Canada faces risk from potential housing correction, Moody’s report says

House graphic
House graphic

Moody’s Investors Service has released a report that identifies Canada as one of four Aaa-rated countries that are exposed to a potential housing market correction.

In addition to Canada, the report lists New Zealand, Sweden and Australia as countries that have seen the largest increases in home prices and household debt among advanced economies over the last three years.

Residential construction accounted for 7.6 per cent of GDP in Canada and 7.5 per cent in New Zealand, Moody’s noted.

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“In Canada and New Zealand, a housing downturn would involve sizable spillovers to the broader economy through the supply chain and impacts on employment and consumption,” the agency said in its report dated Monday.

However, Moody’s said that unless reversals in house prices are accompanied by other long-lasting negative shocks, they would not fundamentally undermine the sovereigns’ credit profiles.

The debt rating agency said all four countries have strong banking systems with high capitalization levels, conservative business models and strong liquidity.

“Banking systems in the four countries are among the strongest that we rate,” Moody’s said.

The housing sector has been identified as a risk for the Canadian economy as housing prices have marched higher and household debt has soared.

Low interest rates have made borrowing cheap for Canadians, but some have expressed concerns about what could happen when rates rise or if there is a shock to the economy that results in a large number of job losses.

Last week, Royal Bank CEO Dave McKay raised concerns about the repercussions that high house prices in Toronto and Vancouver could have on the country’s economic growth. He called on all three levels of government to work together in devising an intervention.

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