While these figures are concerning, to say the least, the carnage could be much more severe than even we anticipate, given that household balance sheets remain in poor shape and that the economy’s exposure to the real estate market is near all-time highs, with real estate as a share of disposable income at a record 563 per cent and the share of new mortgages with variable rates at 55 per cent.
We decided to skim through the history books and assess what the hit to real GDP would be should these two key housing-sensitive components revert to the long-run mean. As for the consumption component of the equation, housing-related expenditures would have to fall to a 5.3-per-cent share of consumption from 6.1 per cent, while residential investment would be pared back to 32 per cent of overall investment from 36 per cent. All in, these two declines combined would lead to a 1.
I thought there was going to be trouble due to how many have taken variable rates - what I didn’t know was 55% have done that this year. Oh man.
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