Thursday, December 22, 2011

Take one part over-indebted consumer. Add two parts bubbling RE and... have a recipe for disaster...

From the Globe and Mail;

IMF casts nervous eye on Canadian housing market

Posted on Thursday, December 22, 2011 12:55PM EST

It is worth looking at the whole article but here is a pertinent excerpt:

With household debt at about 150 per cent of disposable income, the domestic spending boom that helped Canada weather the financial crisis already is at its limits.

A collapse in housing prices would be a serious blow to the economy because of the link between consumer demand and household wealth.

The IMF, in its annual report on Canada’s economy, estimates that a 10 per cent decline in housing prices could result in a 1.1 per cent drop in personal consumption, excluding durable goods, which would correspond to loss 0.5 per cent loss in gross domestic product.

Now you know why Carney is worried, but he wont do anything about it except jaw-bone away.


  1. BTW I regard that 0.5% GDP number as wildly optimistic. It ignore the huge knock effect to new construction, Realtor and mortgage broker incomes, bank hiring etc and looks primarily at consumer consumption alone.

    0.5% would be the best case scenario IMVHO.

  2. It still baffles me how dropping housing prices affects families spending. Assuming the family doesnt lose any work, it's totally psychilogical. They think "crap, our house isnt going up in value anymore, we need to save some cash" when really unless they were planning on selling it shouldnt affect their day to day life one bit.

    I know there is the whole trickle down thing with building and sales and all that, but still...

    On the other hand when interest rates rise, yikes things are going to get ugly since more of the household income has to go towards that mortgage.

  3. The mistake is not saving cash when house prices are going up. Some people even spend the gains directly. Leverage amplifies the effect.

  4. It is a psychological effect. When their house goes up $100K a year tax free, that makes their net worth go up and they buy a BMW. When the price drops $100K, their net worth drops, they feel poorer and will defer the purchase.

  5. A Host of Factors Are Set to Undermine China's Economic Growth

    Carney's worried? 10,000 HAM fugitives are already in safe haven. China's lost is our gain.

  6. A drop in price does affect household consumption as some use their house value to obtain credit. Bank won't lend you any money if your mortgage is at par or more than the worth of your house. So forget the 52 inch tv that you want to purchase on boxing day as the bank won't even consider lending to a homeowner who is leveraged to the max in a declining market.

  7. I agree about the psychological effect, but on the other hand, if politicians and bankers kept convincing us that the grow had no end. We believed and spent on things we didn´t necessarily need. Household debt in Canada is so high and we cannot expect lowering it any time soon. People can´t sell their houses or do anything, because the values are going down.