There Could Be Corporation Meltdown if a Real Estate Crash Occurs
Canada just can’t seem to let go of the debt trend which is causing financial turmoil to most of us. Everyday new headlines are popping warning about overstretched Canadian wallets.
But that’s just a piece of the cake. According to new report by the Canadian Center for Policy Alternatives (CCPA), Canada has racked up an additional $1 trillion to its non-government debt, and most of the increase came from Canadian companies, not households. Corporate debt increased $671 billion (in 2016 dollars) since then.
CCPA economist David MacDonald, author of the report noted that Canada now leads advanced economies in private-debt accumulation, which is one of the best predictor of economic crises.
In an interview with the Global news, “The risk for both Canadians and household companies is that the credit they are both using will start to decline, leaving them a debt load that’s bigger than the assets they purchased”, says MacDonald. “The priority then becomes to reduce your debt”.
But for the typical Canadian, that could mean cutting back on expenses “which would hurt growth by lowering aggregate consumer spending”.
Corporations could decide to pull back on hiring or cut jobs, cancel planned expansion, or give up on new spending on machinery and equipment, which would also hit GDP, he noted.
It’s normal for companies to carry some debts, MacDonald told the Global News. But knowing what you’re using your debt for is also very important. But in Canada’s case, corporations have been using much of their debt to purchase real estate, he further noted.
“Over the past five years, the value of commercial real estate held by Canadian companies went up by $269 billion and that of land by $226 billion.”
Whilst that might seem like a huge increment in real estate prices, company balance sheets suggest corporations have been loading up on commercial property.
“Mergers and acquisitions, like rapidly increasing house prices, are using debt as a means of assets speculation, rather than for long-term productivity growth,” notes the report.
According to MacDonald, things would have been much different if corporations had used up their debt to invest in things like new machinery and equipment, which generally drives up productivity and, in aggregate, creates sustainable long-term growth.
