The ‘Trillion Pound Question’
Some readers suggested a topic on non-US housing. “The countries I am most familiar with; Australia where I live, and the UK where most of my relatives live, seem to have dodged the bullet, for now.”
Another said, “I have noticed that Austrailia and the UK home prices have come to a soft landing. Is this scenario that is being played out in both those countries relevant to the United States housing market.”
This was added, “Good topic. I am sure some areas won’t crash. However; I am in S. Florida and it is crashing!”
And another said, “If one believes this is a bubble, then economics 101 says we must see a return to the mean. This could happen by a price decline. OR it could happen by prices staying neutral for a long period (say 7-10 years) and inflation bringing them back in line.”
The West Australian. “There are early signs that Perth’s overheated housing market is cooling with analysts warning of slipping demand for rental properties. The evidence prompted several property management companies and at least one economic forecaster to warn the local market’s jawdropping bull run could be slowing.”
“They were supported by figures released yesterday which show new homes sales fell 12 per cent last month compared with May last year.”
“Tony Warren, managing director of Perth’s biggest property management group said properties were taking longer to let than a few months ago. Analysis of a local website showed a 70 per cent increase in listings since last July. The number of available rentals had jumped about 25 per cent since May.”
“‘Historically the market does slow down at this time of year..but really not to this extent,’ he said. Mr Warren said many investors who bought a property early in the year had settled and wanted to rent them out. Mr Warren said if the trend continued there would be an oversupply.”
From the Guardian. “With house price rises now bubbling along at 5 per cent a year, dire warnings of a property crash seem long forgotten; but some experts still believe the worst may not be over.”
“Since the Bank of England stepped in with a confidence-boosting cut in interest rates last August to steady a rapid decline in consumer spending, the housing market has surprised many observers by bouncing back, though not to the gravity-defying double-digit price increases of the past five years.”
“Analysts warn that despite the market’s impressive performance since the turn of the year, many of the same factors which made house prices vulnerable 12 months ago are still in place, and it’s only a matter of time before they take their toll.”
“‘There are a lot of headwinds facing consumers at the moment, which makes me surprised that we have seen such a rebound, and sceptical about whether it can continue,’ says George Buckley, chief UK economist at Deutsche Bank. ‘The fundamentals are not really in place to sustain a significant further boom. Real income growth hasn’t been that strong, inflation is rising for non-discretionary items like energy bills, taxes are increasing and there’s a greater need for people to save for their pensions.’”
“John Butler, chief UK economist at HSBC, agrees. ‘I think the fact that it has rebounded over the past six to nine months doesn’t mean we’re past the worst: a lot of issues could weigh down on the housing market. House-price-to-income ratios are very high, the debt-servicing burden is high, and banks are suffering a pick-up in arrears. We are still where we were a year ago.’”
“‘There is a bigger group of people who are very vulnerable to a 1 or 1.5 per cent rise in interest rates than there would have been five or 10 years ago,’ says Ed Stansfield, property market economist. Also unclear are the consequences of the rapid expansion in so-called ’sub prime’ lending, often to borrowers with shaky credit records.’”
“‘While demand seems fairly stable, the deterioration in affordability and its likely impact cannot be ignored. Mortgage payments for someone on average earnings now take up around 42 per cent of takehome pay compared with around 32 per cent three years ago,’ said Fionnuala Earley, the Nationwide’s chief economist.”
“As the steam comes out of the market, analysts and homeowners will once again be asking themselves whether they face a flat few months, or the beginning of a much trickier ‘hard landing’. That has now become a trillion-pound question.”
The BBC ran a report last year where they pointed out that the last bust in England has no less than three ‘false rallys.’ As some in the Guardian said, wages aren’t propping up that market; debt, a rate cut and higher %’s of take home pay are. I would add that the US housing bubble has floated much of the globe the last few years, including Asia.
But now rates are headed back up, as the Bank of International Settlements and the IMF have been clear about. So we’ll see.
I’m wondering how long it will take for all these rate hikes to take effect?Raising rates is essentially dropping home vales but it will take some time for it to show up in the data.
the slope up was milder in the UK 80’s also- hense gentler down, but the UK is wierd this time for sure
Just go back and review the headlines from the last housing bust in this country 17 years ago: “Housing is in the tank.” “Oh, now its recovered.” “Oh, no it hasn’t.” Repeat this cycle of headlines for 5-7 years. That’s how the last bust played out in this country. The UK and Australia will discover the same thing. Nothing moves in a straight line.
