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The long shadow over Canada's housing market (Alexei Vella/Alexei Vella for The Globe and Mail)
The long shadow over Canada's housing market (Alexei Vella/Alexei Vella for The Globe and Mail)

The long shadow over Canada's housing market Add to ...

As economists debate what comes next in the real estate sector, they're surveying unfamiliar terrain: The country has never been in quite this situation before. Any one of the series of obstacles facing the housing market has the potential to wipe out billions of dollars of household wealth and stall the economy.

Interest rates are at record lows, but will inevitably move higher and price some people out of their homes. Prices have soared far beyond the rate of inflation for most of the past three years. Over the past decade, average prices have increased 121 per cent to $331,089.

The OECD called Canada's housing market "overpriced" in a recent report, adding that 7.5 per cent of Canadian households could find themselves in trouble by the middle of 2012 if interest rates rise, as they're expected to do.

Prices have finally reached the point where they've scared some buyers out of the market. The Canadian Real Estate Association has reported that September sales numbers gained an anemic 3 per cent, after declining as much as 45 per cent in some cities (such as Vancouver) through the summer.

Home prices, which shot upward in the spring, have reverted back to levels last seen a year ago, effectively erasing a year of gains. Higher interest rates in the next year are expected to further quell the market.

Market forecasters are near-unanimous in the belief that prices will fall in the coming years, though few foresee the sort of rapid declines that savaged the American market. The stateside disaster was largely fuelled by loans made to people who weren't creditworthy. Canada's problem is different - easy credit is luring people into buying houses they may not be able to afford when rates rise to more historically normal levels. That's why economists and market watchers foresee a drawn-out retraction of the market that will gradually erode prices, rather than a crash.

The effects of a slow burn can still be devastating, however. Among those most affected are property developers, real estate agents, investors who hope to flip houses, municipalities that rely on revenue from building permits and housing construction, and baby boomers planning to cash out their homes to finance their retirement.

Housing-related spending - including the rental market and the sale of existing homes - accounts for about 20 per cent of gross domestic product in Canada, the Canada Mortgage and Housing Corp. stated in its annual report released in late September. (Statistics Canada only counts residential construction's impact on the economy in its GDP estimate, which it places at a 7 per cent share.)

It's the highest level CMHC has recorded in a decade, and translated into $307-billion in economic output in 2009. And that means the impact of a slip in prices is greater than it would have been only a decade ago when it accounted for $184-billion in spending.

If home resale prices were to fall just 5 per cent, $10-billion would be sucked from the economy, said Benjamin Tal, deputy chief economist at CIBC World Markets. Consumers, worried about their falling net worth, would stop spending on things such as restaurants and shopping trips.

"The housing market of the last 10 years has been very important in terms of the wealth effect," Mr. Tal said "And I can tell you, the next decade will be much weaker. Does this have consequences for the broader economy? Of course it does."

And that's merely the effect of a decline in the value of existing homes. Any housing slowdown usually comes with a major impact on new home construction - and it played a pivotal role in the rapid healing of Canada's labour market after the recession.

About 35 per cent of all jobs created through the recovery can be traced back to construction, according to the Canadian Home Builders' Association, with home builders accounting for the majority of the activity. But much of the work taking place today harkens back to sales made last year, when the industry set new sales records.

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