Shuswap Homes
You are here: News » Archive » Canada's Economy Threatened

Canada's Economy Threatened By Weakened Housing Sector

Posted On: 2010-08-13
Deirdre McMurdy, August 13, 2010, MSN.ca

As the Canadian real estate sector softens, the broader economy suffers.

So just how bad is it going to be?

It's become increasingly clear that the Canadian housing market is cooling down after years of unprecedented growth. New housing starts declined in June for the third consecutive month and prices for existing homes have steadily softened since the beginning of this year.

This chill reflects a broader global trend, but data shows that Canada, after showing exceptional resilience, is now being hit the hardest.

But what does that actually mean - especially in the context of expectations that the housing market will continue to float upward indefinitely?

The first point worth making is that for all the dire language about a "dramatic" slowdown, Canadian housing prices were only 6.8 per cent higher in the second quarter than they were a year ago. Granted, it's less than the 16.6 per cent year-over-year price gains posted in the first quarter - but it's hardly a disaster.

The outlook - based on the cooling effects of such factors as higher national interest rates, a bond yield curve that has pushed longer-term mortgage rates up faster than expected, the fact that many people bought and sold last year in anticipation of rate hikes, tighter mortgage rules from Ottawa, the introduction of a harmonized sales tax in Ontario and B.C., and recurring job market jitters - is that prices will, at worst, be flat for the rest of this year.

The second point worth making is that particularly these days, expectations adjust far more slowly than markets move. Whether you're talking about equity markets, mutual fund or portfolio performance, or house prices, there's always an assumption that things will continue to trend in the same direction. Even when the evidence suggests conditions are unsustainable. Even when people say they know conditions won't last.

In May, CIBC economists estimated that house prices in Canada were about 14 per cent about "fair value", having increased at that point by about 23 per cent in the past 18 months.

In short, none of the changes to the housing market should come as a surprise.

Given how important the housing market has been in propelling the Canadian economy forward, the real issue what this all means for other sectors.

One of the first things that's certain to feel the squeeze is the so-called "wealth effect." It's well-documented that when people feel the value of their home is high, they are far more willing to spend because they perceive less pressure to save. A house is considered a marketable asset and - given that housing comprises one-quarter of the asset base of Canadian households - when it's value is strong, people feel rich.

According to economist David Rosenberg of Gluskin Sheff in Toronto, every dollar increase in housing wealth translated into up to nine cents in incremental spending.

That tremendous spinoff almost certainly affect the consumer spending that accounts for two-thirds of GDP growth.

In addition to cutting back the number of jobs created by construction activity and the boost for lumber, nickel and other commodities used in construction, weaker housing starts also means that the after-market for big-ticket purchases like new appliances, furniture and other home goods, is also going to take a hit.

Consumer hardware and renovation retailer, Rona, has already warned investors that slower housing markets could mean a less robust performance in the second half of the year. That, and the fact that the scramble to take advantage of last year's renovation tax credit means much of that spending has been done.

Higher interest rates play into this as well: abut 30 per cent of mortgages written between 2007 and 2009 have terms of less than three years. That means they'll almost certainly be starting to be re-written at higher rates starting soon.

Mortgages represent two-thirds of household debt in Canada. Overall housing stock (buildings plus land) are pegged at a value of $2.78 trillion. At the end of 2009, about $950 billion of that was mortgaged - double the amount a decade ago.

When home equity-secured credit lines are factored into the equation, mortgage debt is closer to $1 trillion.

A three per cent increase in mortgage rates on a mortgage of $254,514 means an extra $444 in monthly payments. That would shift $1.82 billion extra towards mortgage costs annually - money that wouldn't be spent on consumer goods.

All of which is to say, it isn't just the housing market that hangs in the balance, it's much of the domestic economy.

And just how bad is it? Not that great.

 

Current News Archived News