A Tale of Two Housing Markets

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By Peter G. Hall *
Vice-President and Chief Economist EDC

Few barometers of economic activity say as much as housing data. They usually give ample warning of recessions. Housing sales and construction activity is typically as good at predicting recovery. The prescience of these data speak to the deep linkages the housing sector has to the broader economy. As such, when these data shift in a big way, it pays to pay attention.

US and Canadian housing markets are being hit by big shifts that look like the best of times and the worst of times. As of December, US housing starts are just shy of the million mark, up 37 per cent over December, 2011. In contrast, Canada’s January starts plunged 20 per cent compared with year-ago data, eking out just 161,000 units. Are we headed for recession while the US economy recovers?

Housing markets on either side of the border have been worlds apart over the past two decades. Housing demand and supply were roughly in balance stateside in 2001 after eight years of solid growth. Low interest rates spurred a buying frenzy, creating a massive, five-year bubble. The game was up in 2006, the beginning of a tortuous three-year collapse.

Four years of negligible construction ensued, enough to soak up the surplus, and US markets are again on the march. Prices are up, sales are up, and construction is making a beeline for more normal levels. Even with growth to date, there is still room for the US housing market to see 22 per cent growth in each of the next two years, as only then will starts match basic household formation. This is the best indication of a US economy that after years of languishing, is on the move.

Canada’s jobless recovery in the 1990s translated into chronic underbuilding of houses for a large part of the decade. In 2002, Canadian homebuilding surged in tandem with the US market, but in our case, it was to bring markets back into balance. Recession brought building levels back to reality, but it was a much softer correction than in the lower 48 – on a relative basis, Canadian building was three times the US level. Low interest rates returned Canadian homebuilding to the ‘excessive’ zone, this time creating a bubble. January’s tumble is an overdue correction to a more sustainable pace.

If Canada is indeed seeing a housing correction (it’s still too early to tell), then does it portend gloom? Normally it would, but this time seems different. Canada has a huge list of resource projects on the 10-year docket – if only a fraction of these are realized, spending will have a huge impact on overall GDP. And then there’s trade – if the US economy is indeed recovering, Canadian exports can add the windfall to the increasingly significant, fast-growing trade we are doing with emerging markets. For a change, Canadian housing may not be the bellwether it used to be.

That’s good news for Canadian exporters. Pummelled by the collapse of global trade in 2009, exporters looked to the domestic economy as a shelter, and were not disappointed. That source of growth is now getting thin, starting with housing – but just as the world economy seems at long last to be recovering. Once again, it seems like it’s time for exporters to increase their outward focus. It’s beginning with the wood products sector, but will likely spread to other sectors quickly.

The bottom line? Signs of correction in Canada’s housing market don’t point to a home-made recession. Rather, it’s a signal that the balance of growth is shifting back to trade and investment. Those who follow the new course of demand face the greatest opportunities in the coming cycle.

© EDC     

JULY 2018

Vol. 12 - No. 12


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