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The retail sales data history is far more volatile than housing prices, but by and large, the annual changes in consumption and housing prices are closely related.

Dave Chidley/The Canadian Press

The latest reading on Canadian retail sales was well below economists’ expectations, but still supportive of an improving housing market and evidence of the domestic economy’s remarkable resilience in the face of a global economic slowdown.

Retail sales for August fell 0.1 per cent from July, Statistics Canada reported on Tuesday – far weaker than Street expectations for a rise of 0.4 per cent. Retail sales were up 1.1 per cent compared with a year earlier.

That monthly retail sales number, however, is far less weak than the headline number indicates. Falling prices were responsible for all of the decline, as total volumes still rose 0.2 per cent.

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Consumption levels have become an important indicator for the domestic housing market in recent years as domestic household indebtedness hovers near a record peak, at 177 times disposable income.

Signs of resiliency

Retail sales,

YoY % chg

Teranet-NB National Composite

House Price Index, YoY % chg.

16%

10%

9

14

8

12

7

10

6

8

5

4

6

3

4

2

2

1

0

0

‘14

2015

2016

2017

2018

2019

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: scott barlow, teranet

Signs of resiliency

Retail sales,

YoY % chg

Teranet-NB National Composite

House Price Index, YoY % chg.

16%

10%

9

14

8

12

7

10

6

8

5

4

6

3

4

2

2

1

0

0

‘14

2015

2016

2017

2018

2019

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: scott barlow, teranet

Signs of resiliency

Retail sales,

YoY % chg

Teranet-NB National Composite

House Price Index, YoY % chg.

16%

10%

9

14

8

12

7

10

6

8

5

4

6

3

4

2

2

1

0

0

‘14

2015

2016

2017

2018

2019

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: scott barlow, teranet

When the inevitable happens and Canadians begin to struggle with debt loads, the damage will first become apparent in weaker spending as households pull back in order to make mortgage and other debt service payments. This would signal the onset of an extended household deleveraging process that would almost certainly end the domestic housing boom.

The accompanying chart highlights that, thankfully, the limiting effects of high debt loads are not yet apparent in the consumption or housing price results.

The retail sales data history is far more volatile than housing prices, but by and large, the annual changes in consumption and housing prices are closely related. We’d expect this because both reflect Canadians’ willingness to borrow and spend.

The year-over-year growth rate in spending and real estate prices remains well off their five-year peaks, struggling to remain in positive territory. In the case of housing prices, however, there is cause for optimism.

The Teranet-National Bank National Composite House Price Index, released last week for September, showed a 0.1 per cent month-over-month increase. In a research report, National Bank noted this marked the fifth consecutive month of gains. The year-over-year increase in real estate values was solid at 0.7 per cent.

Perhaps more importantly, the Vancouver market, which has been holding the housing price index back, continued to show signs of improvement. Values are still dropping, but a sharp increase in sales activity – from 1,500 residences a month earlier in the year to more than 2,500 now – suggested the sell-off might be reaching an end.

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In addition, a Tuesday research report from Bank of Montreal economist Priscilla Thiagamoorthy noted that in inflation-adjusted terms, residential demand is now strong enough to drive new construction. Investment in new home building turned higher in August – by 0.7 per cent – after nine consecutive months of negative results.

The relationship between consumer spending and housing prices is an important one for investors and indebted homeowners. A sharp deterioration in retail spending could signal the end of the domestic real estate bubble. But when the annual growth in consumption is higher than housing price appreciation – as it is now – hopes of a rebound in housing prices remain.

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