Slowing Ontario Market May Produce 'Mild Hangover' For Economy

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Slowing Ontario Market May Produce 'Mild Hangover' For Economy

The real estate market in Southern Ontario has enjoyed a decade of growth, taking only a short breather in 2008. But the provincial government changed all that in April when it introduced a 16-point plan to slow down the market. Since then, sales and prices have dropped.

Interest rates have started to rise and the federal government may implement additional measures to make it even more challenging for would-be home buyers to qualify for a mortgage.

What impact will the real estate slowdown have on the economy?

A report by RBC economist Laura Cooper in May says that, “When home sales fell by 30 per cent in 1990, activity generated by new home construction began to decline in the following quarters and subsequently fell by just over 30 per cent. This shaved nearly $10 billion off the economy with the home-building share of GDP falling from four per cent to just over two per cent by mid-1991.”

Cooper says in the current market, “the direct relationship between home building, transfer costs and existing home sales implies five per cent of the economy is highly exposed to a sales slump.”

A report by DBRS says that housing booms in British Columbia and Ontario “have spilled over into the local job markets, with employment in housing-related sectors growing faster than the rest of the economy.”

But the report says “the extent of labour misallocation does not appear acute, particularly when compared to some U.S. states during the U.S. housing boom. In the context of solid economic growth and steady population gains, the labour markets in both provinces are likely able to absorb a potential home-price correction without major disruption.”

In B.C., the provincial government introduced a foreign buyers’ tax in the Vancouver area in August 2016. It slowed the roaring market, with sales and prices dropping to the end of the year. Since then, the market has picked up and by this summer, average prices were above last year’s levels.

Most analysts believe that Toronto-area sales and prices will soon rebound as well.

“Population increases and economic growth create a healthy demand for housing and thereby boost the number of jobs in housing-related sectors,” says the DBRS report. “Ontario and B.C. have both benefited from large net immigration flows as well as provincial migration…

“Population growth combined with a robust economic expansion has contributed to strong job growth across economic sectors.”

The report defines housing-related employment as jobs in construction of buildings and specialty trade contractors; home-supply retail stores including furniture stores, building material and garden equipment outlets; and the finance and real estate sectors. It found that from June 2007 to June 2017, this housing-related employment increased by 28 per cent in B.C. and Ontario. Jobs not directly related to housing rose by 11 per cent in Ontario and 15 per cent in B.C.

“Housing-related employment in Ontario and B.C., however, has not expanded as fast as in some U.S. states during the U.S. housing boom,” says the DRBS report. “In California and Florida, two states that experienced very large home-price appreciation during the boom, housing-related employment grew by 61 per cent and 60 per cent respectively. This is more than twice the increase seen in Ontario and B.C.”

During the last three years as housing prices rose sharply in the two provinces, the pace of housing-related job growth was “relatively steady”, says the report, unlike Florida, which saw a big jump in related employment.

The RBC report says that other non-housing sectors would also be impacted by a housing downturn.

“Rising housing wealth amongst households likely contributed to the record levels of car sales in Canada and an insatiable appetite for renovations in the recent housing upswing,” says RBC’s Cooper. “Vehicle purchases, eating out at restaurants and spending on recreation, cultural events and financial services all have a tendency to slow somewhat against a backdrop of declining home sales, but tends to occur over a period of six to nine months following the beginning signs of a housing downturn.”

Cooper says that “tallying up the contributions of everything from the building of new homes to the costs of maintaining and running a home, housing-related expenditures climbed to a record 25-per-cent share of the Canadian economy in 2016. Not all of this activity is vulnerable to a downturn in home sales.” She says about 15 per cent of the economy has some degree of exposure, but only five per cent has a strong relationship to home sales.

“We don’t expect a downturn similar to that recorded in the early 1990s or even in the United States leading up to the financial crisis,” says Cooper. “But after Canada’s years-long housing-market party, a mild hangover is likely to follow, with important implications for Canada’s economy.”