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The Canadian retail sales data reported Friday were surprisingly weak and another potential sign that households are beginning to stagger under notoriously high debt levels. The trend in consumption, if it continues, has clear negative implications for housing prices.

Economists had forecast a 0.5-per-cent month-over-month rise in domestic retail sales for October, but instead we got a 1.2-per-cent decline when the report was released on Friday. In year-over-year terms, consumption was down 0.6 per cent.

I had been following retail sales data as an indicator of future housing prices. The thinking was that because skipping mortgage payments is decidedly not an option, financial stress for households would first appear as the type of weaker discretionary spending data released last week.

The accompanying chart compares the year-over-year change in retail spending and housing prices. It shows that the recent peaks in housing price growth and retail spending occurred in June and October of 2017, respectively. The most recent data show housing prices climbing at a 1.4-per-cent pace while year-over-year consumption has dropped by 0.6 per cent for two consecutive months.

Weak spending threatens home

price recovery

Year-over-year percentage change

Teranet-NB National House Price

Index Composite 11 (left axis)

Canadian retail sales (right axis)

16%

10%

14

8

12

6

10

8

4

6

2

4

0

2

0

-2

2017

2018

2019

2016

2015

THE GLOBE AND MAIL, SOURCE:

SCOTT BARLOW; BLOOMBERG

Weak spending threatens home price recovery

Year-over-year percentage change

Teranet-NB National House Price

Index Composite 11 (left axis)

Canadian retail sales (right axis)

16%

10%

14

8

12

6

10

8

4

6

2

4

0

2

0

-2

2017

2018

2019

2016

2015

THE GLOBE AND MAIL, SOURCE: SCOTT BARLOW; BLOOMBERG

Weak spending threatens home price recovery

Year-over-year percentage change

Teranet-NB National House Price Index Composite 11 (left axis)

Canadian retail sales (right axis)

16%

10%

14

8

12

6

10

8

4

6

2

4

0

2

0

-2

2017

2018

2019

2016

2015

THE GLOBE AND MAIL, SOURCE: SCOTT BARLOW; BLOOMBERG

Retail sales is a volatile data series, as the blue line on the chart highlights. This means that a sharply positive, above consensus report for November spending could easily occur. But the results for October gross domestic product growth released on Monday provided another surprise – 1.2 per cent on an annual basis (down 0.1 per cent month over month) versus 1.4 per cent expected – making a recovery in spending less likely.

The two lines on the chart have moved roughly together but there’s no reason to expect the close relationship to continue. However, continued negative surprises on the consumption front would signal that Canadians are finally struggling to maintain high debt loads. This has negative implications for future spending and overall economic growth for a services-oriented economy.

Weaker consumption also implies that Canadians will be more likely to pay down debt than borrow. Lower demand for loans means slower mortgage growth, or maybe no growth at all, which would put downward pressure on housing prices in many regions.

Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.

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