The cooldown from the overheating housing market could negatively impact the Canadian economy, believed to be headed for a more pronounced recession. But the ramifications could be much worse.
Rosenberg Research & Associates founder David Rosenberg, who said more than a year ago that the housing market “might be [in] one of the biggest bubbles of all time,” is now saying that that bubble might start to shrink, taking the country’s economy along with it.
“Our analysis indicates that a reversion to the mean with respect to housing-related consumption expenditures and residential investment would lead to a 1.4 per cent drop in real gross domestic product (GDP), and keep in mind that this is a best-case scenario,” Rosenberg noted.
The analyst looked back in history to consider how the cooldown of the market to its long-run average would affect the economy. He noted that “housing-related expenditures would have to fall to a 5.3% share of consumption from 6.1%, while residential investment would be pared back to 32% of overall investment from 36%.” These two declines are expected to result in a 1.4% drop in GDP.
The effect, however, could extend to the labour market, which saw construction employment’s share rise to 7.9%. Should it go back to the long-run mean of 6.4%, Rosenberg estimates around 283,000 jobs will be cut–pushing the unemployment rate to 6.3% from the current 50-year low of 4.9%.
The authors also warned that the declines are conservative estimates, believing it is “hardly likely that these measures will simply mean revert after years of overheating.”
But Rosenberg added that current economic indicators of the housing market could indicate a “carnage…much more severe,” given that real estate’s share in household disposable income is at a record 563% and share of new mortgages with variable rates is at 55%. A cooldown for the real estate industry could spell a hit on consumption, further made vulnerable with the high exposure of the economy to the housing market–all possibly compounding the negative effect on the country’s GDP.
“[We] believe the current rate-hiking cycle by the Bank of Canada combined with weak fundamentals are likely to take their toll in the coming months,” Rosenberg, alongside fellow economist Julia Wendling, said.
The economists also added that the accumulated high levels of mortgages coming from its extended bull run might take a toll on future GDP growth and attempts to revive the economy should it head for recession, “particularly as debt-servicing costs continue their ascent in tandem with interest rates.”
“As a result, we remain steadfast in our belief that the Canadian economy is headed for trouble and the Bank of Canada’s monetary policy tightening campaign will be stopped dead in its tracks (or even reverse course) before year-end. Our advice is to steer clear of the loonie and remain bearish on real estate-related retailers and home improvement,” Rosenberg added.
Information for this briefing was found via The Chatham Daily News. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
