Few economists doubt that a correction is looming for the Canadian housing market. The only real arguments surround the timing and how bad it will be.
In an attempt to predict when the housing price decline will occur, we can assume that stress on the household balance sheet will first become apparent in broad retail spending. The last payment a Canadian homeowner is going to skip will be the mortgage. Reduced spending on luxury items, new cars, dining out and Christmas presents is likely to come first.Report Typo/Error
Canada Retail Spending (year over year per cent) vs Teranet/National Bank Home Price index
SOURCE: Scott Barlow/Bloomberg
The Canadian economy is a big, complex machine and we have to be cautious about reading too much into this one relationship. It doesn’t include the effects of mortgage rate changes, a potential excess of condo supply in major cities, commodity prices and many other factors. The changes in consumption growth are also, while significant, not yet dramatic. Spending growth is still positive, so it’s too early to panic.
Nonetheless, the longer term trend in Canadian retail spending is lower in the post-crisis era and it’s almost certain that, at some point in the next decade, Canadian households will have to deleverage and reduce their debt loads. This process, whenever it occurs, will dramatically reduce demand for mortgages and housing. It’s too early to call a top in the domestic housing market with any kind of confidence. But a continued downward slide in retail spending, if combined with rising home prices, will make the correction more and more likely with every passing month.