How would a housing downturn affect Canada’s economy?

In a follow up to its recently released report titled, “House prices likely to fall for several years,” Capital Economics says that a housing downturn will hit Canada’s economy hard, much like it did in the United States.

The overview of the report argues the following points, and others.

• The now inevitable downturn in the housing sector will severely constrain economic growth over the next couple of years, as consumption expands at a more muted pace and housing investment shrinks back towards a more normal size. Economic growth will rely increasingly on business investment and net exports.
• Over the last several years, growth in consumption has far outstripped income gains, as households have gone on a spending binge, funded by credit growth and home equity extraction.
• With household balance sheets stretched and house prices expected to fall, however, we forecast that growth in consumption spending will lag income growth for the next couple of years, as households focus on rebuilding their saving rate.
• House prices have been growing rapidly for nearly a decade now and it has reached the point where housing is so overvalued relative to incomes that a downward correction seems unavoidable. We fear that house prices could fall by as much as 25% over the next three years.

The complete report from Capital Economics can be found here.

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Norm Fisher
Royal LePage Vidorra