January 22, 2008
Blurb: Neither a weakening stock market, a housing sector slump south of the border nor global recession fears seem to be unduly hurting Canadian housing.
Will rate cuts prolong Canada’s real estate surge?
By Peter Diekmeyer • Bankrate.com
This week all eyes were turned to the economy. Stock markets fluctuated wildly amidst speculation that the U.S. economy may be headed into a recession. To guard against this, the U.S. Federal Reserve made its largest policy rate cut in 15 years, a move that provided the Bank of Canada maneuver room to cut rates too.
All this has left Canadian housing sector stakeholders’ heads spinning, wondering what it all means. On one hand, house prices and new construction have been doing well here. However Canada’s job market remains heavily exposed to developments in the United States, our largest trading partner. Counterbalancing that is the fact that recent central bank rate cuts are putting downward pressure on mortgage interest expenses, which for many Canadians is their largest housing related cost.
Strong resale and housing start activity
To get an accurate picture of Canada’s housing market a broad variety of indicators need to be looked at. The good news is that despite recent turmoil, on the whole these indicators are broadly positive. For example last week the Canadian Real Estate Association released its 2007 results. The data show that existing home sales, new listings and dollar volume of sales in Canada’s major markets as measured by the association’s Multiple Listing Service all reached their highest levels ever.
While much of that data is of interest mostly to housing industry insiders, one statistic is vitally important to homeowners: the average selling price of Canadian homes in CREA major markets surged an impressive 11.6 percent during the fourth quarter of 2007 to a record $333,105.
Not surprisingly, construction activity too has been strong. According to the Canada Mortgage Housing Corporation, housing starts, which declined slightly in December, totaled an estimated 229,600 units during 2007, their second highest level ever. Housing starts are important, because not only do they provide high paying jobs for workers in construction and related industries, they also stimulate a slew of spin-off purchases ranging from appliances to snow removal contracts.
Interest rates and the U.S. economy
There is considerable debate among economists on how badly the U.S. economic slowdown will affect the Canadian economy. In fact, economists can’t even agree on how bad the U.S. slowdown will be. Many forecasters think that the data will eventually show that the American economy has already slipped into recession, while others think that the U.S. is merely headed for a period of extended sluggishness.
Whatever the case may be, the stakes are huge for Canada. Depending on how high the Canadian dollar is valued at, our exports to the United States total between one fourth and a third of Canadian GDP. So when America catches a cold, a lot of Canadian jobs are at stake.
On the other hand, when the American economy catches a cold, the U.S. central bank typically provides it medicine, as it did earlier this week when it announced a 75 basis point cut in its policy rate. That move that will provide Canada’s central bank room to cut its own policy rate even further than the 25 basis points that it announced earlier this week. Central bank rate cuts are crucial for the housing industry because these usually translate to lower mortgage costs down the line, though holders of variable rate mortgages tends to benefit faster than holders of longer term fixed rate mortgages.
One threat: stock prices
Another question arising from the recent economic turmoil has been the effect that recent stock price fluctuations would have on the housing market. On Monday, the benchmark S&P/TSX composite index lost close to 600 points, leaving many investors in a panic. However after the Fed’s and the BoC’s policy rate cuts, the index quickly re-gained most of its lost ground. However even after the bounce back, by mid-week the S&P/TSX was still trading at more than 2,000 points below its 52-week high.
According to one expert, the possibility remains that lower stock prices could one day also threaten housing values. “In many Canadian markets, real estate prices have risen so high, particularly in Alberta, British Columbia and Saskatchewan, that it is hard to find real estate investments that are cash flow positive,” says Gary Siegle, a regional manager at Invis, Canada’s largest mortgage broker. “As a result, some investors could begin to regard cheaper stock prices as a buying opportunity.”
Whether that happens or not remains an open question. By and large, forecasters tend to regard Canada’s near term prospects far more favorably than those of our southern neighbor. And if they are right, it’s a fair bet that our housing sector will do far better too.
Peter Diekmeyer (www.peterdiekmeyer.com) is a freelance business and economics writer.
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