Eric Beauchesne
Sun
OTTAWA — This housing boom won’t go bust, as did the last one in the late 1980s, but even a slowdown will hurt the economy, CIBC World Markets warned Monday.
“Never before has the housing market been so important to the Canadian economy,” it said, warning that if interest rates rise this year they will hit the real estate market next year just as it will be running out of steam.
Most analysts expect the Bank of Canada to start raising interest rates this fall to head off inflation down the road, although CIBC economists aren’t so sure, and add that any increase will be small.
“We believe that any increase in Canadian mortgage rates — short and long — in the coming 12 months will be minimal at best,” it said.
The strong dollar has been “real estate’s best friend” as the dramatic appreciation of the dollar put the brakes on interest rate increases by the Bank of Canada and helped to keep long-term rates near historic lows, it said. And with cheap credit being the lifeblood of the housing market, prices continue to surge.
However, in the past few months there has been some softening in the rate of growth of house prices, home sales and housing starts, it noted.
“The year-over-year rate in house prices is now at around eight per cent, well below the pace seen in early 2004,” it said. “At the same time, housing starts are running seven per cent behind year-ago levels.
“Not that we are predicting a crash in the housing market, but even a soft landing, as projected by virtually everybody in the industry, would conspicuously damage the economy,” it said.
Real estate has been one of the “most powerful economic engines of recent years,” it said.
Not only is residential investment, as a share of total economic output, 20 per cent above its long-term average, there are the indirect positive impacts on the economy from the hot housing market including the so-called housing wealth effect, record-high home equity withdrawal, and strong housing-related spending, such as on furniture, appliances and so on.
“Even a leveling off in real estate activity will bite significantly into 2006 GDP growth,” it said, adding that’s not the ideal environment for aggressive interest rate increases by the Bank of Canada.
© The Vancouver Sun 2005
