A major house price correction could be in the offing, implications for growth and inflation – ABN Amro

A potentially toxic cocktail for the housing market is emerging. Economists at ABN Amro judge that both the price correction as well as the implications for growth and inflation will be more moderate this time.

How vulnerable is the economy to a sharp fall in house prices?

“Falling real incomes and fast rising interest rates are marking an abrupt end to the housing boom – aggravated by looming recessions. Our base case is for a moderate correction, but house prices could ultimately drop by 20-30 percent.” 

“The growth impact of deep housing market corrections would be strongest for the UK but milder in the eurozone and US. The drag on inflation would be biggest in the US.” 

“Even if there is a major correction, strong financial buffers would prevent this from being systemic. A notable exception is in China, with its mainly self-inflicted problems that are of a different nature.”