Lower real estate costs could trigger increased retail spending by some
TORONTO, Nov. 29, 2012 /CNW/ - A cooling in Canadian house prices may
not be all bad news for the country's economy as cheaper real estate
may free up retail spending power for prospective first time home
buyers, finds a new report from CIBC World Markets.
The report notes that while the evident slowing in Canadian home sales
will take a bite out of domestic economic growth by reducing new
housing starts and related sales of furniture and appliances, a gradual
retreat in prices may be beneficial for parts of the economy and for
"For one, a retreat today could be the preferred alternative to a harder
landing from even higher prices down the road," says Avery Shenfeld,
chief economist at CIBC. "Less understood is that cheaper home prices
could bring winners as well as losers across the economy.
"What of the young newlyweds scraping by on mac and cheese in order to
save for their first home? A slip in prices could ease that task,
freeing up spending power in the process."
Mr. Shenfeld notes that increases in Calgary house prices have trailed
the Canadian average over the past five years, including a near-15 per
cent dip in 2008, yet retail spending in the city has outperformed the
"British Columbia house prices led on the way up and now down," he adds.
"But affordability issues have been a drag on B.C. growth; the rapid
run-up in prices was one factor turning the province from a beneficiary
of in-migration to a net source of emigration. Dreams of retiring in
B.C., and taking one's spending money to that province, might be back
in vogue if relative prices of housing are better in line with other
While deflation in housing prices has widely been cited as the cause of
the economic woes in jurisdictions like the U.S. and Ireland, Mr.
Shenfeld argues that it wasn't the falling prices that caused the core
problems in these economies but rather the accompanying wave of
defaults that devastated their financial systems.
He notes that, while a Canadian home owner that counted on downsizing to
fund her retirement might have to pare spending plans, Canada is not in
danger of a similar crash.
"Canada hasn't lent as aggressively to its lower-income home buyers, and
a correction in house prices caused by a tighter regulatory environment
and earlier price overshooting, rather than by defaults, would not on
its own generate that same banking system shock. Most historic wealth
declines coincided with other sources of economic weakness, including
rising unemployment or high interest rates that depress consumption.
"As a home owner, I'd prefer that one particular Toronto street stays
insulated from any house price declines. But to look on the bright
side, a gradual cooling in house prices, one early enough to avoid a
larger financial sector shock, will look good in hindsight if Canada
gets more support from global growth in the next two years."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/einov12.pdf.
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SOURCE: CIBC World Markets
For further information:
Avery Shenfeld, Chief Economist at 416-594-7356, email@example.com or Kevin Dove, Head of External Communications at 416-980-8835, firstname.lastname@example.org.