New Blog 2: Houseing Market

Thursday, 8 November 2012

Houseing Market

While the government is doing its best to prop up the housing sector and maintain credit growth, most common metrics suggest house prices are still elevated. This artificial prop buys banks time by preventing banks from taking losses and depleting capital while the yield curve is still steep. Yet, investors are coming to the realization that short-term rates will stay near zero percent for a very "extended period" indeed. Perpetual zero (PZ) is having the perverse effect of flattening the yield curve and reducing the carry trade that is benefitting banks. If banks are unable to restore adequate capital to deal with the loan losses that removing the government prop would induce, the next recession will be very painful.