Title: A return to normal

Sub-title: Experts believe that housing starts will trend to more stable levels and house prices will rise gradually.


New home construction is expected to move more in line with demographic demand during 2010 and 2011, following a dip late last year according to a Canada Mortgage Housing Corporation forecast released earlier this month. A week later, the Canadian Real Estate Association updated its own activity forecasts and predicted that average house prices will to rise by 1.3 percent during the next two years to $347,900 by the end of 2012.


The news came on the heels of a series of data that suggest Canada’s economy is gaining steam. “We are now more certain of a sustained expansion in North America through this year and next,” notes Sherry Cooper, chief economist at BMO Financial Group, citing firmer industrial production numbers, improved credit availability in the US and stronger employment here in Canada.


Canada’s century?

Much of Canada’s recent economic strength stems from increased demand for our products in the United States, our largest trading partner. Continued loose monetary policy down south, coupled with president Barak Obama’s recent deal with Congress to extend Bush-era tax cuts have lit a fire under the US economy, which should outperform Canada’s this year.


That said, Avery Shenfeld, an economist at CIBC World Markets, notes that Canada is entering the new millennium with a particularly strong hand. “Real gross national income, a measure of how much we can buy with what we earn producing our output, has risen faster in Canada than stateside since the turn of the century,” said Shenfeld.


“Wilfred Laurier famously forecast that while America dominated the 19th Century, the 20th would belong to Canada. As long term forecasts are wont to do, that call did not quite work out,” said Shenfeld in a recent note to clients, which highlighted the impressive impact that rising prices for resources such as oil and copper that Canada is rich in, are having on the country’s economy.


“The 20th century wasn’t Canada’s,” Shenfeld concludes. “But we started the current one with a strong hand and have emerged from a global recession in better shape. Laurier may simply have been 100 years too early.”


Some risks ahead

Not so fast says Carlos Leitao, chief economist and strategist at Laurentian Bank Securities, who while bullish on the outlook for 2011 in both Canada and the US, notes that there are serious risks underlying existing forecasts. One of these is food price inflation, which is beginning to bite hard into the pocketbooks of emerging market households.


Another big “Black Swan” risk is the effect that current uncertainty in the Middle East is having on oil prices, and thus the economy. While the value of oil consumption comprises a far smaller share of Canada’s GDP than it did during the 1973 and 1990 oil crisis, spiking prices were a major contributor to the 2008 recession, and there is a fear that this could happen again. As of this writing oil prices had spiked to near and sometimes over the $100 per barrel level, due to worrying reports coming out of Libya, the world’s second largest producer. One thing to watch for is whether similar troubles spread to Algeria and possibly even Saudi Arabia.


However “the most important risk to our North American forecast comes from an aggressive re-pricing of the public debt of developed market economies,” says Leitao. “The federal debt held by the public will increase from 62% (as a share of GDP) today to 75% by the end of the decade.”


The worry is that all of that government borrowing will suck up much of the available cash and drive up interest rates. This in turn would inevitably crimp consumer borrowing, notably mortgage loans, and could well send both America’s and likely Canada’s economy right back into slowdown mode.


That said, for now the outlook here looks fine. However even if Canada’s economy has turned the corner and is heading for a bright future, the housing sector stakeholders sill have to learn with a pace of construction activity that is far below that of pre-recession levels.




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