Heavily-leveraged financial and household sectors had to undergo a phase of balance-sheet “repair” that in many instances is still taking place. Households took advantage of interest rate relief to repay some of their liabilities, rather than fund renewed consumption of goods and services.
Faced with a higher share of non-performing loans, banks tightened lending criteria, dampening the stimulative effect of lower central bank policy rates. As asset prices adjusted to more realistic levels, the implied negative wealth effect reigned in consumption and banks’ appetite for lending. The gradual reduction of excess housing inventories delayed any recovery in residential construction.