Canada's Housing Bubble

Sep 27, 2010 Michael Babad Globe and Mail

Rosenberg sees mortgage defaults

Home sales

Economist David Rosenberg expects a "rising number" of Canadian homeowners won't be able to meet their mortgage payments as interest rates rise and real estate values sink. Canada's recovery from the recession has been fuelled by the boom in the housing sector, which is now slowing, but "that goose is no longer laying any golden eggs," the chief economist of Gluskin Sheff + Associates said today in a report, noting that housing starts, building permits and home prices have slipped.

"Housing cycles, both up and down, tend to go further than anyone thinks, as we saw occur in the United States, which is still suffering from a post-bubble hangover three years after the initial turndown," he said. "Even if this correction in housing is a fraction as harsh as was the case south of the border, the economy, and the financial markets, are likely in for a rude awakening in coming quarters as lower home prices cut into household wealth, confidence and spending plans."

While there are no published numbers or forecasts on delinquencies, Mr. Rosenberg added in an e-mail that a "rising number is inevitable."

The main event

Economists expect Statistics Canada to report Thursday that the economy shrank in July, meaning a lame start to the third quarter as the recovery ebbs. They believe gross domestic product contracted by about 0.1 per cent in the month, hit by the slowdown in the United States.

GDP at basic prices

"Canada seems to have started the third quarter on the wrong foot," said CIBC World Markets economist Krishen Rangasamy. "The slowdown in global trade resulted in a ramp down in factory activity, as suggested by the decrease in manufacturing shipments in July. Construction was likely restrained by the recent weakening trend in housing starts although there may be some offset from stimulus-related infrastructure projects.

"Looking at the services sector, the picture isn’t any rosier. The all-important retail industry struggled in July, with volumes falling for the first time in three months."