The prospect of a U.S. recession has some homeowners and prospective buyers nervous about the impact on the real estate market in Canada, but one economist says a slowdown could actually boost activity in Canada's housing sector.
It's not surprising that economic uncertainty in the U.S. has been the focus of much discussion and speculation in recent days, since Canada has followed the American lead during four of the last six U.S. recessions.
But Gregory Klump, chief economist for the Canadian Real Estate Association, said it's still an "open question" whether the U.S. slowdown will turn into a recession -- as defined by two consecutive quarters of negative economic growth.
"The chances are about 40 per cent, but the U.S. Federal Reserve is expected to cut interest rates and do so very aggressively to prop up their growth and keep them out of recession," Klump told CTV.ca.
"So while they're heading for a soft patch of growth it's an open question whether they'll enter a recession. My own thought is no, they won't."
There is a direct link between the economies of the two nations, which are each other's largest trading partner. If the U.S. demand for Canadian exports declines -- as the result of the strong loonie or a limping U.S. economy, for example -- the Canadian economy usually follows suit.
But even if the U.S. does slip into a recession, there's no guarantee Canada's strong real estate market will lose any steam. In fact it might do the opposite, Klump said.
That's because prospects for softer economic growth -- which is "the current sentiment in financial markets and the Bank of Canada" -- usually prompt the central bank to lower interest rates, which can make home ownership more affordable and more attractive, Klump said.
"Softer growth means lower interest rates and lower interest rates are positive for the housing market," he said.
Possibility of interest rate cuts
With that in mind, Klump said he expects the Bank of Canada to cut the interest rate by a quarter-point on Jan. 22, and again when they meet in March, he said.
However, he conceded, with the U.S. slowdown expected to continue to reduce Americans' demand for Canadian manufactured exports, housing markets in single-industry towns and regions in Canada that rely heavily on trade with the U.S. are likely to feel the pinch.
Cities like Toronto that have a wide diversity of industries, however, are better insulated to weather the storm, he said.
Avery Shenfeld, senior economist and managing director of CIBC World Markets, agrees the negative effects of a U.S. recession would likely be localized.
"Real estate markets in areas of the country that are heavily weighted to manufacturing could see softening up but national house prices may not be affected much," he told CTV.ca.
He added: "We would see some weakness in house prices, we could see some softening in house prices in areas of the country that are dependent on manufacturing."
Market in Canada's largest city
Andrew la Fleur, a Toronto real-estate agent and BlogTO.com's resident writer on the subject, told CTV.ca he hasn't seen any impact on the Toronto housing market yet. His clients, he said, aren't rushing to buy or sell and he hasn't heard any convincing arguments that a slowdown is likely to hit Canada's largest city.
That being said, he has noticed an increased level of trepidation among people looking to get into the real estate market for the first time -- a sentiment he said is at least partly linked to U.S. economic uncertainty.
"I am seeing the issues in the U.S. creeping into the conversation when it comes to 'should we enter into the market or not' or 'what happens if we buy and then the entire market collapses?'" la Fleur said.
"But it's nothing new. First time buyers always run all the nightmare scenarios through their minds before making a decision to buy. It's just that right now the hot-button topics seem to be the U.S. economy as well as the usual one heard in Toronto over the past decade -- there are too many condos going up therefore the market is about to crash."
In step with Klump and Shenfeld, la Fleur suggested Toronto and other major cities in Canada are insulated, and the impact of a recession will first be felt in manufacturing and export-based regions.
"Toronto is primarily a finance-based city and our economy is doing very well, and as long as that continues, the real estate market here should continue to be healthy," he said.
Andy Johnson, CTV.ca News January 20, 2008
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