Housing correction would damage Canada's economy, says BMO report

OTTAWA - The Bank of Montreal says a sudden and sharp correction in the housing market could have a devastating impact on the Canadian economy overall, enough to trigger another recession.

The analysis by senior economist Sal Guatieri finds that even a 10 per cent correction — what many would call a soft landing — could sap as much as one percentage point from gross domestic product growth.

Guatieri says a 20 per cent or more plunge in prices and homebuilding could send the economy into recessionary territory.

The conclusion stems from an analysis of the contribution of the brisk housing market on the economy between 2002 and 2007, when prices rose five percentage points faster than incomes.

According to the BMO, the rapid escalation in home values and construction activity added 0.56 percentage points to annual growth during those six years.

But now, with home values at or near record levels, a sharp correction would have the opposite effect.

The BMO report does not suggest the housing market will crash, in fact it argues against it, but warns homeowners to manage their debts prudently.