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January 24, 2012

 

Housing major key to Canadian economic strength

 

January, as usual has banking and investment sector economists fussing over their economic prognoses for coming year. To help some the key talking heads get the word out, the Investment Industry Association of Canada held a series of luncheons, which last week landed in Montreal.

 

The investment management business consists of convincing others to entrust you with their money. So it should be no surprise that the outlook tended to be positive. “We are perennial optimists,” admits Pascal Duquette, president of Natcan Investment Management. “At the micro level things look good.”

 

Stephane Rochon, head of private client research at the Bank of Montreal, agreed that “probabilities are favourable for North American equities.” And Peter Gibson, managing director of CIBC WorldMarkets, noted that fears that China may hit economic turbulence, dragging other countries with it were overblown. 

 

Slower, but positive growth

Private sector economists seem to be coalescing around a view expressed last week by the Conference Board of Canada that despite uncertainties facing the global economy, the country’s GDP growth will likely slow slightly to the 2.1 percent range this year. The think tank cited record household indebtedness, a pullback in public sector spending, and a slowdown in business investment growth for its moderate outlook.

 

Government spending in particular, which is expected to fall by 0.6 per cent in 2012 due to the federal, provincial and municipal governments efforts to get their budget in line, will take $2 billion in stimulus out of the economy during the period.

 

That said, despite the overall optimism, forecasters note considerable downside risks to their outlooks, such as continued uncertainty over European debt, gridlock in the US Congress, whether western economies face Japans-style long term sluggishness, or will slip into inflation or deflation.

 

A strong housing sector contribution

According to the Canada Mortgage Housing Corporation, one reason that Canada continues to have such a relatively positive outlook relates to its strong residential real estate sector. The CMHC’s annual report on the state of housing in the country, which was released late last year, provided a stark reminder of the sector’s overall influence.

 

“Housing related spending accounts for more than 20 per cent of Canada’s gross domestic product, contributing about $330 billion for the Canadian economy in 2010, up 7.1 per cent from $308 billion in 2009,” notes the agency. “Housing urban core need improved between 2002 and 2008, as 87 per cent of urban Canadian households either had or could afford acceptable housing in 2008.”

 

The report also notes the growing influence of seniors (whose share of the population will rise from about 14 per cent to almost 28 per cent by 2036) on the housing market, the importance of low interest rates on driving house prices upwards and the growing popularity of condominiums.

 

Continued strength

That contribution was particularly prominent in December as housing starts rose to a seasonally adjusted annual rate of 200,200 units during the month, up from 185,600 units in November. That’s far above the 175,000 new units that economists figure that the country needs to build each year to keep up with demographic demand. The existing homes market for its part, also continued to hold up as well according to the Canadian Real Estate Association, with actual average selling prices increasing in December to $347,801, up 0.9 percent compared to December of 2011.

 

Of course the continued, though slightly waning strength from Canada’s housing sector raises interesting questions as to how long the good luck can hold out. For example according to the CMHC, 68 percent of Canadians now own their own homes, a high level from a historical standpoint (home ownership as a percentage of the population in the US peaked at just over 69 percent in 2004, but has fallen significantly since then). 

 

Furthermore as the Canadian Real Estate Association notes, comparative average selling prices for the first quarter of this year are unlikely to shine, due to the fact that prices spiked during the corresponding quarter in 2011 due to positive momentum in the upper end of the market. The question now is how those prices will hold out in the rest of the year.

 

The good news is that interest rates, one of the key drivers of real estate demand look set to remain low for some time. The Bank of Canada maintained its policy rate at 1 per cent this week, and its communiqué gave no indication that any change is coming.

 

Peter@peterdiekmeyer.com

 

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