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Canadian consumer spending and housing prices continue to climb, but at rates suggesting retail sales is resuming its role as a leading indicator for the residential real estate market.

Consumer spending is more sensitive to short-term changes in economic growth because trips to the mall are at least in part discretionary and mortgage payments are not. We can expect that retail sales will weaken significantly before a major housing correction. Canadians struggling with high debt loads will first reduce spending in order to continue making mortgage payments.

The accompanying chart highlights that we are not at that dire point yet. Year-over-year change in both retail sales and housing prices remains in positive territory.

Statistics Canada released data for March domestic consumption last Friday. At the first glance, the results were promising – a month-over-month increase of 0.6 per cent easily exceeded economist estimates of 0.3 per cent.

A closer look, however, uncovered some problems under the surface.

“Overall retail sales climbed 0.6 per cent, but strip out auto dealers, and sales came in well below consensus with a 0.2-per-cent decline,” CIBC economist Avery Shenfeld wrote in a note. “Retail volumes were … still no higher than they were back in mid-2017, so it’s not clear that we have put the recent slowing in consumption behind us.”

In the past, retail spending growth has often provided a leading indicator for housing prices. On the chart, it’s evident that retail spending growth immediately after the financial crisis peaked in March, 2010, while housing price growth began to slow three months later in June, 2010. The pattern of retail sales growth changing direction first, followed by housing prices, was loosely consistent for the 2008 to 2015 time frame.

In hindsight, it looks like the 17 months from the end of January, 2016, to the end of June, 2017, is when the true frenzy in domestic real estate occurred. While consumption growth eased, the pace of housing price appreciation accelerated to 14.2 per cent year over year from 6 per cent .

Housing price increases have now slowed dramatically and the current pace of 5.6 per cent is in the same ballpark as the 4.1 per cent year-over-year growth in consumer spending.

If current patterns persist, the chart offers two primary takeaways. One, that changes in the direction of retail spending growth are often followed in a few months by the same change in trend for housing prices. The data also imply that Canadians should pay careful attention when the path of retail spending growth diverges from real estate price growth.

Mr. Shenfeld’s subtle warning that “it’s not clear that we have put the recent slowing in consumption behind us” is a bit ominous for Canadians who are banking on sustained, rapid home price increases. Homeowners and potential buyers should feel a lot more comfortable if an improvement in retail spending clears the way for future gains.

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

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