Could Canada’s high household debt and rising housing prices lead the country into a recession? Richard Koo, chief economist at Japan’s Nomura Research Institute, warns it could be possible.
The expert on balance sheet recessions, which happen after debt-financed bubble bursts, was interviewed by macleans.ca. He explains why.
“Since 1997, Canadian households have been in deficit all these years. And that means a huge buildup of debt over this period. Now as long as house prices are rising faster than your debt levels, balance sheets will still look fine for individual households.
“But if something should happen to house prices, if they should start falling, then suddenly some of the people who bought these houses realize their balance sheets are underwater. And if they all start paying down debt or increasing savings, Canada could fall into a balance sheet recession.”