment, a significant increase in new housing supply and tightening and regulation aimed at lessening risk to the whole financial system have all combined to help drive the correction.