A sudden and sharp correction in the housing market could have a devastating impact on the Canadian economy overall, enough to trigger another recession, says a new BMO report.
The analysis, led by senior economist Sal Guatieri finds that even a 10% correction — what many would call a soft landing — could sap as much as one percentage point from gross domestic product growth, or basically halve the current growth rate.
The findings stems from an analysis on the contribution of the brisk housing market on the Canadian economy between 2002 and 2007, when prices rose five percentage points faster than incomes.
According to the BMO, the rapid escalation in home prices and construction added 0.56 percentage points to annual growth during those six years, and “lifted household wealth, confidence and borrowing ability.”
But now, with home values at or near record levels throughout the country and many economists predicting some kind of correction, the opposite scenario would unfold from a price and accompanying construction drop.
“This suggests a moderate correction could have a meaningful slowing effect,” Guatieri says in a report issued Friday.