The U.S. housing market ran on nitro heading into 2007, thanks to lax lending standards that led to the sub-prime debacle. By contrast, because Canada didn’t really have a subprime segment in 2008 and its housing market came out of the Great Recession largely unscathed.
Going into 2020, the backdrop was greatly healthier in the U.S. Meanwhile, Canadians have accumulated a substantial load of personal debt relative to their income, and household balance sheets don’t look as healthy as in 2007. However, because the bulk of the debt load is linked to real estate, we are not too concerned about the short-term resilience of households assuming economic activity resumes in a few months. Arrears on personal and mortgage loans will likely increase, but personal defaults usually lag by about a year.
Our main concern with elevated Canadian household debt has always been to cause persistently slower growth because of debt deleveraging, which has caused retail sales to stagnate since the BoC began hiking rates in the summer of 2017.
For U.S. households, the current situation is quite different. After experiencing a severe credit rationing following the GFC, household balance sheets gradually recovered. Although we expect job losses and the unemployment rate to surge in the next couple months, we expect this to be a transitory adjustment for most workers and businesses until normal life resumes.
In the current context of social distancing and uncertainty, we expect real-estate transactions to catch a severe cold, but a 1- to 3-month sharp decline in real-estate transactions is unlikely to trigger a cascading selloff and price correction. The 2002-03 SARS episode in Hong Kong and the 2001 U.S. recession are good examples where a recession caused real-estate transactions to fall sharply without impacting prices. We believe the Canadian and U.S. housing markets will experience the same kind of mild price patterns in coming weeks.