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“For downside risks to be realized, however, any potential housing-related weakness must spill over into the labour market,” analyst David Doyle wrote in a note to clients Thursday. “While rising rates put pressure on consumer finances, job losses trigger defaults and a tightening in credit conditions that can lead to more severe economic outcomes.”

Roughly half of all economic weakness during recessions since the Second World War is tied to fluctuations in residential investment, he calculates, and the extent to which Canadian output and employment are currently reliant on this is “unprecedented.”

Macquaire’s best-case scenario is that the fallout, starting in 2020, will be as bad for Canada as the 2008-09 financial crisis. Worst case: The unemployment rate will spike by more than any recession since the Great Depression.

In terms of employment concentration in housing-linked industries, this dependency is particularly pronounced in Ontario and British Columbia but still prevalent across the rest of the country. Job growth in these sectors has come amid shrinking payrolls in other cyclical areas like manufacturing, making “housing an all the more important driver of the Canadian business cycle,” Doyle said.

The strength in housing starts and consumer spending, however, suggests only a “modest” risk of a housing-led recession in the nearer term, according to the analyst.

Macquarie sees the U.S. dollar rising to $1.36 relative to its Canadian counterpart by the end of 2019. Housing-related risks inform the bank’s stance to overweight outward-facing segments of the S&P/TSX Composite (like energy, technology and industrials) while underweighting areas with immense domestic ties (banks, consumer and telecom).

Bloomberg.com