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Posthaste: Canada among countries most at risk of housing crash spiralling into a bigger crisis, say these economists Back to video

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Good morning,

The steep decline of housing markets, not just in Canada, but in advanced economies around the world is starting to raise red flags among economists.

Oxford Economics in a recent report warns that the global risks of housing market crashes spiralling into banking crises are now much higher than historic norms.

Using a banking sector risk tool that measures 35 macroeconomic and financial indicators, Oxford suggests that up to 16 per cent of major economies have an 18 to 20 per cent chance of suffering a housing crisis within the next three to five years, compared to a historic average of just 2 per cent.

Canada, along with Iceland, the Netherlands, Sweden and Denmark, is among the five most vulnerable with a 7 per cent probability of this leading to a banking crises within the next year and 18 to 20 per cent chance in the three to five years.

All of these markets share two things in common. A housing market that overheated during the pandemic when borrowing rates were low and now a steep decline in property prices and credit now that interest rates have climbed, in Canada’s case by as much as 4.25 percentage points.

The risks appear to be highest in advanced economies, said Oxford senior economist Evghenia Sleptsova, as households in emerging economies are less indebted and their housing markets experienced less of the boom and bust.

The housing booms in advanced economies were fuelled by a long period of ultra-low interest rates. Oxford says real housing prices rose by 36 per cent between 2013 and 2021, an increase equal to that seen in the run-up to the great financial crisis.

Nearly half of that increase was in 2020-21 during the pandemic, when prices rose at their fastest pace in 50 years.

As central banks such as the Bank of Canada swiftly raised interest rates to battle soaring inflation housing markets fell into steep downturns.

“Canada’s housing market, after years of overheating, is already in crash territory. Having risen by 47 per cent between March 2020 and March 2022, real house prices fell for nine months in a row up to December and were 19 per cent down from their peak in Q1 2022,” said the report.

“Historically such sharp falls in property prices have been a precursor to housing and wider banking crises,” it said.

In other words, the higher they fly, the harder they fall.

A decline in prices after a period of excessive growth has historically been a key trigger of housing crises, said Oxford. Its analysis finds that most crises are preceded by on average eight quarters of falling real home prices. Once prices start to fall there is the risk of a negative feedback loop in which tightening credit supply exacerbates the housing downturn.

Whether or not this develops into a banking crisis, depends on the health of the banks’ balance sheets, said Sleptsova.

Oxford includes Canada among the countries where a weak housing market may aggravate existing weaknesses in the banking sector. Others are Sweden, the Netherlands, Australia, Ireland, Germany, Russia and Hungary.

On Oxford’s banking sector balance sheet scorecard below (10 is the highest risk) Canada comes in second, with indicators such as household credit as a percentage of GDP registering the highest possible risk score.

“We worry that the number of countries in the high-risk categories (scoring above 4; 27 countries) is much higher now than the historical average. It’s also close to the levels seen in early 2007, when it was 26,” said Sleptsova.

Whether Canada’s banks are as vulnerable as Oxford suggests is certainly up for debate as mortgage and lending rules in this country are designed to prevent just such crises from happening.

But higher provisions for bad loans, a drop-off in borrowing and slower economic growth in the months ahead may pose a challenge for lenders.

Bank earnings reports out this week should give us a better idea of what they are facing.

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EV sales keep climbing despite supply challenges in the auto industry. Today’s chart, brought to us by BMO senior economist Erik Johnson, shows EV sales in the United States (battery electric and plug-in hybrid) hitting 7.8 per cent of new vehicle sales in January, up from 6.7 per cent in 2022. Gas price spikes in the past year probably fuelled demand, but so did up to $7,500 in subsidies under the Inflation Reduction Act and prices cuts by Tesla and Ford, said Johnson, pointing out that entry level Teslas at US$46,400 are now cheaper than the average new vehicle in the U.S.

In Canada the surge appears even stronger. When the final numbers are in “we could see the Canadian market cross the 8 per cent threshold in 2022,” said Johnson.

GLOBExCHANGE 2023, a global sustainability conference will take place in Toronto on Feb. 27 to March 1

Today’s Data: Canada current account balance, U.S. durable goods orders, U.S. pending home sales
Earnings: Ivanhoe Mines, Zoom Video Communications, MEG Energy

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One of the hardest situations to face in life is when your income is jeopardized. From providing your family with a place to call home, to filling your fridge and affording your lifestyle, money really does make the world go ’round. But there are steps you can take if you are laid off to keep your finances from going awry. Sandra Fry has advice to make dealing with a reduction in income a bit easier.

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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