Overvalued housing will deepen Canada’s next recession: CIBC

High housing prices in Toronto and Vancouver will make the next recession in Canada deeper and longer, CIBC economists say.

“[A] correction in house prices in Ontario and B.C. might well lop off a few decimal places from growth through softer consumer spending, in addition to a direct hit to residential construction,” Avery Shenfeld, chief economist for CIBC, says in a statement. The bank issued a new report, “Would We Fear or Cheer a House Price Correction?”

“Housing matters, but a correction that wiped off the past couple of years of gains in the hottest markets, but left the vast majority of owners with substantial equity, wouldn’t on its own be a national recession scenario,” Shenfeld adds. “Recessions are more likely to be the cause of a house price decline, rather than the reverse.”

Read: Speculators drive housing demand in GTA, but who will help?

CIBC notes that the biggest impact of a housing correction, in tandem with a recession, would be on consumer spending, a more substantial contributor to GDP than housing.

The Bank of Canada’s ability to raise rates as the economy picks up is limited given the squeeze it would put on households dealing with large mortgage principals for high-priced homes.

“A 2% rise in mortgage rates would be fairly gentle by past tightening cycles, but would raise monthly payments by roughly 25 per cent on a conventional five-year mortgage,” Shenfeld says.

At the same time, with rates remaining low, the BoC will have less firepower to cut rates when a recession eventually hits, the report says. It adds that a house price correction may not come anytime soon, noting that gloomy predictions of a housing downturn were wrong three years ago.

Also read:

Why the BoC sees just 1.8% growth in 2019

Canada one of four advanced economies vulnerable to housing

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.