The evident slowing in Canadian home sales will take a bite out of domestic economic growth... But another dimension of the recent trend, a cooling in house prices, is less of an unambiguous negative as it’s often made out to be.
For one, a retreat today could be the preferred alternative to a harder landing from even higher prices down the road. Less understood is that cheaper home prices could bring winners as well as losers across the economy.
A home owner that counted on downsizing to fund her retirement might have to pare spending plans.
While a month ago we quoted widely cited estimates of the wealth effect on spending, it’s difficult to disentangle them from the data.
Most historic wealth declines coincided with other sources of economic weakness, including rising unemployment or high interest rates that depress consumption.
Didn’t house deflations sink the US and Ireland? Not on their own. It was the accompanying wave of defaults that devastated the financial system in both countries. Canada hasn’t lent as aggressively to its lower-income home buyers, and a correction in house prices caused by a tighter regulatory environment and earlier price overshooting, rather than by defaults, would not on its own generate that same banking system shock.
The central conflict is this belief that "Canada hasn't lent as aggressively to its lower-income home buyers."
I know I beg to differ.
This belief, that Canada hasn't lent as aggressively to its lower-income home buyers, is the crux of what the analysts like Somerville are counting on.
We shall see in the months ahead.
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