Photo: James Bombales

By now it’s common knowledge that most economists are predicting a slower year for the Canadian housing market in 2018. But will things cool down more dramatically than they had initially thought? One Quebec-based credit union thinks so.

“In Canada, the continuing gradual rise in interest rates is intensifying concerns over high household debt,” writes the Desjardins economics team, in a recent report. “This could trigger a sharper housing correction than forecast, and a considerable slowdown in spending.”

Last week, the Bank of Canada hiked the overnight rate to 1.25 per cent, causing the credit union to note that Canadians have some of the highest levels of household debt in the world.

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The interest rate hike — when combined with a new mortgage stress test for uninsured borrowers that came into effect on January 1 — could severely limit the purchasing power of many would-be home buyers, cooling the market dramatically.

But while most economists agree that these factors will dampen the market in the first few months of 2018, many believe it will eventually adjust to the changes. What’s more, some argue that Canadians debt levels aren’t as worrying as they might first appear.

“Household debt in Canada is seen by some as unsustainably high and a source of vulnerability for the financial system,” write National Bank chief economist Stéfane Marion and senior economist Matthieu Arseneau in a recent report. “But the international evidence suggests that Canadian household leverage and home prices are not abnormal.”

According to Marion and Arseneau, Canada’s level of household debt is matched by its strong economic fundamentals.

“Our analysis suggests that the ratio of household debt to disposable income in Canada is relatively conservative,” they write. “This probably reflects the cumulative effect of all actions taken to mitigate the vulnerability of the financial system to household indebtedness.”

As for how sharp 2018’s housing correction will be, Scotiabank’s economics team has a guess — not very.

“Housing demand fundamentals, including low unemployment, strengthening wage gains, aging millennials and increased immigration remain supportive [of market growth],” they write.

Going into 2018, most local markets remain balanced, and are unlikely to drop into a deep buyers market for long.

“The national average price growth is forecast to remain positive, albeit more subdued in the low single digits, with the majority of local market in balanced territory,” writes the team.

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