It will take the patience of Job to not jump the gun on this downturn.
THERE lived in Arabia a very rich man named Job. He loved God and avoided sin. He had seven sons and three daughters. He had thousands of sheep and cattle. One day God wished to prove the goodness of Job to Satan who said that it was easy for Job to be good because he was rich.
God said to Satan, “You can do what you want to Job’s property, but do not hurt his body. You shall see how he will remain faithful to Me.” Soon after, a messenger arrived before Job to tell him that his cattle had been stolen and all his servants slain. Another messenger told him that, his sheep and shepherds had been struck by lightning. A third messenger came to say that his camels and those who took care of them had been killed.
The fourth messenger brought the worst news: “There came a strong wind from the desert. It shook the whole house. The house fell and killed all your sons and daughters. I alone escaped to tell you.” When Job heard all this, he was filled with great sorrow. He did not sin by blaming God, but prayed, “The Lord gave, and the Lord has taken away! Blessed be the Name of the Lord!”
Satan caused sores to break out, all over Job’s body. But Job did not complain. His friends said that his trials must be a punishment for his sins. But he answered that he had done no wrong. Job said, “Although He should kill me, I will trust in Him. He shall be my Savior. For I know that my Redeemer lives, and in the last day I shall rise out of the earth, and in my flesh I shall see my God.”
God was much pleased with the patience of Job. He freed him from his sufferings. He gave him even more riches than he had had before. God also gave him seven sons and three daughters. Job lived happily till he was one hundred and forty years old.
And failing to muster the patience of Job may well result in reaping the trials of Job…
It appears to me that the “soft landing” that occurred in some countries happened within the context of an expanding global credit bubble.
Now that liquidity appears to be drying up, the conditions that allowed for those “soft landings” are not likely to apply to the U.S. market, making a harder landing more likely in the U.S.
Further, the tightening liquidity may effect the “soft landing” countries in a way that makes those landings evolve in a “less soft” fashion as well.
Good points. The BIS said just last week that all central banks needed to tighten. They have been saying this for over a year now. IMO, these guys/gals have known the spigot had to be turned off and have been preparing various markets for that the whole time. Remember when Greenspan flip-flopped in spring 05, and started talking about over-priced housing every chance he got? Notice that the Chinese and Koreans openly talk about bringing the property markets down?
Another point; the press in the UK and Australia stopped scrutinizing the home markets sometime last year. I’m not sure why. But as much as we complain about the media cheerleading in the US, they have gotten more critical of the sector; to the point where people attack them for it.
What and where is BIS? Thanks for the ever informative blog!
Sometimes called the central bankers bank, the Bank for International Settlements supposedly coordinates actions among the various CB’s. The put this out last week:
‘BASEL - Central banks need to continue raising interest rates to deal with rising inflation pressures and threats from global current account imbalances, but their task will be much easier if governments also tighten fiscal policy, the Bank for International Settlements said. ‘The appropriate path for global monetary policy in the current circumstances should…be towards tightening,’ the BIS said in its annual report.’
‘Central banks also need to take account of financial imbalances when setting interest rates, and focus more on the long-term impact of their decisions, it said. ‘A much richer set of indicators is now needed to guide the setting of interest rates, in particular indicators of financial imbalances,’ it said. ‘Over longer time periods, such imbalances can pose an even greater and more dangerous threat to price stability, on the downside, than shorter-term and more conventional inflationary ‘pressures’, such as output gaps,’ it said.’
‘The consensus expectation for 2006 is for global growth to again exceed 4 pct and for moderate inflation to continue,’ it said. But it added: ‘There is nothing inconsistent in expecting the best but planning for the worst, particularly if the costs of the unexpected might well be high.’
“The BIS said just last week that all central banks needed to tighten.”
Suppose for the sake of argument that all central banks tacitly colluded to continue spiking the punchbowl, instead of heeding the BIS warning that tighter rates are needed to nip inflation in the bud. Where would that lead?
Where would that lead?
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To the over-hyped “soft” landing. Again, let’s repeat: this is a CREDIT bubble. Housing/flippers/speculators/suicide loans, etc. are a result of this credit bubble. In order for a proper (complete) landing to take place, we need to see worldwide credit tightening over an extended period of time, IMHO.
