Canada’s housing bubble has burst: David Rosenberg

0
186
Canada’s housing bubble has burst: David Rosenberg

This section is Presented

This section was created by the editors. The client was not given the opportunity to restrict the content or to check it before publication.

from HSBC

Breadcrumb Trail Links

The upcoming recession could be deeper than people on Bay Street are expecting

Publication date:

October 28, 20221 day ago3 minutes read Canadian house prices are now down 9 percent from their peak on the way to a roughly 30 percent decline, says David Rosenberg. Canadian house prices are now down 9 percent from their peak on the way to a roughly 30 percent decline, says David Rosenberg. Photo by Tyler Anderson

content of the article

By David Rosenberg and Alena Neiland

advertising 2

This ad has not yet loaded, but your article continues below.

content of the article

Canada’s real estate bubble has burst. The MLS home price index is now down nine percent from its peak last February on track for a roughly 30 percent decline, which we think is consistent with deteriorating affordability and the Bank of Canada’s over-aggressive monetary tightening.

By clicking the subscribe button, you agree to receive the above newsletter from Postmedia Network Inc. You can unsubscribe at any time by clicking the unsubscribe link at the bottom of our emails. Postmedia Network Inc | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300

content of the article

We estimate that the negative wealth effect associated with such price falls will shave about 2.5 percentage points off gross domestic product (GDP) growth. Add to this the deleveraging effect of higher interest rates on consumption and investment, and the impact on trade of the expected downturn in the United States and the global economy, and it’s not hard to see why the coming recession in Canada could be deeper than the Bay Street folks expect.

advertising 3

This ad has not yet loaded, but your article continues below.

content of the article

All of these factors last played a role in the early 1990s when Canada entered a Bank of Canada-induced recession

Individuals spend more when the value of their assets (e.g. stocks and houses) increases because they feel they are getting richer. This is happening through multiple channels: there is a behavioral aspect that leads to spending more of earned disposable income, as well as improved access to credit, an issue that has dominated over the past decade given the persistently low cost of borrowing. As homeowners continue to make regular payments on their mortgages, their credit scores improve, making them better candidates to take on more debt.

content of the article

But with the Bank of Canada’s overnight lending rate up 350 basis points since March (with more to do), the theme of rising wealth is bound to fade as access to credit dries up and house prices plummet. The MLS home price index is already down 9 percent from last February’s peak and the correction is far from over.

advertising 4

This ad has not yet loaded, but your article continues below.

content of the article

Households are being hit as they head into this recession by a confluence of factors: rapid credit cutbacks, higher debt-service costs amid near-record household debt, and inflation limiting disposable income. Added to this is the dwindling wealth on both the equity and residential real estate markets, which is also weighing on sentiment.

The last time all of these factors played a role was in the early 1990s, when Canada entered a Bank of Canada-induced recession and home prices fell nearly 30 percent from their 1989-1996 peak.

This housing reduction is just beginning

While consumption will slow down due to the multitude of factors mentioned above, the wealth effect will also make a negative contribution. If house prices end up falling 30 percent from the peak — which we think is consistent with the deterioration in affordability and the Bank of Canada’s over-aggressive monetary tightening — consumption would fall about 5 percent (using the central bank’s estimate of nearly six cents per dollar in marginal propensity to consume due to changes in housing wealth), representing a decline in annual GDP growth of about 2.5 percentage points.

advertising 5

This ad has not yet loaded, but your article continues below.

content of the article

Even assuming that Canada Mortgage and Housing Corp. Right, with a more modest 15 percent fall in home prices from peak to trough, the GDP hit from the wealth effect will be about 1.3 percentage points, which is still significant. Worse, there is reason to believe that the macroeconomic impact will continue to be skewed to the downside, as this analysis does not even account for the deleveraging effects of higher interest rates on consumption and investment.

  1. A group of tourists walk past a temple in Thailand.  The country is among the countries that investors should focus on.

    David Rosenberg: These economies are best positioned to withstand rising interest rates

  2. Pedestrians walk past stock market numbers in Toronto's Financial District in September.

    David Rosenberg: Equities generally don’t price in a recession, but an asset class does

  3. Federal Reserve Chairman Jerome Powell has aggressively hiked interest rates, pretty much the highest on record in a short period of time.

    David Rosenberg: Make no mistake, the Fed is leading us into a credit crunch

advertising 6

This ad has not yet loaded, but your article continues below.

content of the article

The Bank of Canada, while acknowledging the negative wealth generated by housing (though not necessarily the magnitude), is unwilling to give up its hawkish stance amid still hot and above-target inflation. With more monetary tightening on the horizon, the overnight swap market is now pricing in a top rate of 4.25 percent by year-end, so these housing losses are only just beginning. And given consumer sensitivity to the drop in home prices, Canada’s recession is likely to be deeper than many Bay Street types are anticipating.

As such, the Canadian dollar will see many more months and quarters of weakness, not only because of the bear market in commodities, but also because of the severe impact on the economic outlook from escalating weakness in home equity values ​​and the multiplier effects on the broader consumer Entire.

David Rosenberg is the founder of the independent research firm Rosenberg Research & Associates Inc. Alena Neiland is an economist there. You can sign up for a free one-month trial on Rosenberg’s website.

Share this article on your social network

advertisement

This ad has not yet loaded, but your article continues below.

Comments

Postmedia strives to maintain a vibrant but civilized forum for discussion and encourages all readers to share their views on our articles. Comments may take up to an hour to be moderated before they appear on the site. We ask that you keep your comments relevant and respectful. We’ve turned on email notifications – you’ll now receive an email when you get a reply to your comment, there’s an update on a comment thread you follow, or when a user you follow comments follows. For more information and details on how to customize your email settings, see our Community Guidelines.