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Reasons Why Canadians Might Have Nothing to Fear Regarding Housing Market Correction

Is the housing market in the verge of a correction? CIBC’s economic team and chief economist Avery Shenfeld won’t say so, but fellow economists Nick Exarhos and Andrew Grantham bring up whether a housing market crash could bring down the entire economy in Canada – just like what happened to our neighbor, the U.S.A., last decade.

Is Market Correction Looming?

The 3 economists share that we aren’t really that close to a correction and that gloomy forecasts could be wrong. They also share that they’ve been often asked whether people should fear or be happy about a significant house price pull-back. The 3 economists were quick to share that a house price pull back isn’t necessarily a bad thing and that there is a possibility that it won’t trigger the same type of economic issue as what occurred south of our border a decade ago.

Will It Be Different for Us?

While some people worry, the trio says that any consequences of a house price correction will mostly be influenced by what triggered it, to begin with.

For instance, if public policy would change and cause an increase in house and apartment construction, this will bring down market prices and rent due to increased supply but at the same time, will also be great for our GDP (gross domestic product), leaving our economy at an advantage.

Another feared trigger of a crash is a huge surge in interest rate; but then, the Bank of Canada will only be doing so because our economy is doing so well. This is far from being the same as what happened down south in which poor quality credit was their downfall.

The trio shared that the U.S. housing crisis was brought upon partly by poor mortgage origination standards, something that’s not the case in Canada.

The trio also shared the following quote about circulating stories regarding record Canadian debt: “Forget about the aggregate debt-to-income ratio for the country as a whole. What matters is who has the debt, and their specific income.” This means that a development in this regard may not even affect you and followed with, “In the U.S., a surge in dubious sub-prime mortgages caused arrears rates to climb before the recession hit job growth, and the resulting forced selling led the turn in house prices by a few quarters. There is no similar advance warning being seen in Canadian arrears rates,”

Another thing they brought up is that there are no records of many major price declines in Canada, more so in the absence of a trigger such as a recession or an increasing interest rate.

A possible “wealth-effect” might be experienced where people will experience a shrinking of their net worth, but then, only 0.4% of nominal GDP growth was contributed by the housing sector to Canada’s economy last year. It won’t have that much of an impact compared to the grand scheme of things.

The trio further added that a correction by itself wouldn’t cause a national recession and that it is usually a recession that will cause house prices to drop, not the other way around.

Still not sure what to do regarding your mortgage in view of this news? Contact us and we’ll be happy to discuss things with you so that your needs will surely be met.

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