Why a Housing Cool-Off May Leave Consumers Unperturbed This Time

(Bloomberg) -- In a post-financial-crisis world, the phrase "housing market slowdown" has a ring of impending disaster.

But as the $220 trillion global housing market starts to cool off in some places against a backdrop of monetary policy normalization, economists at Eurizon SLJ Capital offer a reason for calm. Because price declines are hitting extremely expensive cities, they might not drag down consumption the way standard theory would predict. We summarize their research below and provide links to other studies that caught our eye over the past week.

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Theory and Practice

In theory, a housing price decline should leave households feeling less confident about their finances and less willing to spend. But the pace of home price increases has exceeded the rise in disposable incomes by so much in some markets that a little cool-off might instead make consumers less budget-constrained.

“Modest declines in property prices in Mumbai, Hong Kong, Shanghai, London and even New York City may not lead to a significant weakening in consumption,” write Stephen Jen, CEO of the London-based hedge fund, and economist Joana Freire. That’s good news, because they think global property prices may have peaked for the cycle, noting that they’re in decline in London, New York, Stockholm, Hong Kong and many other cities.

“Since property prices had gone too high, the incipient price correction -- assuming it remains modest and gentle -- may perversely lead to an increase in consumption,” they write.

In the U.S., the S&P Case-Shiller housing index has showed home-price increases slowing. A recent Trulia analysis suggested that the booming real estate market in California’s Bay Area -- home to some of America’s priciest abodes -- are showing signs of tapering off in some places.

Other Research worth a read…

Using Empirical Marginal Cost to Measure Market Power in the U.S. Economy

Stanford University economist Robert Hall takes a crack at one of the big unanswered questions of the economic moment: are we seeing an increase in market power that companies can exploit to charge higher prices? He looks at the change in the so-called Lerner index, which measures how much margin companies are making relative to what they’re charging for their goods or services, and finds that it’s increased “moderately” between 1988 and 2015.

Traders Dilemma : Developing Countries’ Response to Trade Disputes

If today’s trade spats escalate into a full-on war, what’s a developing country to do? Turn the other cheek, according to World Bank researchers. They build scenarios of how countries could respond if the U.S. rolled out a 30 percent tariff on imports from all regions and the European Union, China, Mexico, Canada, and Japan all retaliated. In that hypothetical case, they find that countries would be best-served by forming regional trade agreements while liberalizing tariffs on U.S. imports, allowing them to seize on the new opportunities the reshuffle creates.

To contact the reporter on this story: Jeanna Smialek in New York at jsmialek1@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Sarah McGregor, Alister Bull

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