Canada’s cooling housing market not all bad

A cooling in Canadian house prices may not be all bad news for the country’s economy as cheaper real estate may free up retail spending power for first-time homebuyers, finds CIBC World Markets.

While the slowing in Canadian home sales will take a bite out of domestic economic growth by reducing new housing starts and sales of furniture and appliances, a gradual retreat in prices may be good for parts of the economy.

“For one, a retreat today could be the preferred alternative to a harder landing from even higher prices down the road,” says Avery Shenfeld, chief economist at CIBC.

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He adds, “Less understood is that cheaper home prices could bring winners as well as losers across the economy. What of the young newlyweds scraping by on mac and cheese in order to save for their first home? A slip in prices could ease that task, freeing up spending power in the process.”

Shenfeld says increases in Calgary house prices have trailed the Canadian average over the past five years, including a near 15% dip in 2008, yet retail spending in the city has outperformed the national average.

Meanwhile, affordability issues have been a drag on B.C. growth.

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“The rapid run-up in prices was one factor turning the province from a beneficiary of in-migration to a net source of emigration. Dreams of retiring in B.C., and taking one’s spending money to that province, might be back in vogue if relative prices of housing are better in line with other provinces.”

While deflation in housing prices has widely been cited as the cause of the economic woes in jurisdictions like the U.S. and Ireland, Shenfeld argues it wasn’t the falling prices that caused core problems, but rather the accompanying wave of defaults.

And while a Canadian homeowner who counted on downsizing to fund her retirement might have to pare spending plans, Canada is not in danger of a similar crash.

Read: Canada won’t see U.S.-style housing meltdown “Canada hasn’t lent as aggressively to its lower-income homebuyers, and a correction in house prices caused by a tighter regulatory environment and earlier price overshooting, rather than by defaults, would not on its own generate that same banking system shock,” says Shenfeld.

He adds, “As a homeowner, I’d prefer that one particular Toronto street stays insulated from any house price declines. But to look on the bright side, a gradual cooling in house prices, one early enough to avoid a larger financial sector shock, will look good in hindsight if Canada gets more support from global growth in the next two years.”

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.