Contributed by Stephen Thompson, CFP® Housing continues to be a much talked about sector of the Canadian economy. In stark contrast to the US housing sector which crashed, Canada experienced only a short dip followed by a resumption of housing growth over the past six years or so. The performance of Canada’s housing market is followed closely by many analysts some of whom raise concerns about its durability. We thought a few comments might be helpful.
The Canadian housing sector has grown dramatically over the past decade in terms of units as well as prices. According to the International Monetary Fund (IMF), Canada’s residential investment in housing stood at about 7% of GDP in 2012 compared to about 2.5% in the US. (In housing’s boom days US residential investment reached about 6.2% of GDP.) Growth in Canadian housing prices began to moderate in 2012 but exhibited some regional variation. The pace of new housing unit construction remains relatively strong and growth generally continues to outstrip household formation. An IMF analysis shows the country’s housing stock more than doubled since the 1970s with the largest gains in the provinces of Alberta and British Columbia
Against this housing experience, Canada’s household debt measured as a share of disposable income has climbed over the past decade to about 160 percent of disposable income. (The ratio is roughly 120% in the US.) Mortgages and home equity credit lines explain this growth to a large extent, the IMF finds, but consumer credit also grew. Over the past few years, Canadian authorities have taken some positive steps to constrain this growth in household debt but the levels remain high.
The IMF observes that the combination of current high housing prices, strong construction activity, and domestic debt makes an adjustment likely to take place in the housing sector at some point in coming years. Other economic factors influencing Canada’s macroeconomic environment will also affect housing’s adjustment process. These include interest rate movements and exchange rates. In recent years, Canada’s real exchange rate has strengthened dramatically, but in recent months, the Canadian dollar has weakened as markets are now focusing on commodity price weakness, housing sector concerns, and domestic debt levels. The interplay of domestic and external factors will affect the housing sector’s adjustment path and determine to what an extent it is a moderate one.