Canadian Companies Might be Affected by a Real Estate Correction
It is no longer a hidden fact that the debt ratio of Canadian households is on the increase with banks and other financial institutions always warning on the risk people will face if any change is to be made on interest rates. Likewise, policymakers have been trying to figure out ways to help households to cut down on their debt rations.
However just as the Canadian debt ratio is on the increase, another private-entity is also on the increase to the unsuspecting attention of people.
In the recent years, the Canadian private sector has been on the increase with the country adding close to $1 trillion with the increase mostly being fueled by Canadian corporations and not households. According to data from the Canadian Center for Policy Alternatives (CCPA), private sector debt has risen to $671 billion since last year.
David Macdonald CCPA economists noted that corporate debts have presently taken the lead in the private-debt ratio and this is one of the fastest ways to determine the risks of the economy.
The economic crisis in such a situation will imply that household and corporate companies will face higher debts which are not commensurate to the assets they are buying.
Macdonald reported that the best way to avoid this is to cut down on debt and to incorporate this in the daily lives of Canadians which will mean they will have to cut down on their standards of living and this will in turn affect the economy as it will reduce the economic growth rate.
For corporate companies, they will have to cut them on their employment levels, get rid of developments and cancel the purchase of new equipment which might also possibly affect the GDP.
Joining together possible risks faced by Canadian households and companies will be disastrous for the economy.
Theoretically, there is no harm in companies incurring a certain amount of debt but the important aspect people should focus on is on what companies are spending the debt on.
Macdonald’s study suggests that corporate companies have been using their debt to get involved in the housing market like every other Canadians.
In the last five years, private Canadian companies have seen an increase in the value of their real estate shares by $269 billion and that of land by $226 billion. Although part of the increase is as a result of rising home prices, the other half is mainly as a result of an increase activity of the companies in the housing market.
There would have been a different story if Canadian companies had been using their debts on other things such as purchasing machinery and equipment which increases on their productivity and also promotes lasting growth.
Far from this, investments in the real estate sector have been on the increase by $60 billion.