Low house prices not all bad news, CIBC says

A slowdown in house prices isn't necessarily completely negative for Canada's economy, one of the country's largest banks said today.

"Cheaper home prices could bring winners as well as losers across the economy," CIBC World Markets economist Avery Shenfeld said.

After a multi-year run-up, price gains have slowed down and even started declining in many Canadian cities. The Canadian Real Estate Association reported recently that the average price of a Canadian home was $361,516 in October, virtually unchanged from a year ago.

'A gradual cooling in house prices … will look good in hindsight'  —CIBC economist Avery Shenfeld

That slowdown has led to much speculation that a modest price correction — or worse — could be in the offing, and gotten economists thinking about the implications of declining home prices on Canada's economy.

Contrary to conventional wisdom, Shenfeld suggests a decline in home prices would be welcome news for other parts of Canada's 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," he said.

Shenfeld's theory is that every dollar spent on housing is a dollar that could otherwise be spent somewhere else. So if a would-be homebuyer is able to knock $10,000 off the purchase price, that's $10,000 that's likely to be spent somewhere else, instead of pledged to a bank to pay back the mortgage.

The less "house poor" someone is, the more he or she is able to spend money elsewhere in the real economy, the theory goes.

Local examples

Realtors are quick to note that all real estate markets are local, so extrapolating from national data could often be misleading. And indeed, Shenfeld takes the example of the City of Calgary's housing market to illustrate his point.

In Calgary, house prices have trailed the Canadian average over the past five years, including a drop of almost 15 per cent in 2008, when many markets were seeing outside gains.

Yet the data shows despite Calgary's housing market underperforming the national average for the last half-decade, the city has posted some of the largest increases in retail spending over that time period, outperforming the national average in that category handily.

Shenfeld points to the nearby British Columbia housing market to illustrate another point. The province's housing prices led the country on the way up, and are currently doing so on the way down. Before 2003, the province saw a net outflow of people to other provinces, but between 2003 and about 2010, B.C. saw net in-migration.

The rapid run-up in prices was one factor that caused that trend to reverse again, Shenfeld suggests.

"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," he said.

No crash expected

While the report does acknowledge there's financial pain to be had from lower housing prices, Shenfeld says that doesn't mean Canada's in for the type of calamity that a housing crash wrought on the U.S. and Irish economies in recent years.

In both cases, it wasn't just lower home prices that started it all, but the wave of defaults that followed. That's simply less likely to happen here, Shenfeld says, because Canada never loaned as aggressively to low-income buyers due to much tighter regulation.

Shenfeld notes that while a Canadian homeowner that counted on downsizing to fund her retirement might have to pare spending plans, he doesn't expect any widespread economic pain related to housing on the horizon.

"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," he said.