Forex Flash: Housing busts hold sweeping macroeconomic consequences in US and EU – Goldman Sachs

FXstreet.com (Barcelona) - Housing busts have long-lasting macroeconomic consequences. According to the Economics Research Team at Goldman Sachs, “The subdued and sub-par economic recovery in the US, the recurrent crises in the Euro area periphery and even the current troubles in Cyprus are, in some way, shape or form, related to the preceding housing busts. And in some places such as Spain, Greece and Italy, in particular these housing busts may still be ongoing.”

Over the past few years, we have studied several aspects of housing busts, and how they have affected the subsequent macro-market landscape: In general, housing busts are followed by sluggish recoveries and a long period of negative output gaps. Private-sector credit growth also tends to languish for a prolonged period as households work off the debt overhang for several years.

Moreover, tepid post-housing-bust recoveries are typically accompanied by moderately positive equity returns and low bond yields. Equity markets on average bottom out shortly after the bust, but nominal rates tend to stay low for a much longer period until the output gap starts to shrink decisively.