Canada one of four advanced economies vulnerable to housing

Moody’s Investors Service has released a report that identifies Canada as one of four triple-A-rated countries that are exposed to a potential housing market correction.

New Zealand, Sweden and Australia are the other three countries that have seen the largest increases in home prices and household debt among advanced economies over the last three years, says Moody’s.

Read: Will solution be found before hot housing tested?

For Canada and New Zealand, specifically, Moody’s says a housing downturn could involve material spillovers to the broader economy. Residential construction accounts for approximately 7.5% of GDP in both countries.

However, Moody’s says that unless reversals in house prices are accompanied by other long-lasting negative shocks, they would not fundamentally undermine the sovereigns’ credit profiles.

On the upside, the debt-rating agency says all four named countries have strong banking systems with high capitalization levels, conservative business models and strong liquidity. The housing sector has mainly been identified as a risk for the Canadian economy given housing prices have marched higher, fuelled by low interest rates.

Read: Household spending continues to drive growth

Silver lining

In its release, Moody’s suggests the situation in Canada–and in the other three countries–shouldn’t be compared to the situations in Spain, Ireland and the U.S. in the period leading up to their mid-2000 housing peaks.

Viewed in that context, the pace of the increase in household debt relative to disposable income has been noticeably slower in Canada, as well as in New Zealand, Sweden and Australia. However, the starting levels of household debt relative to income in Canada and the other countries is higher than the starting levels were for the U.S. and Spain.

Read: The solution to Canada’s housing crisis

Moody’s notes Australia faces the greatest risk of households needing to deleverage abruptly in an economic or housing downturn, whereas Canada and New Zealand have large, liquid financial assets that would provide some financial cushion to economic shock in the same situation.

Moody’s adds New Zealand and Sweden are particularly vulnerable to potential reversals in population booms; “in the event of a negative economic shock, the recent acceleration in immigration could reverse, acting as a further drag on housing demand and economic activity,” it says in its release.

For its part, Canada has grown reliant on residential construction, as has New Zealand.

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