Existing home sales data reported by the Canadian Real Estate Association Monday were wretched – the 6.7-per-cent month-over-month decline was the weakest result in seven years – and we're going to need some indicators to judge just how deep this economic rabbit hole goes. Retail sales growth likely holds the key.
The importance of retail sales lies in the fact that, for most Canadians, a portion of their spending is discretionary but mortgage payments are not.
So if the burdens of household mortgage payments are going to result in slower overall economic growth, the negative effects should first be visible in consumption data.
There is also the issue of the wealth effect. Financial insecurity in real estate will make Canadians feel less wealthy and confident, and they'll be more inclined to save rather than consume.
In the initial stages of a downturn, mortgage payments will be made but consumers will tighten their belts and spend less elsewhere. This problem will intensify as mortgage rates and monthly payments rise.
The accompanying chart shows the year-over-year increase in both domestic retail spending and housing prices for the past five years.
I'm not looking for correlation here – there's no reason for retail sales and housing prices to rise at the same rate, even if their growth rates were similar for most of 2013 and 2014.
The decline in the retail sales growth rate beginning in September, 2014 (almost certainly caused by the swoon in oil prices) did, however, coincide with a slowdown in housing price appreciation.
Canadian retail sales growth flattened out but importantly, remain at healthy levels near 7 per cent, well above the five-year average of 4.1 per cent.
Statistics Canada will report month-over-month retail sales (not year-over-year, as depicted in the chart) for May on Friday. Economists expect a gain of 0.3 per cent.
As it stands, things are fine. Monday's data highlight a slowdown in residential real estate activity, but housing prices have yet to see significant declines even in the hot markets of Vancouver and Toronto. National consumption, helped by a partial recovery in the energy sectors, remains solid.
That said, investors should take any weakness in domestic retail sales more seriously than in times past. There is good reason to believe that, with mortgage rates climbing, we've reached the ninth inning for the housing bubble, and consumer activity will help measure the economic fallout.