Real estate is a highly levered asset class, which means
that pricing is sensitive to interest rate changes.
Larry Summers recently published a post on his blog
where he argued that the Fed (US) is being far too complacent about their
ability to respond effectively to a future recession. He sees this as their
biggest monetary policy challenge going forward.
Given the potential impact to real estate and city building
as a whole, I thought I would summarize some of his key points:
- Private sector GDP growth in the US averaged
1.3% over the last year
- Since the 1960s, this level of tepid growth has
typically foreshadowed a recession
- Larry sees > 50% chance that the US economy
will enter a recession in the next 3 years
- 400-500 basis points of monetary easing is
usually needed to counter recessionary pressures
- The Feds will likely not have this much room to
play with when the next recession comes along
I don’t think anyone could have predicted that rates
would remain so low for so long. (10-year Treasury = ~1.6% at the moment.) Still,
my view has been that rates in Canada and the US won’t be posting meaningful
increases anytime soon. And Larry’s post reinforces that for me.
What’s your view?