So says Senior Canada Economist, David Madani of Capital Economics, one of the leading independent economic research companies in the world.
The most important word is "independent".
Regardless of what you are told, bank and other investment company research cannot be truly independent because they have an agenda (a bias based on their relationship with / to their readers). Even the Bank of Canada tries to put a positive touch on their press releases to avoid frightening their clients (the good folks of Canada).
I spent this morning at the Capital Economics Annual Conference entitled Stumbling or soaring? Global growth in the age of populism: David Madani sees a 20-40% correction in the Canadian housing market which could trim Canadian GDP by about 1-2 percentage points (that would be a stumble, I would imagine).
The Bank of Canada would likely never issue as bold an outlook as that for fear of shaking Canadians confidence in their housing market (and confidence is important to keep consumers spending and businesses investing, even though households have been spending well above their means).
But somebody needs to suggest (and likely it will come from an economist who has no particular "ax to grind" other than putting his reputation out there) that a little reality might need be brought into the housing price conversation. This (Madani's forecast) may be a pretty heavy dose of reality.
Unfortunately, lower short-term interest rates may only encourage borrowers to build more debt. Debt that is continuing to pile up at record levels. That may be tough for the BOC to swallow, but it may also be their only option if Canadian GDP starts to shift lower and takes inflation lower with it.
Being globally diversified from an investment strategy perspective (and holding assets in $US) will be essential should this scenario unfold.
And the housing price issue is only one concern. We also have to consider the uncertainties surrounding the re-negotiation of NAFTA and the BOC worries over the possibility of greater protectionist policies from our biggest trading partner to the south. 2/3 of Canada's economy is dependent on trade.
The outlook may just be less than rosy.
Add that to a possible recession in the US in 2018 if the Trump Administration doesn't get tax reform (as planned) accomplished, according to the Capital Economics forecast.
We'll have that discussion here (and on our weekly client webinar) tomorrow.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist