Skip to main content

Home construction slowdown may be good news for real estate

Homes under construction in Richmond Hill, Ont., are seen in this file photo.

Moe Doiron/Moe Doiron/The Globe and Mail

The housing bears ask: what's to keep the soft landing in housing from morphing into a hard landing? Won't a slowdown in sales and prices, they ask, curb housing-related industries and homeowners' consumption, producing a retrenchment in the economy that leads to greater selling pressures in the housing sector? Let me try to answer the housing bears' questions, although it may not be quite the response they would like to see.

First, a drop in home construction is actually a positive development for the housing market. It supports prices by curtailing supply. Layoffs in housing-related industries could possibly dampen the economy and cut into housing demand, but there will be an offset on the supply side.

In fact, the home building industry is now cutting back. But this is good news. As Gluskin Sheff economist David Rosenberg notes in his May 9 research report: "Housing starts for the past four months have come in below underlying demographic needs of around 185,000 units per year, and that is a critical part of the process in terms of prices finding a bottom."

Story continues below advertisement

Second, I believe Roberto Cardarelli, the International Monetary Fund's chief economist for Canada, has it right when he says the hit to construction-related sectors and homeowners' consumption will be offset by an expansion in other industries. "We expect the pace of expansion [in Canada] to accelerate over the course of 2013," declares Mr. Cardarelli in the IMF Survey Magazine. "The main reason for our optimism is that we expect export growth to strengthen, as the recovery in the U.S. economy gradually steps up the pace."

Many people are worried about recent softening in the housing market, Chinese economy and commodity markets, but the U.S. accounts for about 75 per cent of Canadian merchandise exports. As it engages in unprecedented monetary stimulation and ramps up its economy, there should be a substantial and positive spill-over effect for Canada.

Furthermore, "as the U.S. economy strengthens and commodity prices moderate, we would expect some natural depreciation of the Canadian dollar, which will help boost exports and economic growth," adds Mr. Cardarelli.

"These positive developments should more than offset the unfavourable conditions from weaker construction activity and more moderate consumption," he concludes.

In short, the current housing slowdown likely isn't headed toward a hard landing.

Larry MacDonald is a retired economist who manages his own portfolio and writes on investing topics. He tweets at @Larry_MacDonald

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter