Bankrate.ca

 

October 2011

 

Title: A soft landing for Canadian residential real estate?

Sub-title: Housing sector data this month have been mixed. That might not be a bad thing.

 

Getting a handle on economic developments during recent months hasn’t been easy. Stock market fluctuations, the never-ending European sovereign debt crisis and fiscal gridlock in Washington are all contributing to growing uneasiness. However within all of this mess there is an island of relative stability says one expert.

 

“Continuing uncertainty over the global economic outlook, and highly volatile financial markets have yet to contribute to any notable slowing in Canada’s housing market,” notes Adrienne Warren, an economist with Scotiabank Group. “On a trend basis, sales are tracking in line with the average of the past decade.”

 

Unlike in many other countries, Canadian residential real estate prices have done well during the past ten year, and have escaped the turmoil that has hit many other global markets ranging from the United States, the United Kingdom, to Ireland and Spain. The question is whether Canada can avoid a similar fate.

 

A possible soft landing?

Any asset class that experiences strong gains over a long period of time, eventually either comes back down to earth, or it enters what economists call a “soft landing,” in which price gains tail off dramatically, but don’t actually tank. That’s true of rises in Japanese real estate prices during the 1980s, US stocks during the 1990s, or Dutch Tulips during the 1640s … and almost certainly of Canadian residential real estate increases during the past decade.

 

This month, several signs emerged that we might well take the latter course. According to the Canadian Real Estate Association, home sales made via its Multiple Listing Service, which increased by 2.7 percent in September, were roughly in line with long-term trends. Furthermore the average prices of homes sold during September, which at $352,600 was 6.5 percent higher than levels reached in during the corresponding month in 2010, was the smallest percentage jump so far this year.

 

The same moderating trend can be seen in housing starts. According to the Canada Mortgage Housing Corporation, new starts increased to 205,000 units last month. However the organization expects starts to move in line with near-term demographic fundamentals by yearend.

 

“The housing market remains balanced and is performing well, due in particular to current low interest rates and unemployment (7.1 percent in September), which counterbalance the negative impact stemming from the recent tightening in mortgage lending rates, and (a) drop in household confidence,” notes a recent report written by Laurentian Bank Securities economists for its clients.

 

Canadian economic fundamentals

Part of the strength is due to the fact that it increasingly looks like we will avoid slipping into recession this year. “Recently, an accumulation of favourable data, related to the domestic demand outlook, indicate that the Canadian economy will continue down the growth path,” says the report. Gross domestic product, Purchasing Manager Index and job creation data are all cited as setting a positive tone for the third quarter. This, plus household formation, which Statistics Canada estimates will continue to run at about 175,000 units, should continue to sustain demand.

 

That said, there are risks to on the horizon. Continued weakness in the US, means that Canada’s exports are unlikely to surge anytime soon. The sluggishness has forced the US Federal Reserve to keep interest rates near zero to stimulate activity, which has enabled the Bank of Canada to do likewise. But rates are bound to rise at some point, and no one is really sure what will happen if they do. Finally, the Canadian government, which loosened its spending to help the country bound back from the recent financial crisis, will tighten stimulus during the coming two years.

 

Pessimists, particularly those who buy for speculative purposes, argue that any slowdown in real estate prices is a bad thing. However in today’s globalized economy Canadians are well aware of the debacles faced by those in other markets, who bought housing with the expectation of turning a quick profit. As a result, most housing sector stakeholders would be more than happy if a soft landing did in fact materialize here.

 

It would be sure a lot better than the most likely alternative outcome.

 

 

Peter@peterdiekmeyer.com

 

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