House prices to moderate, no imminent Canadian recession

Growth is expected to slow, but we're unlikely to see a recession in the next 12 months, says Vanguard’s Todd Schlanger.

Ruth Saldanha 23 November, 2018 | 6:00PM
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Ruth Saldanha: The housing market in Canada is rather hot at the moment with people concerned about whether they can even afford homes at current prices. Vanguard recently released a report that examined four markets, the U.S., the U.K., Australia and Canada, and found that Canada and Australia stand out, both for the high cost of housing as well as high levels of household debt. What does this mean for Canadian homebuyers and home prices going ahead and what does it indicate for the larger Canadian economy? With me to discuss this is Todd Schlanger, Vanguard's Senior Investment Strategist. Todd, thank you so much for joining us here today.

Todd Schlanger: Thank you very much for having me.

Saldanha: For investors, there is this mental gap in their mind where they believe that housing prices and the global financial crisis are actually connected. How are you reading this situation? Because right now, there is some fear that we might be heading into a recession.

Schlanger: Sure. So, there's the broad probability that we would enter a recession and then there's the housing market. And so, we can go through, kind of, both of them. But broadly, the findings of our report is that a lot of these structural forces that have supported the increase in housing prices that we've seen are beginning to moderate. And so, with that moderation, in other words, let's say, with interest rates, lower interest rates have supported higher housing prices. Population growth in Canada, for example, and other places has been rather strong. Those metrics are also moderating. So, with those metrics moderating, we would expect then housing prices to begin to moderate as well.

In terms of the broader impact on the Canadian economy, if you look at other factors that are still strong, so we still have high wage growth, we still have a low unemployment rate that continues to decline, those are all support of an economy that continues to grow. And so, it's really a situation where we think growth will likely slow, but we're not calling for at least – and these things are hard to predict, of course. But in the next 12 months or so, we wouldn't be calling for a significant risk of a recession in Canada. But we may see a slowdown in the pace of growth.

Saldanha: One thing that the report did flag off was the high levels of Canadian household debt. How do you think this plays into the entire equation? And if there were actually to be a correction, how would that impact the debt levels?

Schlanger: Right. So, that is a risk that we see, something we monitor, is that, as I said, with interest rates rising, if you have an indebted consumer, what are their options? So, they can even save less, or they are going to have to pull back on their spending. And so, that, all else equal, we think will moderate the growth. About 60% of the Canadian economy is consumer driven. And also, these external factors; if you look at the interplay between Canada and the rest of the world, a slowing U.S. economy, as well as general slowdown in global growth, falling commodity prices, these are all negatives to Canada.

But there are some positives as well. So, we still see wages growing; we see a pretty healthy employment market. And so, we are not calling for an eminent recession or anything like that. But certainly, that's going to moderate. And there's what's called a wealth effect as well that will, kind of, begin to weigh on Canadian consumers in that if you've seen your house go up in multiples over the past few decades, you generally feel better about your spending. And so, as that begins to moderate, so may their spending and then there will likely knock-on effects for general growth in Canada.

Saldanha: Thank you so much for joining us with your perspectives, Todd.

Schlanger: Thank you for having me.

Saldanha: For, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Senior Editor at Follow her on Twitter @KarishmaRuth.


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