If a recession sweeps through North America, Canada would be hit harder than the US this time around — and it’s partly because of the economy’s overreliance on the housing market.
So suggests Eric Lascelles, chief economist for RBC Global Asset Management, in a #MacroMemo, his series of weekly dispatches on economic news.
“Were Canadian home prices, resale activity and housing starts to all decline simultaneously and significantly — as they sometimes do during recessions — that would weigh heavily on the Canadian economy in a way the U.S. would not experience,” Lascelles writes.
That would be a reversal of what happened in the wake of the 2008 Financial Crisis and subsequent recession.
While a subprime mortgage market collapse brought the US housing market — and broader economy — to its knees, Canada’s more stringent regulations are credited with helping the country emerge relatively unscathed.
“Canada’s housing boom continued for another decade, due in significant part to the ultra-low rates brought about by the financial crisis itself,” Lascelles explains.
That growth has resulted in housing activity accounting for close to 22 percent of Canada’s GDP, whereas the historical norm is 19 percent.
“In contrast, the U.S. housing market is currently a smaller share than normal of its economy,” he continues.
Meantime, Canadian households are more highly leveraged than their neighbours to the south.
The debt-to-income ratio in Canada has been trending higher, while stateside it is easing.
Chart: RBC GAM
But while there are the ingredients present to make a recession in Canada worse, Lascelles isn’t flagging the housing market as an area he expects to cause such a downturn.
“To reiterate, there is little to suggest that Canada’s housing market is at particular risk of inducing a recession by itself. If anything, housing has recently stabilized,” says Lascelles.
According to the Canadian Real Estate Association, home sales increased 6.7 percent on a year-over-year basis this May, while prices were down 0.6 percent annually. The association considers nearly three quarters of local markets to be “balanced.”
“But the country’s housing market is nevertheless more vulnerable than usual, capable of worsening a recession should a North American recession increase the unemployment rate,” Lascelles adds.
