Lower real estate costs could trigger increased retail spending by some Canadians

TORONTO, Nov. 29, 2012 /CNW/ - A cooling in Canadian house prices may not be all bad news for the country's economy as cheaper real estate may free up retail spending power for prospective first time home buyers, finds a new report from CIBC World Markets.

The report notes that while the evident slowing in Canadian home sales will take a bite out of domestic economic growth by reducing new housing starts and related sales of furniture and appliances, a gradual retreat in prices may be beneficial for parts of the economy and for some Canadians.

"For one, a retreat today could be the preferred alternative to a harder landing from even higher prices down the road," says Avery Shenfeld, chief economist at CIBC. "Less understood is that cheaper home prices could bring winners as well as losers across the economy.

"What of the young newlyweds scraping by on mac and cheese in order to save for their first home? A slip in prices could ease that task, freeing up spending power in the process."

Mr. Shenfeld notes that increases in Calgary house prices have trailed the Canadian average over the past five years, including a near-15 per cent dip in 2008, yet retail spending in the city has outperformed the national average.

"British Columbia house prices led on the way up and now down," he adds. "But affordability issues have been a drag on B.C. growth; the rapid run-up in prices was one factor turning the province from a beneficiary of in-migration to a net source of emigration. Dreams of retiring in B.C., and taking one's spending money to that province, might be back in vogue if relative prices of housing are better in line with other provinces."

While deflation in housing prices has widely been cited as the cause of the economic woes in jurisdictions like the U.S. and Ireland, Mr. Shenfeld argues that it wasn't the falling prices that caused the core problems in these economies but rather the accompanying wave of defaults that devastated their financial systems.

He notes that, while a Canadian home owner that counted on downsizing to fund her retirement might have to pare spending plans, Canada is not in danger of a similar crash.

"Canada hasn't lent as aggressively to its lower-income home buyers, and a correction in house prices caused by a tighter regulatory environment and earlier price overshooting, rather than by defaults, would not on its own generate that same banking system shock. Most historic wealth declines coincided with other sources of economic weakness, including rising unemployment or high interest rates that depress consumption.

"As a home owner, I'd prefer that one particular Toronto street stays insulated from any house price declines. But to look on the bright side, a gradual cooling in house prices, one early enough to avoid a larger financial sector shock, will look good in hindsight if Canada gets more support from global growth in the next two years."

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/einov12.pdf.

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SOURCE: CIBC World Markets