Home Construction Slowdown May be Good News for Real Estate
First, a drop in home construction is actually a positive development for the housing market. It supports prices by curtailing supply. Layoffs in housing-related industries could possibly dampen the economy and cut into housing demand, but there will be an offset on the supply side.
In fact, the home building industry is now cutting back. But this is good news. As Gluskin Sheff economist David Rosenberg notes in his May 9 research report: “Housing starts for the past four months have come in below underlying demographic needs of around 185,000 units per year, and that is a critical part of the process in terms of prices finding a bottom.”
Second, I believe Roberto Cardarelli, the International Monetary Fund’s chief economist for Canada, has it right when he says the hit to construction-related sectors and homeowners’ consumption will be offset by an expansion in other industries. “We expect the pace of expansion [in Canada] to accelerate over the course of 2013,” declares Mr. Cardarelli in the IMF Survey Magazine. “The main reason for our optimism is that we expect export growth to strengthen, as the recovery in the U.S. economy gradually steps up the pace.”
Many people are worried about recent softening in the housing market, Chinese economy and commodity markets, but the U.S. accounts for about 75 per cent of Canadian merchandise exports. As it engages in unprecedented monetary stimulation and ramps up its economy, there should be a substantial and positive spill-over effect for Canada.
Furthermore, “as the U.S. economy strengthens and commodity prices moderate, we would expect some natural depreciation of the Canadian dollar, which will help boost exports and economic growth,” adds Mr. Cardarelli.
“These positive developments should more than offset the unfavourable conditions from weaker construction activity and more moderate consumption,” he concludes.
In short, the current housing slowdown likely isn’t headed toward a hard landing.