This only works with wage inflation, non-wage inflation at a rate higher then the rate of household income growth will only reduce affordabiltiy and thus house prices.
OT a bit but I wonder what peoples thoughts are on what the ‘fear factor’ will be like when house prices start to tumble. It’s one thing to be underwater to the tune of a half or full years income, but many people are going to be down 2-3 years income. That level of loss would enough to ruin the lives of most people for a very long time.
If people are hurting, they will cut back and hope to ride it out.
But when they’re so far down they may go for immediate bankruptcy, or be forced to by external circumstances, when there is no possibility of getting solvent in a reasonable amount of time.
IMO, a lot of people are going to be down half a lifetime of earnings with the kind of numbers I’ve seen thrown around on this blog!
This is why I suspect that BB’s Fed will go weak-kneed on their tough anti-inflation rhetoric. Actions speak louder than words, but are much more costly, as talk is cheap. Unfortunately, doing so will leave us in the same pot of stew (negative savings rate, increasingly unaffordable housing prices, accelerating inflation, continued deterioration of productive sectors of the economy in favor of gambling activities), with a bigger correction needed down the road to restore balance.
bb already has - see gold ? biggest move up since 9-11
Maybe — one Fed meeting does not a trend make…
In the 80’s in Houston, if you didn’t lose your job, you were ok. You could walk away from the house or sell at a loss. We tried living on credit cards through the job loss years, one year out of work for each of us. Took about 12 years to recover.
I have been following UK and US prices for some time. In the bubble areas of the US and the whole of the UK move together. But you have to price them in the same unit (USD, GBP doesn’t matter which). The “soft landing” in the UK over the last 2 years is an artefact of exchange rates. The USD has gone up against the GBP over that time and so gently rising GBP prices translate to flat or falling USD prices. Priced in dollars the UK market tracks San Diego almost month to month.
These observations support the notion of a “global” process” going on. It would be naive in the extreme to use an observed “soft landing” in the UK as evidence of the likelihood of the same in the US.
Big difference between US and other countries. The US economy is so big that its twitches have global impact. Not so for Aus or UK. Or for Vancouver, for that matter.
When housing goes into a soft landing in Australia, the world macroeconomy still sails along. The commodity boom continues; Aussie’s economy is still blooming. That is, they have a hot economy to temper the local macroeconomic impact of the housing soft landing and the loss of RE/Construction jobs.
On the other hand, if the US market goes bust, this will hurt US consumer spending very bad as HELOC money dries up. Also, as construction slows so does demand for wood and construction workers. Again, large scale global macro impact. For this reason, a soft landing in the US is much less likely.
Moreover, if the US tips the global economy into doom and gloom territory, all the talk of a soft landing in the UK,AUS or Vancouver will dry up if the global recession spreads.
someone or lots of someones just bought 7000 homes.
mid may was 799,000
6/10/06 was 836,471
6/14/06 was 840,935
6/17/06 was 846,120
6/20/06 was 850,317
6/22/06 was 855,892
6/24/06 was 860,647
6/29/06 was 866,037
7/01/06 today 858,675
http://tinyurl.com/znn8m
my guess: lots of expired listings happen when the calendar “rolls over.” If you sign a six-month listing contract at, say, the begining of the year, this is when it would expire. Just a hypothesis, but I’ve noticed in my local market tracking that inventory seems to dip as the month turns over, then goes right back up a few days later as new contracts are signed, homes are re-listed, etc.
That makes sense. Thanks.
There has been a substantial dip in inventory this week on the SF Peninsula. I thought (hoped) this was due to folks taking their homes off the market so as not to be bothered over the July 4th holiday. I don’t recall whether or not this happened last year. If it didn’t then my idea is out the window. If it is holiday-driven then we should see a big bump up next week.
It happened this time last year as well. Actually at the beginning of the week listings went up and then on Thursday they began going down. I believe for SC County we’re only down 100 listings from last week. No big deal since it is the end of the month and there is a holiday weekend.
Per ziprealty, inventory in my No Va have also fallen a very good amount this week. Who is buying?
