Canadians watch and observe the rest of the world with a keen interest in politics and the world economy. However, many of us might not understand the actual impact that the U.S. economy has on our way of life, including the Canadian real estate market. As a homeowner, buyer, seller or renter, it’s important to be aware and understand the type of impact that our neighboring country has on our own country. Here are four ways the U.S. economy impacts Canadian real estate.
1. RECESSION, TRADE WARS AND THE CANADIAN REAL ESTATE
You’ll be happy to know that according to BMO Capital Markets, we’re going to “skirt recession.” BMO’s Michael Gregory points out that on a global level, things will slow. Much of this is based on trade wars between the U.S. and China which will impact Canada.
Trade wars occur when one nation imposes tariffs on another nation’s imports and as a result, foreign countries impose similar forms of trade tariffs to protect their interests.
“We do think the worst effects of this trade war will probably be felt around the turn of the year,” Gregory says. “…we’ll get a little bit of easing (in the economy), but that’s it.”
As well, Greg Taylor, chief investment officer at Purpose Investments, thinks investors could suffer if the trade wars don’t go well. He believes a truce will be reached, although he is not sure exactly what that would look like. It could be a delay of tariffs, or future agriculture buys from the Chinese. Either way, he feels confident the worst-case scenario isn’t likely to happen.
However, where Canadians might feel the pinch is in the purchase of new homes. The problem is that builders who purchased steel or aluminum during the time Trumps tariffs were in play might be looking for ways to make back the additional cost they were forced to pay when suppliers panicked. The tariffs imposed by Trump in May 2018 subjected Canadian exports of steel to a 25% tariff, and aluminum to a 10% tariff. Although the tariffs were lifted, according to Gerard McCabe of real estate consultancy firm Turner & Townsend, either the owner or the end-user will be the ones expected to pay. “In terms of condos, it’s just factoring its way into the price. Developers, they’re not going to take the hit. They’re going to continue to make the margins they need to make on the development and they’ll pass the cost of the development… on to the end-user or the purchaser, until such times as the price gets to a point where it affects sales, then they’ll reduce the price.”
2. THE U.S. IMPACT ON THE CANADIAN RESIDENTIAL CONSTRUCTION
Canada is experiencing population growth which is working out well for residential construction when it comes to investments and productivity, says Gregory. Canada is seeing what he calls a “boomlet” thanks to immigration that is creating a demand for housing.
However, because of trade war fall out, although cities such as Ottawa, Toronto, Montreal, and Vancouver might be flooded with projects, if builders expect a sudden drop in prices when the metal tariffs were lifted, they were sadly mistaken.
He views the prices as the new norm. Only in the case where we see market changes and less building and volume of construction will we see prices drop based on a lift in tariffs. The price drop would be due to an increase in market competition.
3. THE FALLOUT OF THE U.S. DRIVEN GLOBAL ECONOMY CHALLENGES
When we look at the data for the Canadian real estate in September, there was a 2.5 percent decrease in the seasonally adjusted annual rates of housing starts from August, according to Canada Mortgage and Housing Corporation (CMHC). To some, this is a bad sign. Avery Shenfeld at CIBC Capital Markets told the Financial Post: “While we could get some growth from real estate agents fees and renovations, the pop in GDP growth we got from housing in Q2 is likely to be less vigorous in the next couple of quarters.”
Munk Senior Fellows’ Philip Cross points out the housing market is always a major growth source in the economy. However, August’s numbers are not so optimistic. “The effects of the turmoil that took hold in the global economy over the summer may not have fully materialized,” explains Cross. “Canada may yet experience a more protracted economic slowdown.” And who is driving these global economic issues: President Trump.
4. FEDERAL BANK AND INTEREST RATES
When comparing what action the banks are taking, we see that the U.S. federal bank cut interest rates, while Canada is content leaving things as is at least for now. Gregory at BMO, takes the position that the U.S. slashed interest rates to counter what was happening with the trade wars.
Meanwhile, in Canada, the CBC reports the Bank of Canada’s Stephen Poloz is envisioning global growth will drop to 2.5 percent. This will lead to drops in resource prices. The result? A loss of Canadian jobs and a drop in housing prices. These worries are the reason we didn’t see changes to our interest rates.
Wrapping it Up
The U.S. economy and factors such as trade wars and bank rates impact the Canadian real estate market. Despite Trump’s hostile approach to trade and the negative impact it has had on the global economy, the Canadian economy remains resilient.
The CBC also reports this can be seen in two major economic elements: consumer spending and, real estate prices. Supported by growth in both jobs and wages in Canada, despite Trump’s attempts to overpower the world’s economy, Canada stands strong and so too does our real estate market so far.
At OnlyWith.ca we are more than real estate agents. We keep stay up to date on everything that has an impact on the Canadian economy and specifically the real estate market. We do that, to help our customers make better-informed decisions. Experienced in navigating the challenges of a changing real estate market, we are here to help you in your home search. Reach out to one of our agents today so we can help you find your home.