Housing correction could devastate Canada's economy: BMO
OTTAWA -- A sudden and sharp correction in the housing market could have a devastating impact on the Canadian economy overall, enough to trigger another recession, says a new Bank of Montreal report.
The analysis by senior economist Sal Guatieri finds that even a 10 per cent correction -- what many would call a soft landing -- could sap as much as one percentage point from gross domestic product growth, or basically halve the current growth rate.
The findings stems from an analysis on the contribution of the brisk housing market on the Canadian economy between 2002 and 2007, when prices rose five percentage points faster than incomes.
According to the BMO, the rapid escalation in home prices and construction added 0.56 percentage points to annual growth during those six years, and "lifted household wealth, confidence and borrowing ability."
But now, with home values at or near record levels throughout the country and many economists predicting some kind of correction, the opposite scenario would unfold from a price and accompanying construction drop.
"This suggests a moderate correction could have a meaningful slowing effect," Guatieri says in a report issued Friday.
"Based on our model, a 10 per cent decline in prices and construction reduced annual growth by one percentage point, with the two channels contributing equally. Given underlying growth of just over two per cent, prices and construction would need to fall more than 20 per cent to spur a contraction."
Guatieri adds that given the record levels of household debt accumulated by families, the negative impact of a correction could even be worse than the bank's models project.
On Wednesday, Bank of Canada governor Stephen Poloz said while a housing correction remains a risk to the economy, the most likely outcome was for a "soft landing."
The central bank took comfort in the fact price increases had moderated and that household debt levels had stabilized -- while remaining elevated -- at 164 per cent of disposable income.
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