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Residential Market Commentary - week of May 15, 2017

May 15, 2017, 12:34 PM by Joelle Park

Moody’s credit rating service managed to get everyone’s attention last week when it downgraded all six of Canada’s big banks.  The move triggered fresh fears that the country has a housing bubble and it is about to burst.  But what does it amount to?  For the banks, not much.  For the rest of the economy, and in particular housing, it is being seen as a warning.

Many market watchers are calling the Moody’s downgrade a yellow flag that is drawing attention to fundamental economic concerns – most fundamentally: debt.  The Moody’s report explicitly cites the high level of consumer and private business debt in Canada.  It now totals more than 185% of GDP.  That is higher than the worrisome debt-to-household income ratio which stands at a record high of 167%.  Moody’s pointed to similar concerns back in 2013, the last time it expressed credit concerns about Canada’s banks.  The sky did not fall then and the general mood is that it will not happen this time either.

Most observers are offering soothing words about the risk of a bursting housing bubble.  Even the perpetual “Housing Bear”, David Madani, appears to have softened his apocalyptic predictions.  He still says a 30% to 40% price correction is coming.  But he now adds, it will happen over time and will likely be focused on Vancouver and Toronto, leaving the rest of the country largely unscathed.