Canada's Condominium Magazine

Real estate to contribute to growth in 2016, economists say

Real estate is a major driver in the economies of Canada and the United States. Housing market analysts polled by Reuters believe it will remain a bright spot in the economy for 2016, with interest rates expected to remain at historic lows. They forecast housing prices to gain 3.3 per cent over the year. They also forecast home building to remain robust for the year. CMHC has given itself plenty of margin for error, calling for new housing starts in a range of 153,000–203,000 units.

As for the country’s two hot spots, BMO Capital Markets senior economist Sal Guatieri said that the risk of a correction in Toronto and Vancouver will increase when interest rates go up, “which won’t be this year.” Buyer demand will remain strong in Toronto in 2016 due to millennials entering the market for the first time, and an “influx” of foreign investors. Other analysts also predict there will be no rate rise until mid-2017. Guatieri also believes that real estate markets in Canada’s oil-producing regions will begin to stabilize this year on an expected partial recovery of oil prices.

In the US, the Federal Reserve did raise interest rates in December, the first time in nearly ten years, but January home resales, according to Reuters, were at a six-month high. Home prices in the US rose 5 per cent in 2015 and are forecast to repeat the performance in 2016. Mr. Guatieri called the US housing recovery “quite sustainable” as mortgage rates are likely to remain low, even if the Fed rate rises slowly.

In fact, the real estate picture south of the border is, if anything, more positive than it is in Canada, because in most regions of the country buyers can find good value. The median resale price of a home in the US in the third quarter of 2015 was $227,400. The average resale home price in Canada—not quite the same thing, but the Canadian Real Estate Association doesn’t provide a national median price—was $$470,297 as of January, 2016. According to the chief economist at the National Association of Realtors, US markets will continue to do well this year, with consumer confidence high and job growth solid, especially in the West and the South.

All in, Canada still warrants a triple-A credit rating, and Ottawa can afford a moderate fiscal boost, especially for hard-hit regions. However, the deterioration in medium-term finances from weak commodity prices, less favourable demographics, and softening provincial credit ratings suggests that Ottawa should proceed with prudence.

Canada, meanwhile, is looking at some hefty deficit spending—$18.4 billion for 2016/2017. Is that reason to worry? Yes and no, according to BMO’s two top economists, Douglas Porter and Robert Kavcic. On the one hand, the country’s growth prospects are restrained by lower commodity prices: you can’t spend your way out of low oil prices. On the other hand, interest rates are so low that the government will save $1.5 billion a year on interest payments. Further, even a $30 billion deficit would represent only 1.5 per cent of GDP, considerably lower than the 2.5 per cent ratio of the US federal deficit.

The two economists conclude that Canada’s triple A credit rating is secure for now, but the commodity shock is not something that can be remedied by a big fiscal boost. Prudence among government spenders is advised.

As for investors, they can count on the stability of real estate, which has been on an upward trajectory, compared to bonds and equities over the last four decades. The growth has been consistently in the 2–5 per cent range per quarter, according to the vice president of investment management firm Lincluden, at a Benefits Canada investment forum last December. Derek Warren also noted that real estate investments can be an effective hedge against inflation. If inflation and interest rates rise, so do rents.

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