bank of montreal housing correction Photo: Jerry Bowley/Flickr

Canada’s booming housing market has played a significant role in the country’s economic growth through the 2000s and a steep correction in prices and construction could trigger a recession.

A Bank of Montreal report released on Thursday analyzed the impact of rapidly increasing house prices and residential construction across the country beginning in 2002. It found that the housing boom added 0.56 percentage points to annual GDP growth between 2002 and 2007, accounting for one-fifth of total economic growth.

“This suggests a moderate correction could have a meaningful slowing effect,” wrote BMO senior economist Sal Guatieri.

The BMO report points to 2008 as the end date of Canada’s housing boom. Since then, outside of a few “hotbeds” like Toronto and Calgary, house prices have mostly kept pace with incomes indicating a soft landing for the national market.

“Based on the MLS home price index, prices are currently rising about on percentage point faster than personal income, well short of boom-time conditions,” wrote Guatieri.

While Canada’s housing boom is long over in BMO’s eyes, there is still a risk of a major correction plunging the economy into a recession.

Guatieri identify two scenarios: one in which a 10 per cent correction in prices and construction occurs and one in which a sharp 20 per cent correction impacts the economy. According to BMO’s estimates, a 10 per cent correction would slow economic growth by one percentage while a 20 per cent correction would likely cause a recession.

Although he stops short of explicitly stating whether either scenario is likely to occur, Guatieri appears to suggest that Canadians are on the right track to avoiding a housing catastrophe.

“[T]he recent slowing in household credit growth in line with personal income is welcome. Should home prices rise more slowly than income for a period of time, as we anticipate the economy’s vulnerability to a housing correction would decline further,” he wrote in the report’s conclusion.

Scotiabank released a similarly downbeat report on Wednesday but economist Adrienne Warren took a different position, writing that resale activity will fall this year and in 2015 due to strained affordability caused by rising mortgage rates, high housing prices and stricter mortgage regulations.

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