Market chaos could help housing sector
By Tony Wong
The upside in a global stock market rout may ironically be a healthier housing market – at least in the short term, say economists.
“The housing market has nine lives. Every time interest rates are supposed to go down, something happens and it helps to keep the market going,” said Benjamin Tal, senior economist at CIBC World Markets.
Interest rates were supposed to be headed up before the crisis of terrorist attacks in New York on 9/11, and the last crash in 2008. But that didn’t happen. And it looks like rates will be staying down for a while, says Tal.
The market is already betting that Bank of Canada Governor Mark Carney’s plans to hike interest rates as soon as September will have to be put off until the end of next year.
South of the border, the Federal Reserve said Tuesday that it expects “exceptionally low levels of the federal funds rate at least through mid-2013.”
And ironically, while the U.S. has experienced a downgrade in its credit rating from Standard & Poors, investors have continued to pile into the Treasuries market.
The U.S. dollar remains the global reserve currency as investors head for shelter as they find few safe haven options out there.
The demand for treasuries means that yields have gone even lower. Which means there is downward pressure on longer-term interest rates. Long-fixed term rates are affected by a variety of factors such as competition for funds in financial markets and to prices in the bond market. Short-term rates are more affected by the key overnight central bank rate.
“The interest rate environment will continue to be very attractive for homebuyers for both short term and longer term borrowing costs. With the safety of U.S. bonds that’s keeping longer term rates low,” said Scotiabank economist Adrienne Warren.
Industry groups are warning, meanwhile, that during an already tough recovery, any sudden move upward in rates could have dire consequences on real estate sales.
“The very recent global economic news demonstrates the Bank of Canada needs to consider any future rate hikes with extreme caution, as the recovery may be more fragile than believed,” said Ontario Home Builders’ Association President Bob Finnigan.
Some investors may also be looking at real estate assets for a place to park their money because of the volatile stock market, said Tal.
Lance Dore, a member of the U.S.-based Royal Institution of Chartered Surveyors, says investment in real estate may be a beneficiary from those looking for safe haven.
“The sell-off of stocks is a clear signal that people are not confident in the future and want safety now. What has also happened in the past declines in the stock market is a flight to quality,” said Dore. “Real estate tends to be the recipient as part of this flight. Real estate values are at all-time lows with returns at all-time highs. The convergence of excess cash due to stock sell-off and corporations flush with cash for investment will push these excess funds into the inevitable diversification to real estate.”
While the future for the stock market looks shaky, the real estate sector is improving due to improving fundamentals based on increasing rents, absorption of distressed supply and increased interest for diversification, said Dore.
However, if the stock market continues on a downward path, housing will not escape unscathed. While lower interest rates are a huge mitigating factor, the losses on the market may eventually translate into job losses.
For one thing, it takes confidence to plunk down that down payment for a home. It usually means that you’ve got a job, some savings, and hope for the future.
But confidence is not in abundance in global stock markets this week as concerns over sovereign debt have panicked investors. Without confidence, the housing market – the biggest ticket item on the consumer checklist will suffer no matter how low rates go, say economists.
In the United States, where more than a quarter of borrowers have negative equity – meaning they owe more than their homes are worth – this could mean another setback for the already beleaguered market.
In Canada, where markets have been stable, and have been forecast to cool down next year, this could mean that sales and valuations may come down to earth quicker than expected.
“Assuming the volatility and uncertainty continues in the markets it will have negative implications for both potential home buyers and for builders,” said Scotiabank economist Warren. “There is still a big difference between Canada and the U.S. But it certainly reinforces our view that growth in Canada and internationally will be on the soft side.”
So far, economists have not changed their outlook on the Canadian housing market. Most expect the market to flatline or correct slightly by next year. But that could change if the rout continues.
“If this is the precipitation of a larger more protracted slowdown for the economy it will certainly affect housing,” said Peter Norman, chief economist real estate consultancy Altus Group.” If we get into a soft patch with slower employment growth then we will see slower home sales. For investors who are speculating on future events this adds another layer of uncertainty in the market. So this would cause them to sit on the sidelines.”
In separate reports on Tuesday, Canadian housing starts surprised by rising unexpectedly in July, climbing to a 15 month high, up 4.3 per cent to 205,100 units according to the Canada Mortgage and Housing Corporation. And U.S. home values actually had the smallest drop in four years in the second quarter according to figures released by Zillow Inc.
But this was before the impact of the stock market drop which will affect confidence as consumers suffer from a declining wealth effect. During a recession, the high end of the market, of purely discretionary purchases such as cottages and luxury condos might be the first to feel the impact. But a lack of confidence will affect all sectors of the market.
“We continue to hold that new home construction will start to cool in the second half of the year, but this may come more slowly than anticipated as rates remain low for longer,” said Arlene Kish, principal economist for IHS Global Insight. “On the other hand, if the recent slide in financial markets remains persistent, consumers will become less optimistic and will likely stay away from home purchases.”