I’ve noticed this in Bethesda, too. But the homes I’ve been watching didn’t go under contract, they were just pulled off the market. IMO, people are waiting to relist in September or else they were just testing the waters and never serious about selling in the first place.
no one- people throw in the towel on the 4th
wait for fall bounce er, ah fall
peak in my hood 22151 was may 05
My guess is that this dip in the inventory figures is a seasonal artifact of the July 4th weekend — a miniature version of the bigger seasonal dip which occurs between December 24th and January 1st each year. But we will know for sure in a couple of weeks…
I’ve been keeping track of certain zips in San Diego for over two years. This happened in 2004 and 2005, right around the end of June/beginning of July. By July 7th, inventory was back where it was, and started to increase steadily from there. Just a “calendar blip”, nothing more, IMO, especially since we are seeing it in so many markets (per these posts).
From Thailand
‘The government should investigate alleged speculation at several land plots near the three new electric train routes that the caretaker Cabinet is likely to approve tomorrow, a property expert said last week.
Since the government recently re-solved to go ahead with the routes, land prices in the area have risen by 20 to 50 per cent. ‘Speculation is the cancer of the property industry. The government has to investigate and launch measures to protect business. For instance, it could introduce a capital gains tax to curb the speculation,’ Prof Manop Bongsadadt, chairman of the International Real Estate Federation in Thailand, said.’
From China
‘CHINA’S Supreme People’s Court has called for tighter handling of real estate issues to help implement the government’s new round of policies designed to cool down the property market. Tightening supervision over the real estate market is one of the court’s efforts to safeguard the country’s macroeconomic control policies, Xiao said. ‘We will carry out China’s policies in the real estate industry to prevent speculation and illegal land seizure as well as illegal buying and selling,’ said Li Daomin, a high court president in central China’s Henan Province.’
I would love to hear “on the ground” updates from places like India, New Zealand, Southeast Asia, South Pacific, Tasmania, etc.
Thought I would respond. Just got back from 2 weeks in England visiting Farther and other relatives. First let me start by saying it was like dejavue, house after house had for sale signs in the front yards, my farther told me most ahd been up for a few months now with the odd one selling from time to time. Secondly a long chat with various people I know told me that wages are stagnant to declining i.e. my Farthers Business which contracts with the US Air force was under bid by 25% when their contract was up for renewal, 6 months ago hence they had to rebid 32% total in orde to keep their jobs. Multiply this by several thousand other businesses that is what is going on over there right now. Also they ahve a big imigrant problem mostly with the Portaguese, they are coming over and working for a lot less than the average English person is (sound familiar) so hence pushing more peolpe on the unemployment line.
Yep when the goverment cut the rates it did kindle a little fire again i the market but that is long wearing off. Every one I talked to all agreed on one thing over there, that the economy can not go on like this for much longer and they are all watching us over here and all agree once the US economy shows signs or starts to collapse England and the rest of Europe will follow in tandem. So like many ahve siad today here yep there is and always will be false ups like they just had, but anyone trying to rely on what happened there happening here and saving their ass well kiss it goodbye.
p.s. as for the dollar any one who feels rich here do to Europe and see what you money gets you not a lot.
“Also they ahve a big imigrant problem mostly with the Portaguese, they are coming over and working for a lot less than the average English person is (sound familiar) so hence pushing more peolpe on the unemployment line.”
———————
I think many of us are missing something here. My mother is from Austria, and they have been having “immigrant problems” from eastern Europe.
This will indeed sound like a conspiracy theory, but is there some kind of GLOBAL move by the PTB to lure poorer/less educated/less skilled workers into the more affluent, educated countries. Is this an **intentional** move to lower the standard of living for so many people from the industrialized nations? Is it being done to eliminate cash and **non-cash** compensation (health & pension benefits, as populations grow older)? It just seems too conincidental that we’re hearing stories like this from various “old economy” countries. And the various “poor immigrants” are coming from different countries. Interesting…
Ack! eliminate non-cash benefits and **reduce** cash wages.
pleasse remember.
cine poland, hungary etc joined the eu they are legal workers in countries like austria, germany etc.
qiute a difference to the us i think from my german point of view
excuse my typos was trying to get post up to quick
I think the big reason the “landing” has been soft in the UK, at least, is captured by this quote from the article, “Also unclear are the consequences of the rapid expansion in so-called ’sub prime’ lending, often to borrowers with shaky credit records.’”
