ChartBrief 212 - SCANNZ Economies
I wanted to revisit this topic, as some of the data have been updated - and it doesn't make things look any better for this group. Firstly - the "SCANNZ Economies" stands for Sweden, Canada, Australia, Norway, and New Zealand. Think of it as another kind of fragile 5, this time a developed market version! I introduced the idea of the SCANNZ economies earlier this year, which I expanded from the initial version which was the "CANZ economies". The bottom line is that property prices look to be rolling over in this what may seem initially odd grouping of countries.
So why SCANNZ, and what (if anything) do these countries have in common?
I coined this term to capture a couple of key common themes and vulnerabilities between these 5 relatively geographically dispersed countries, drawing some inspiration from the BRIC and PIIGS economies.
Common features of the SCANNZ economies:
-Relatively small and open economies with their own currency and independent central bank.
-Export oriented economies with significant exposure to commodities.
-Overvalued property markets.
The trouble with the SCANNZ economies is their housing markets never really underwent a reset in the wake of the GFC. The commodity reliance helped buffer their economies, as did massive interest rate cuts, thus staving off a housing market correction. Yet the subsequent commodity crunch in 2014-16 triggered off additional interest rate cuts and only added fuel to the housing market fire. So they went from overvalued, to even more overvalued.
The key takeaways on the SCANNZ Economies are:
-They share a common feature of significantly overvalued property markets.
-Property price growth is rapidly turning.
-The turn in property price growth to an outright correction is a distinct possibility given the starting point of overvaluation.
1. Property Market Valuations - SCANNZ Economies: As I noted, the SCANNZ economies share a common feature of significantly overvalued property markets. Of course, overvalued markets don’t always just 'spontaneously combust', they usually need some sort of trigger or catalyst. I would say then that the main sensitivity or vulnerability for these economies is either a rise in interest rates (voluntary or involuntary) and/or a weakening economy. It’s hard to make a case for contagion across these economies, but simultaneous stress is plausible.
2. Property prices vs Policy rates: As I mentioned above, the SCANNZ economies got a relatively easy ride through the global financial crisis as the China stimulus programs pushed commodity prices and commodity demand up immediately in the wake of the crisis, and the average policy rate across the SCANNZ economies was slashed over 400bps.
As the chart shows though, in the wake of the commodity crunch of 2014-16 and EM slowdown, the SCANNZ economies underwent further rounds of rate cuts, which drove a surge in house price inflation. But as global bond yields are on the rise, property price growth looks to be rolling over. The risk is that this rolling over in property prices could happen faster than you expect given the substantial overvaluation. So it's one to have on the risk radar and something to keep in mind when thinking about asset markets more broadly in the SCANNZ economies.
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