Few economists doubt that a correction is looming for the Canadian housing market. The only real arguments surround the timing and how bad it will be.
In an attempt to predict when the housing price decline will occur, we can assume that stress on the household balance sheet will first become apparent in broad retail spending. The last payment a Canadian homeowner is going to skip will be the mortgage. Reduced spending on luxury items, new cars, dining out and Christmas presents is likely to come first.
The chart below compares the year-over-year change in Canadian retail spending with the year-over-year growth rate in domestic housing prices. What we're looking for is a disconnect – rising housing prices along with declining retail spending. This would indicate that the notoriously indebted Canadian consumer is feeling the stress of monthly debt payments.
Disturbingly, the data since May of this year could be showing just such a divergence. The growth rate of consumer spending has declined from 3.3 per cent in May to 2.7 per cent in September (the latest data available). At the same time, housing price appreciation has accelerated, from 2.0 per cent to 2.7 per cent.
A close look at non-mortgage consumer credit growth also indicates increasing stress on household balance sheets. Total Canadian mortgage debt appears to be rising at the expense of other forms of borrowing.
Growth in mortgage debt has slowed a bit, but the 5 per cent growth rate remains well above the economy as a whole. Consumer credit growth outside of mortgages, however, has slowed to a crawl. In July, 2010, non-mortgage consumer credit growth was 9.3 per cent. In August, 2013, the last data point available, it was 1.8 per cent.