Roof is about to cave in on the Canadian economy – by David Rosenberg (Financial Post – August 9, 2022)

Shaky housing market and high household debt point to a more pronounced recession than many are calling for

With the Bank of Canada’s aggressive rate-hiking cycle well underway despite a shaky residential real estate sector and high levels of household debt, it’s no secret that we believe the Canadian economy is headed for a more pronounced recession than many are calling for. But just how vulnerable is the overall economy to a collapse in the housing market?

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, since a pullback after years of excess typically leads to such measures going through the mean to the downside.

In addition, a normalization of employment in the construction industry could lead to up to a 1.4-percentage-point jump in the unemployment rate to 6.3 per cent from the current level of 4.9 per cent.

While these figures are concerning, to say the least, the carnage could be much more severe than even we anticipate, given that household balance sheets remain in poor shape and that the economy’s exposure to the real estate market is near all-time highs, with real estate as a share of disposable income at a record 563 per cent and the share of new mortgages with variable rates at 55 per cent.

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