Citi global strategist Yasmin Younes has developed the Global Macro Strategy Housing Vulnerability scorecard to assess developed world economies’ sensitivity to rising interest rates. Canada ranks first.
Five criteria were used in the scorecard, a weighted average of private sector credit growth and nominal home price appreciation since 2020, housing price to income, year-over-year change in mortgage rate and percentage of mortgages with terms less than five years. Bloomberg, Macrobond and internal Citi data sources were used.
In terms of credit growth, Canadians’ 18.3 per cent increase easily outdistanced Australia’s second place 14.7 per cent. (Australia was also second in the overall ranking.)
The domestic house price rise of 16.4 per cent was below Australia’s 22.1 per cent, U.K.’s 26.4 per cent and New Zealand’s 26.9 per cent.
But Canada’s 136.3 per cent housing price to income ratio was the highest in the developed world, challenged only by New Zealand’s 131.9 per cent and the U.S.’s 133.0 per cent. The 1.9 percentage point increase in shorter-term mortgage rates was largely in line with the G10 average.
The scorecard was initially designed to allow the strategy team to anticipate central bank policy. Countries like Canada with high rate sensitivity, for instance, should have seen central banks stop raising rates sooner to avoid housing price calamity and significant financial system stress.
Instead, the Bank of Canada has been among the more aggressive central banks in tightening monetary policy, in part because the housing market has apparently bottomed and seems set to move higher and increase inflationary pressure.
There is no consensus as to what the Bank of Canada will do in July. Consider that just yesterday, a BMO strategist published a report predicting further rate hikes while a BofA Securities economist forecasted a pause.
Citi’s housing vulnerability test is a reminder of the heightened economic risk currently embedded in our economy and the extreme downward pressure on financial stocks.
The central bank will have to thread the figurative needle, raising rates enough to quell inflation but not too much and cause a disorderly unwinding of housing-based consumer debt.
-- Scott Barlow, Globe and Mail market strategist
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