— Citigroup explains why this time should be less painful than the last
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By Fiona Mullen, Sapienta Economics Ltd
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The outlook for the
Some regions are already experiencing a decline in prices and private forecasters are expecting an overall fall for
In April, David Lereah, chief economist for the National Association of Realtors, was forecasting only a small average fall in single-family existing home prices of 0.7% in 2007 but, depending on how it is measured, others are forecasting more.
Moreover, some of Lereah’s indicators were much more dramatic: he expects existing home sales to fall by 2.2%, new home sales to fall by 14.1%, housing starts to fall by 18.4% and spending on residential construction to fall by 13.6%.
The prevailing theory for the past few years has been that as soon as the booming
Memories of the last downturn in the
However, in an interview with the Financial Mirror last week, Jürgen Michels, Director, Economic and Market Analysis at Citigroup, explained why the global impact of this weakening of the housing market might not be as bad as the last one.
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— Economic conditions are more benign
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One of the key reasons is that the impact on
 “We think that they [house prices] will be down by around 3% using the OFHEO index by the start of 2008. That fall in house prices will actually be similar to the previous house price corrections in the
“In contrast to the previous period, this time prices went up more, but the overall economic conditions are more benign than they were in that period.â€
These conditions include the labour market and overall financial conditions. In the previous period both unemployment and interest rates were already high, meaning that the impact of falling prices was harsher.
“There are risks of course … but if you look at the balance sheets of the non-financial sector these look really robust at the end of an interest-rate tightening cycle.â€Â
Michels added that bank capitalisation is also sound, “so there is little risk from that side.â€
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— But growth will still be weaker
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Growth in the
“Growth is going to stay weak for a while because there is a negative wealth effect from falling house prices, which affects consumption, but that will stabilise,†he said.
Citigroup is forecasting real GDP growth to slow from 3.3% in 2006 to 2.4% in 2007, before picking up again to 3% in 2008.
“Our view on the
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— “Decoupling†and emerging
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Another reason for less pessimism, which the Financial Mirror touched on last week, is that the rest of the world is not quite as dependent on the
Demand in
“Having this slowdown in the
“We have some sort of decoupling.â€
To answer the question ‘who is driving the world economy’ Michels said that we have more support from developing countries than from the
“The fast growing developing countries really are the drivers of the world economy and with its right product mix Europe is very well positioned to deliver a huge amount of capital goods to the markets such as the
Thus, while Citigroup expects a sharp slowdown in
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—
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The impact of a weaker
In countries like
Housing starts have fallen rapidly in
However, interest rates rises have not affected affect
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The good news for borrowers is that Michels believes that interest rates in the euro area have reached their peak.
Noting a stronger currency and absence of wage pressure, Michels said that he expected one more rate rise in June but that “4% will probably be the peakâ€.