August 15th, 2007

 

Blurb: Our record low unemployment rate is one of the main drivers of strong Canadian housing demand

 

Housing demand and the job boom

 

By Peter Diekmeyer • Bankrate.com

 

Most Canadians are acutely aware of the housing boom that is sweeping the country. Experts cite many reasons for the double-digit price increases that have become the norm in the sector: relatively low mortgage rates, the steady flow of new immigrants into Canada and the fallout following the pent up demand that built up in the years before the upswing.

 

But one the most important reason for the housing market’s consistent strength can be found in Statistics Canada’s most recent Labor Force Survey. During July, Canada’s unemployment rate fell to a breathtaking 6.0 percent, the lowest level in more than 30 years.

 

In fact the strong job market is one of the main drivers of strong Canadian housing demand. And that’s good news, because the last time such a small percentage of the Canadian population was looking for work, Barbara Streisand’s “The Way We Were,” and Terry Jack’s “Seasons in the Sun,” topped the Billboard charts and the United States was pulling its remaining forces out of South Vietnam.

 

The relationship between jobs and housing

When people find work, they have more available cash to spend. And one of the first things that they spend it on is housing, either by moving from an apartment into a place of their own, or by upgrading from their existing property into a better one.

 

The July unemployment rate’s 0.1 percentage point drop to 6.0% brought it to its lowest level since 1974. However after hovering gradually at that low level, during the late 1970s, unemployment edged up to 8.4% before eventually peaking at 12.0 percent in 1983. Unemployment then slipped gradually though it remained close to 10.0 percent for six years during the 1990s. During the past ten years unemployment has edged more or less steadily downwards from 9.1 percent in 1997 to where it is today.

 

Right now we have pretty much close to what some economists describe as “zero unemployment.” That’s because despite the fact that unemployment is not really zero, most of the people who are currently not working are either between jobs, refuse to accept available work, or count themselves in the labor force even though they are not actually looking for a job.

 

A low unemployment rate doesn’t just help those who have found jobs to upgrade their housing, it helps all workers. When unemployment falls below certain levels, businesses start paying higher salaries to attract new workers and to keep existing ones.

 

This can be seen glaringly in the red hot Alberta market, but also in many major Canadian cities where “Help Wanted” signs litter the streets. While job creation and the housing market do not go hand in hand every month, or even every year, over the long term, they track each other very closely.

 

A strong Canadian residential real estate picture

In part because of that red hot job market, the Canadian residential real estate market continues to show impressive strength. During the first seven months of this year, the number of transactions made via the Canadian Real Estate Association’s Multiple Listing Service set new records in almost all major markets. The average price of a home sold during July rose by a stunning 13.1 percent year-over-year to $332,442. But that’s not all. During the nine years before that Canadian house prices by a stunning 69 percent.

 

Activity in the resale market doesn’t tell the whole story. New housing starts continue to run at a strong pace on a historical basis, though they have slowed somewhat this year. The increase in prices charged for new homes also tapered off somewhat in June, however prices are still rising, which is a clear indication of continued strong demand.

 

How long will it last?

Of course there is no guarantee that the combination of rising real estate prices and a falling unemployment rate will continue forever. Last week, Monster.com, which tracks online recruitment activity, reported that its employment index fell six points in July to 118. And according to a company spokesman, it is by no means clear that the drop is due mainly to the vacation season.

 

“The sharp decline in online recruitment activity can be partly attributed to a seasonal fluctuation,” said Gabriel Bouchard, the company’s vice-president and general manager. “Hiring activity typically slows during the vacation heavy summer months.”

 

However according to Bouchard, the most recent numbers from Statistics Canada, which reported no overall job creation during July, coupled with the fact that GDP growth is slowing, indicate that the economy will likely progress at a more moderate pace during the current quarter.

 

That said, even if job creation does end up slowing during the next couple of months, if the unemployment rate is running at more than a 30-year low and housing prices are running at record highs that means two crucial indicators of economic health are doing just fine.

 

Peter Diekmeyer (www.peterdiekmeyer.com) is a freelance business and economics writer.

 

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