I believe the US subprime lending model is just now getting exported by global banks to other countries - hence the recent uptick in housing. With the new credit “products” available, now the UK and other countries can creatively dig themselves into horrendous debt, just as many Americans have!
Correct. The Danish market had the biggest inflation in the developed world in 2005 with 25% across the country and 40% (!) in the affluent northern Copenhagen suburbs.
The reason is that interest only loans became legal at the end of 2003. By 2005 interest free had become the norm. The bubble had in fact stalled (well single digit appreciation) in 2003 before the new legislation.
David Lereah has expressed fears about housing markets which are vulnerable to higher interest rates, and it seems The Economist concurs. But maybe the soft landing in Great Britain is nonetheless permanent, thanks to the respiking of the punch bowl by the BOE? Maybe, just maybe, they have achieved that elusive permanently high plateau of which Irving Fisher spoke so optimistically back in 1929?
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Housing market
Priced to perfection
Jun 29th 2006
From The Economist print edition
An overvalued market is vulnerable to higher interest rates
DURING the past decade Britain’s housing market has had its most sustained boom in post-war history. Between 1997 and 2006, house prices rose by 175%, one of the biggest increases among developed economies (see first chart). At its peak, in 2002 and 2003, house prices were soaring by over 20% a year.
A bubble had emerged, as Gordon Brown, the chancellor of the exchequer, acknowledged last autumn. By then, it was already deflating. In 2005 residential-property sales in England fell below a million for the first time since 1996. House prices stopped rising for several months.
On past form the slowdown seemed likely to presage a long slump. The boom was the fourth since the early 1970s, and on each of the three previous occasions a bust had followed. At the end of 2005, according to the OECD, house prices were about 30% above their trend level.
The market staged an unexpected recovery, however. Property transactions picked up. Monthly mortgage approvals for house purchase, which had slumped to 76,000 in November 2004, recovered to 117,000 in May of 2006. House prices have also perked up. Fionnuala Earley, chief economist at Nationwide Building Society, now expects house prices to rise by around 5% in 2006.
The housing market appears to have stabilised at much higher valuations than were previously reckoned possible. A common measure of affordability is the ratio of average house prices to average earnings, since income must ultimately pay for the acquisition of a property financed with a loan. Looked at this way, homes are even more overvalued than they were at the peak of the boom in the late 1980s: the ratio stands at 6.0, compared with 5.2 in the third quarter of 1989. Much the same message emerges from another valuation method, which, rather like the price-to-dividends ratio for equities, measures the relationship of house prices to rents.
Yet such yardsticks are not the final word. When homebuyers work out whether a property is affordable or not, the cost of servicing a new mortgage as a chunk of take-home pay is more salient. On this basis, valuations are also stretched, but homes are still considerably more affordable than they were at the end of the 1980s (see second chart).
The decline in borrowing costs over the past decade goes a long way to explaining why house prices have proven so irrepressible. Most of the fall in interest rates has arisen from the collapse in consumer-price inflation. In itself, that makes no difference to the real cost of servicing a loan over its lifetime. It does affect the timing, though. When inflation is high, the burden is “front-loaded” in the early years of the loan, but then eases as the real value of the debt is swiftly eroded. When inflation is low, the initial payments are more bearable but more of the real debt persists, which shunts a bigger share of the costs into the later years of the loan.
This fall in the initial debt-servicing burden on mortgage borrowers has underpinned the rise in house prices over the past decade. Homebuyers have also benefited from greater competition in the market. This has whittled down the margin between banks’ deposit and home-loan rates, so lowering the cost of mortgages.
Buyers have also been encouraged by the Bank of England’s quarter-point cut in the base rate to 4.5% last August. This followed a tightening in monetary policy that lifted the base rate from 3.5% in October 2003 to 4.75% in August 2004. A more important relief to homebuyers over the past couple of years, however, has come from unusually low longer-term interest rates.
British mortgages have customarily been at variable short-term rates, closely tied to the Bank’s base rate. But since the start of 2004, the share of fixed-rate loans being taken out has risen from 30% to 70%. Most of these are for brief terms, typically two or three years, but they have allowed borrowers to exploit the fact that longer-term rates have been lower than short-term ones. The overall effect has been to offset about half the Bank’s monetary tightening, estimates David Miles, chief UK economist at Morgan Stanley.
Too good to last?
