If American Real Estate Market Slows, Canada to Land Softly
Slowdown here not a sure thing - U.S. homeowners borrowing more
By Romina Maurino - Canadian Press
Should the U.S. housing market bog down in an anticipated slump, its Canadian counterpart is likely to be in for a softer landing thanks to lower interest rates and a different attitude to home financing, observers say.
“When you take a look at the new home construction numbers, we’ve been running at the 200,000-plus level for a number of years — this will mark the fifth such year — and it’s felt that generally this is in excess of what long-run demographic demand is,” said Brent Weimer, senior economist with the Canada Mortgage and Housing Corporation, or CMHC.
“We see housing activity easing to a more long-run sustainable level moving forward.”
In recent weeks, analysts have been debating an impending North American housing slowdown and the form it might take. Some say when the market drops it will do so with a resounding crash, while others see a more gradual decline.
They also differ on how Canada and the U.S. will fare.
In Canada, hikes in interest rates, increasing home prices and higher energy costs are nibbling away at affordability but the country has benefited from a strong housing market in the West, as more and more workers settle in Alberta, drawn by the province’s booming energy economy.
Canadians have also seen less aggressive interest rate increases than in the U.S., and are less likely to borrow as much money for their homes.
David Rosenberg, North American economist for Merrill Lynch, has pegged the odds of a “hard landing” in the U.S. between 40% and 80% — significantly above the consensus view of 27%.
“Practically every indicator at our disposal tells us that we are very late in the cycle and the historical record also strongly suggests that the next wave after the Fed has inverted the entire yield curve is either a hard landing or a very bumpy soft landing,” he said in a note.
“Either way, the economy is going to have some sort of a ‘landing,’ which is far different than a ‘take-off.’”
On Tuesday, luxury home builder Toll Brothers Inc., based in Philadelphia, reported its third-quarter profits fell by 19% as housing market woes weighed on sales and caused the company to abandon some building locations.
The company also cut its earnings estimate for the full year, signalling it doesn’t expect the housing market to stabilize soon.
A day earlier, home improvement chain Lowe’s Cos. warned that a slowing U.S. housing market will hurt its earnings for the rest of the year, sending its stock down despite good quarterly results.
BMO economist Douglas Porter said a correction in Canada “won’t be nearly as severe as it’s likely to be in the U.S., because the boom hasn’t rumbled on as long (here).”
And while he expects housing starts and sales to weaken in 2007 and possibly in 2008, he doesn’t see the impending slowdown as a sure thing.
“For about the past five years, economists have been calling for declines in Canadian housing starts and sales, and the entire housing industry has defied expectations and remained incredibly resilient in recent years,” he said.
“This housing cycle has been counted out a number of times in the past and it’s proved to be a lot healthier than many economists believed possible.”
Once the slowdown does hit, it could spread out over a couple of years and “take a little bit of wind our of the sails for consumer confidence,” he added, saying decreases aren’t expected until 2007.
Mark Chandler, an economist with Scotia Capital, said a possible slowdown isn’t enough to push either the U.S. or Canadian economy into a recession.
One of the big differences between Canadian and American homebuyers, he added, is that “U.S. (homebuyers) have been taking a lot more out in terms of mortgage equity withdrawal.”
“Essentially, they’ve been borrowing more than the wealth in their homes have been increasing.”
The CMHC has forecast that both housing starts and sales will slow in 2007, with total housing starts expected to come in at 209,100 and sales of existing homes at 462,200 — less than a 10% drop.
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