Canada – Looking Forward
Traditional housing market price activity can be explained by economic fundamentals such as employment, interest rates, inflation and other rational economic indicators. As Table 8 shows, speculation (or non fundamental drivers) has a large role to play in explaining the run up of house pricing in many markets around the globe. In countries such as the US, UK and Ireland 10% to 30% of price appreciation cannot be explained by fundamental drivers. In these markets, pricing corrections are taking place as house values return to their natural levels. Exposure to both subprime and pricing corrections is acting as a catalyst in stalling economic growth, as consumer spending and investments are put on hold with declining home equity. Fortunately, Canada has limited exposure to both and, in turn, the price appreciation in Canada’s housing market between 1997 and 2007 can be explained by economic fundamentals. As such, this lack of speculation bodes well for a more muted market correction. On the other hand the US and the UK are facing record high levels of unsold properties and, while the number of future foreclosures remains unpredictable, an end to the correction looks bleak as the glut of supply continues to increase.
Percentage Increase from ‘97 to ‘07 Not Explained by Fundamentals 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Italy Spain Japan France Austria Finland Norway Belgium Sweden Canada Australia Denmark Germany Netherlands United States United Kingdom
Ireland
Source: IMF
Table 9. Consistent Housing Starts to Meet Demand Canada Population and Housing Starts 250
34 33
200
Thousand
33 150
32
Population 32
100
31 50
31 30
01
02
03 Single
Source: CMHC / Statistics Canada
Will We Remain a Safe Harbour in the Storm?
06
04 Multi
05 06 Population
07
0
Housing Starts
The first inclination when looking at Table 7 is that the worst is yet to come for Canada, as the market has only just begun to see signs of a housing correction that has been underway in the US and other markets for a while now. However, truth be told, Canada’s correction will neither be as dramatic nor span as long as the corrections being experienced in countries such as the UK or the US.
Table 8. Canadian Growth Justified by Fundamentals
Millions
Housing Prices - A Correction is not in order One of the greatest indicators of the strength of an economy is the fundamentals of its real estate market. While home values in the US peaked in late 2005 and have since fallen by 12%, home values in Canada have had a slightly divergent path, rising by 19% since 2000 to their peak in late 2007, and since falling off by only 6% (Table 7).