Further Signs of Trouble -- Housing

Today's Financial Post carries a story on Canada's troubled housing industry. Once again, while we have avoided the catastrophic meltdown that is occurring in parts of the U.S., nevertheless, prices have already fallen about 13% and are slated to drop another 12% this year. These drops are not spread evenly across markets, and so some will experience this pain much more acutely than others.

The obvious pain is that home ownership and retirement investments represent pretty much all of household wealth in |Canada. So when housing prices drop by a quarter and investments by a third, almost all middle class households take a devastating hit to their wealth. And this, of course, translates into spending, which further depresses output, and so on.

The less obvious pain is that at some point this year a large proportion of relatively new home owners will be placed in a position of negative equity where default and/or foreclosure become a real possibility. And this, of course, would place a glut of homes on the market and further depress prices.