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Canada’s Hot Real Estate Market Cooling!
When certain economic indicators are being viewed through the lens of bearish forecasts for major developed economies, it often attracts attention. Such is the case with the Canadian Housing sector which was the subject of the Global Economic Research report, published by Scotiabank, which indicates that Canada’s hot markets are beginning to cool and could have a slowing impact on a number of sectors in the Canadian economy including employment, commodity prices and investments. In addition, home buyers will find it more difficult to afford a home and current homeowners will be less inclined to refinance as interest rates begin to rise.
While it is true that the overall housing market in Canada is indeed cooling down, according to the report, it is expected to “avoid the sharp downturn witnessed in the United States and Europe.” However the signs appear to be clear that downward pressure on housing activity is increasing and will not be fully realized until about 2015 or sometime thereafter. Inevitably, when demand has lessened, heightened activity that may have existed is reduced thereby effectively ending a phenomenon like the “decade-long housing boom” that existed in Canada from 2000 and lasted for the better part of last decade.
Notwithstanding the less-than-optimistic outlook indicated, the report states that Canadian households are not experiencing the same level of equity drain as was evident in the United States during that country’s economic downturn. In fact, Canadian households have been able to retain most of the 1.7 Trillion Dollars in wealth generated by their real estate holdings during the 2000 decade, a trend that is likely to continue, especially in view of the fact that mortgage delinquency rates are currently low and falling.
However there is still concern about a sudden upward trend in interest rates and/or similarly downward movement in home prices, either of which would have an adverse affect on Canadians with a disproportionate share of their personal debt (152% of disposable income in the first Quarter) in real estate. Based on these concerns, and drastic reduction in residential property investment a year ago, understandably cautious regulators of housing markets policy have tightened standards for mortgage and home equity financing.
As with most developed economies in the technological era, Canada’s real estate sector represents a significant economic driver and could have a profoundly damaging impact on the larger economy in the event of a calamitous occurrence such as the subprime crises and subsequent recession that befell the U.S. markets last decade. The importance of housing to Canada’s economic well-being is well documented, and added benefits derived from those business activities peripherally attached to housing which have all done well as a direct outcome of last decade’s housing boom will also be impacted.
Such peripheral activities include home improvement, the buying and re-selling (or flipping) of residential property by real estate investors and speculators, third-party fees to real estate specialists which include property appraisers, surveyors, consultants and of course real estate brokers’ commissions all helped to boost the overall economy to the tune of 128 Billion Dollars at a time when the economy had already began to show signs of slowing down. This investment activity represented a 4.2% upward swing which began at the turn of last decade and only recently began to level off; but during that period, the Growth Domestic Product grew at a rate of 2.2% and represented over 6% of what amounted to the best economic performance among G7 member countries, and was twice that of the U.S. rate.
When the overall housing sector has been sectioned off into many smaller areas of activity we see that municipal and governmental costs associated with real estate buying and selling (18%), as well as home improvement and repair (37%) combine to represent 45% of the economic spike; and those percentages, when translated to raw currency and tallied up, accounted for over $47 Billion Dollars added to the local economy. This however, should not be considered an unusual occurrence – despite the rapid growth of those segments – since home owners in any economy will avail themselves to low-interest money, whether they use it for home improvement or investment.
Nevertheless, the home improvement activity led to an increase in the overall value of existing residential real estate in Canada from the beginning to the end of last decade and ran two years deep into the current decade. Growth was at a rate of 6% and was twice the growth rate of newly constructed homes; and as a result of this activity, other economic drivers benefited; including manufacturing (appliances), retail (building supplies) and the services like engineering and general contracting. In addition, the jobs market benefited to the tune of almost a quarter of a million people employed each in new construction and real estate services.
The period following Canada’s most recent housing boom, when compared to other similar periods that existed in the 1970s and 1980s, is expected to be a less extended period and, unlike the negative or “flat” growth in real prices that lasted eight years after the 1970s boom and nine years after the 1980s boom. According to the report, households will see relatively little impact on income and are expected to continue rising even though the pace will be more moderate; but national “sales are running only slightly above long-term trends, while
supply conditions have become more balanced and prices have stabilized at record high levels.” This all points to a gradual restoration of confidence and affordability even without a market crash.
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