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Credit Junky Nightmare – Credit Cycles Effect on Housing Market (Part 1 of 3) March 25, 2008

Posted by DustinRJay in Calgary real estate, mortgages, risk spreads, supply and demand.
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When house prices are increasing, if a homeowner’s mortgage is delinquent they have the option to sell and preserve their credit rating.  However, in a falling real estate market, the homeowner will often end up foreclosing due to lack of an option.  Therefore credit risk typically only appears when house prices are falling. 

Credit has become easier in Canada over the past few years and that has affected the supply/demand balance.  The following three posts will cover some aspects of how the credit markets are changing and how risk to the mortgage markets only appears after house prices have started falling.

This rudimentary diagram shows how the credit cycle has positive feedback during the upward cycle:

Credit Cycle - Upward Spiral

And this diagram helps describe how the credit cycle unwinds:

Credit Cycle - Downward Spiral

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