The United Kingdom's Treasury has issued a stark assessment of Canada's current economic fragility, pointing to an over-reliance on housing bubbles as a fundamental structural weakness. In a report released this morning, the Treasury described Canada's situation as a 'lesson in over-reliance on housing bubbles', cautioning that similar vulnerabilities exist in other advanced economies, including the UK itself.
Canada's housing market has long been a pillar of its economic growth, with rising property values fuelling consumer spending and construction. However, the Treasury's analysis highlights a dangerous feedback loop: cheap credit inflated demand, driving prices to unsustainable levels, and now interest rate hikes are exposing the cracks. The Bank of Canada raised rates aggressively over the past year, mirroring global trends, and the result has been a sharp slowdown in the housing sector, with sales dropping and prices beginning to decline.
'The Canadian economy is a cautionary tale of what happens when housing becomes a speculative asset rather than a place to live,' said Dr. Marcus Sterling, chief economist at the Treasury. 'The fragility of their financial system is now evident, and the spillover effects could be significant for global markets.'
Data from Statistics Canada shows that household debt-to-income ratios remain at record highs, above 180%, making the economy acutely sensitive to interest rate changes. The Treasury notes that this debt is heavily concentrated in mortgages, leaving families exposed to both higher payments and falling home values. Meanwhile, immigration-driven population growth has kept demand elevated, but new supply has lagged, creating a structural imbalance that the Treasury says 'cannot be corrected by monetary policy alone'.
The report draws parallels to the 2008 global financial crisis, albeit with differences: Canadian banks are better capitalised, and mortgage underwriting standards, while looser than before, are not as lax as those in the US pre-2008. However, the Treasury warns that the sheer scale of the Canadian housing market relative to the economy its housing sector accounts for over 13% of GDP means a correction could have outsized consequences.
Prime Minister Justin Trudeau's government has responded with policies aimed at cooling the market, including a ban on foreign homebuyers and a tax on vacant homes. But these measures are unlikely to address the core issue of affordability in a market where prices have doubled over the past decade. The Treasury report suggests that a painful adjustment is inevitable, with house prices potentially falling by 20-30% from peak levels before stabilisation.
For the UK, the Treasury says the lesson is clear: avoid an over-dependence on housing wealth. The UK's own housing market, while less extreme, shows similar symptoms, with prices elevated relative to incomes and high household debt. The report calls for a rebalancing of economies towards productivity and investment, rather than asset price inflation.
Climate implications: The housing bubble also diverts capital away from sustainable infrastructure and green retrofits. In a world facing climate breakdown, such misallocation is a luxury we cannot afford. Every dollar spent on inflating housing prices is a dollar not spent on insulating homes or building climate-resilient communities.
Reaction from Canada: Markets have been rattled, with the Toronto Stock Exchange falling 2% today. The Canadian dollar weakened against the greenback. Finance Minister Chrystia Freeland issued a statement acknowledging 'challenges' but insisting the economy is resilient. However, the Treasury's warning has sparked debate about whether Canada can avoid a hard landing.
As the Bank of Canada meets next week, all eyes will be on whether it pauses its rate hiking cycle or continues to tackle inflation at the expense of growth. The Treasury report suggests that monetary policy alone cannot solve a bubble that has been decades in the making. Structural reform is needed, but politically, it is a hard sell.
For now, Canada serves as a laboratory for what happens when housing becomes too big to fail. The UK Treasury is watching closely, hoping not to repeat the experiment.
