A potentially toxic cocktail for the housing market is looming. Falling real incomes, rapidly rising interest rates and a looming recession put an abrupt end to the housing market boom. Our basic scenario assumes a moderate correction, but house prices may eventually fall by 20-30 percent. Effects on economic growth from sweeping housing market corrections would be strongest in the UK, but milder in the eurozone and the US. Pressure on inflation would be greatest in the US. Strong financial buffers will reduce systemic risk in the event of a major price correction. A notable exception is China, with its largely self-inflicted problems being of a different nature.

Macroeconomic news has been mixed over the past month. The good news is that due to the mild start of autumn and a large supply of LNG, European gas prices fell sharply. Meanwhile, in the UK, a change of government and a major policy shift has prevented a potentially major crisis. The bad news is that, as we warned in our previous two Global Monthy’s, a European recession was already underway.

This was confirmed by October’s flash PMIs, which showed a sustained decline in business activity. Consumer confidence also declined further. Against this backdrop of high inflation, rising interest rates and a looming recession in developed economies, vulnerabilities in our economic system may surface. The housing market can be such a vulnerability. Although our baseline scenario is that house prices will fall slightly on balance, the economic uncertainties are large enough to analyse whether major price corrections could occur and what their consequences would be for growth and inflation.