What does a weak US housing market mean for Canada?

We know that the weak housing market in the U.S. is partly a hangover from an era of overbuilding and buying driven by low interest rates, which was followed by a price collapse and mass foreclosures.

 

But it is also a function of a struggling economy. With unemployment so high, fewer people can afford to buy homes, even at discounted prices. And with the value of existing homes dropping, many people feel poorer and cut back their spending – thus dampening any economy recovery.

 

“The housing market is weak because the economy is weak [but] the economy is weak because the housing market is weak,” said Paul Dales, senior U.S. economist at Capital Economics, which projects no sustained home price increases in the United States until 2014 at the earliest.

 

Even some recent housing numbers that look positive - existing home sales showed a 7.7-per-cent jump in August - also have a negative hue. A huge proportion of those sales, 31 per cent, represents distressed properties that were sold at a discount.

 

The weakness in the U.S. housing market has both direct and indirect impact on Canada’s economy, said Peter Hall, chief economist at Export Development Canada, because so many of our exports are linked to the amount of building that goes on south of the border.

 

While the lumber industry is hit the hardest, the depressed U.S. housing market will affect a broad range of Canadian exporters, Mr. Hall said. “You need base metals to build a house, you need a lot of wood, you need asphalt shingles. These are things that Canada supplies raw materials for.”

 

Canadian companies also make goods that feed into supply chains for higher-value products, such as appliances, fixtures, carpeting and flooring, he added. “The housing market permeates many different sections of the economy.”

 

Mr. Hall points out that the U.S. housing market has been in distress now for years, since the low-rate excesses and overbuilding became apparent around 2006. Far too many houses were built in the early years of the decade, when rising prices created the illusion that housing was a great investment. The crash, when it came, helped fuel the 2008 recession.

 

Unfortunately there is no sign of any short-term recovery in the housing market. Mr. Hall projects a real turnaround won’t come for at least another year. “The U.S. economy, broadly speaking, is not going to get back on its feet until the housing market is in better shape,” he said. “Housing is always a leading indicator of economic activity.”

Source: Richard Blackwell, Globe and Mail