The resilience of the housing market owes much to these exceptionally benign credit conditions. The recent upsurge in immigration may also be supporting the market. But purely domestic factors such as planning restrictions, by contrast, are less important than is sometimes suggested. Other countries—notably Australia—have also avoided a bust in their housing markets, and have instead seen price increases flatten out. This suggests a common cause: low interest rates worldwide.
But what has been given can be taken away. Monetary policy around the world is tightening to keep inflation at bay. The Bank for International Settlements—the central banks’ bank—said on June 26th that the squeeze must continue. The Bank of England is expected to push the base rate back up to 4.75% later this year.
Britain’s homebuyers are vulnerable to quite small increases in the cost of mortgages because they have taken on so much debt during the good times. Overall household borrowing has risen from 110% of disposable income in 2000 to 150% at the start of 2005. The burden of repaying so much more debt means that the total servicing charge is high even at low interest rates.
The most frightening words in the financial lexicon are that it’s different this time. This refrain, a favourite of boomsters, was much in vogue at the time of the dotcom bubble. It remains just as suspect when applied to a housing market that is unnervingly priced to perfection.
My personal belief: Unless the central bankers of the world figure out a way to collectively pull rabbits out of their hats, then the brown stuff is still going to eventually meet the rotating blade for those who bought homes at unaffordable prices. Like in the US, the recent low interest rate environment has encouraged UK buyers to finance more debt than their permanent (lifetime) income will prove sufficient to manage. The problem is that, like in the US, the rule-of-thumb for how much to finance is based on monthly payment as a percentage of income, not on ability to actually pay off the debt over time. Unless inflation ratchets up with little or no policy response (higher rates) to correct it, I do not see how this debt burden will not eventually catch up to many of those who are not actually in a financial position to handle it.
it is different in US this time
last time the bust started in oil patch 1985 and rolled to DC in 1990
this time it’s everywhere within 6 months
Did your 6 months start last August?
Keep in mind that the UK has very strict development controls which severely limit the supply of new housing. So the supply cannot explode in response to inflated prices like in the US. Makes the landing softer.
But don’t think development controls can’t prevent a big decline. Japan has them too.
I’m actually in the UK right now with a friend of mine whose sister just bought a place and we helped her move in today. It’s TINY (300 sq ft max) and she paid 290,000 pounds … which is about US$536,000.
She’s not worried though, because prices in London will double in the next five years. I kept my mouth shut.
Afterwards we went out to dinner and she told us her “service needed” light came on in her car on the way over. Her brother toldd her that service would be about 1200 pounds and she gasped because she had no money — she completely drained her savings and “has no money for that.”
I never did find out how much she was paying for the flat she was renting, but it was much larger , had parking and much nicer than the shoebox she was in.
Thanks for your insight! That story is very sad. How can people not stop to ask, “who will be able to buy this from me at an inflated price?”
This bubble just creates more and more problems the longer it is allowed to continue.
An interesting approach to fighting inflation.
SAINT-OUEN, France (Reuters) - The Communist mayor of Saint-Ouen, a working class suburb north of Paris, was so fed up with complaints that property prices had soared out of reach of local budgets that she devised a plan to keep them down.
When her office thinks the price a seller is asking for a property is too high, it simply blocks the sale. Developers are only granted a permit to build if they promise to sell the new properties at a pre-agreed price.
http://today.reuters.com/news/newsArticle.aspx?type=reutersEdge&storyID=2006-07-03T012252Z_01_L09722409_RTRUKOC_0_US-FRANCE-PROPERTY.xml
Like what Ben posted above regarding China and Thailand.
Either we should have truly free markets (with total transparency), where the final lenders and borrowers will NOT be bailed out, no matter what…OR…the govt needs to “do something” about this bubble, now!
Well, our government’s usual approach is to inflate. I guess that’s a form of bailout that has some winners and some losers.
Redux:
This housing bubble will result in a national, if not international, depression. It’s everywhere and has permeate markets which would never have had any housing appreciation on their own. There’s no connection between housing and its respective regional job market in any manner. I think Bakersfield CA is one of the best cases for this point.
My advice to fellow renters, with enough of a savings to put in a 20% down payment after a 40+% correction, is to not bother. You’ll need that money to survive periods of joblessness in the decade to follow. Cash is king during a deflationary cycle.