Watch out: the Canadian housing market could become a drag on the economy in 2019

The Canadian housing market hasn’t provided much of a boost to the country’s economy in 2018 and, according to one bank, it’s a trend that will likely continue in the new year.

Housing starts have been slowing in recent months, which CIBC economist Royce Mendes believes is a sign that the market will exert a drag on the Canadian economy in 2019.

“The recent slowdown in construction activity has [had a negative impact on GDP growth],” he writes. “That said, don’t expect the pace of housing starts to accelerate much from last month’s [data release].”

According to Mendes, stricter mortgage rules and higher interest rates are providing one of “the stiffest headwinds to housing market activity in some years.”

So what does that mean for the Canadian economy? Mendes predicts that residential investment will become a drag on growth in 2019.

He’s not alone in that prediction. In his most recent note, BMO rates and macro strategist Benjamin Reitzes writes that a reprieve in housing starts in the next month should lead to a “pullback” in GDP heading into the new year.

Earlier this year, Paul Ashworth, Capital Economics’ chief North American economist, published a report with similar findings.

“We expect economic growth to slow to 1.7 percent this year and only 1.3 percent in 2019, as the housing downturn continues to weigh on consumption and residential investment,” he wrote.

And housing starts aren’t the only factor to consider — Ashworth predicted that prices will begin to deteriorate in 2019 and beyond.

“For the time being, house prices have merely stagnated rather than collapsing, but that is probably only a matter of time,” he wrote. “Even without a decline in house prices, which would weigh on consumption via the negative wealth effect, we anticipate a sizeable contraction in residential investment over the next few years.”

Sarah Niedoba