A cooling in Vancouver’s real estate market that includes falling house prices might not be all bad news for the economy, a CIBC report says.
The CIBC World Markets report says the slowing of Canadian home sales will “take a bite” out of economic growth but adds there could be “winners as well as losers across the economy.”
Housing affordability issues have been a drag on B.C. growth, CIBC chief economist Avery Shenfeld says in the report.
“(T)he rapid run-up in prices was one factor turning the province from a beneficiary of in-migration to a net source of emigration,” Shenfeld writes. “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 provinces.”
He says if prices in Vancouver fall further than prices in the rest of the country, there would be a longer-term benefit, including that it would make it easier for companies to find employees because people would be more willing to move here.
“Having your house prices so much higher than houses in the rest of the country makes it difficult for people to make the decision to move there,” Shenfeld says.
Further, he says lower prices could free up money for other spending.
“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,” Shenfeld writes.
First-time home buyers would not have to save as aggressively for a down payment if prices in Vancouver were lower, Shenfeld says. “It hasn’t happened much yet because house prices have not come down much yet, but if house prices do come down, that will make the down payment easier to save for,” he says.
In October, the dollar volume of homes sold in B.C. dropped 14.6 per cent from a year ago, the number of sales dropped 10 per cent and the average price — $508,292 — was down 5.1 per cent, the B.C. Real Estate Association reported earlier this month.
“(A) retreat today could be the preferred alternative to a harder landing from even higher prices down the road,” Shenfeld says. “House prices seem to be falling, and it’s unlikely that we’ve seen the bottom of that yet.”
Shenfeld recognizes that an older homeowner may have to lower retirement spending if their property brings in less money when it’s sold. “That is a negative for spending, but there are others in the economy for whom the weaker house price is a positive. It may still on balance be a negative, but not as big a negative as some surmise.”
He also writes that the slowing market could “chop nearly a percentage point from growth,” because there will be fewer houses built and fewer sales of furniture and appliances as a result.
This report is the latest in a series of CIBC reports that play down some of the concerns about the potential for a devastating U.S.-style crash in residential real estate.
More pessimistic analysts have warned some types of Canadian real-estate in some markets are overpriced and at risk of tipping into a rapid decline.
While deflation in housing prices has widely been cited as the cause of the economic woes in jurisdictions such as 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.
“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,” Shenfeld writes in the report. “Most historic wealth declines coincided with other sources of economic weakness, including rising unemployment or high interest rates that depress consumption.”