Discouraging expectations

A “talking head” on television recently was spouting his views on the economy.

This “expert” stated the housing industry will be a very important prop to our economy, that we have had a multi-year slump in house building, and so far we have experienced only one year of recovery.

Hence, he predicted that we should count on more good news from that sector.

According to anecdotal evidence, it appears that young people again are purchasing huge houses with the expectation of flipping them in two years with a tax-free, capital gain. Inasmuch as many are engaged in this pursuit, extraordinary luck is necessary to achieve any success.

Clearly, housing starts in Canada have rebounded after sliding for the past few months. It is argued that housing is reviving after a healthy correction. Ostensibly, governments here were trying to achieve a “soft landing,” put in place to prevent an unsustainable housing boom and then a bust. Mortgage requirements were tightened, and for a variety of reasons interest rates on mortgages climbed substantially.

It is significant that in part the rise in rates was premised on the belief that “quantitative easing,” that is the infusion or liquidity into the monetary system, was about to end. That proved to be an incorrect assumption.

This year housing starts in Canada remain far above demographic requirements. Family formation rates are dwindling and immigration totals have stabilized, so population increases will not be a bullish factor in the housing field. Even if population growth were to continue here, it would take a considerable interval to absorb all the inventory, the highest in more than a decade.

Despite declining demand and more restrictive lending by institutions, housing starts remain elevated. A slowdown is not evident yet. House builders seem oblivious to the situation and are adding houses to the market, ignoring the substantial oversupply already in existence.

Some suggest that we should allow for a strong housing boom from south of the border. Still, the National Bank Financial reported that home ownership there has continued to decline; it has fallen to an 18-year low but remains above the household formation rate. That is a reflection of the trend to renting, something that has been going on for years; currently it is at a record high.

David Madani, chief Canadian economist at Capital Economics, believes housing investment as a share of GDP no longer will be a contributor to GDP growth.

It should be noted that the Organization for Economic Co-operation and Development just stated houses prices here are among the most overvalued in the world.

Therefore, in view of the foregoing, any favorable expectations about the housing industry should be discouraged.



Bruce Whitestone