If current home price trends continue, Canadians are going to be feeling wealthier in the coming years. And when Canadians feel wealthier, consumer spending tends to rise leading to better country-wide economic performance.
While this may seem like economics 101-style logic, TD senior economist Brian DePratto took a closer look at just how large an impact this straightforward dynamic has on the Canadian housing market and the country’s broader economic performance.
First, DePratto observes, in a note published Monday, that Canadian consumer spending growth has been dulled recently despite a number of encouraging market fundamentals — strong population growth, healthy labour markets and relatively low borrowing costs — that would typically result in robust growth numbers.
There are a few reasons this spending isn’t materializing, including weak consumer demand for automobiles, but the TD economist zeroes in on the country’s housing market as a major contributing cause. Yes, the Canadian housing market has “come back to life” over the past six months as DePratto puts it. But, this will not be enough to significantly boost consumer spending — at least not yet.
Last month, another TD report noted that the Canadian housing market still had “room to run” in 2020 even after six straight months of growth. As of August 2019, home sales were up 13 percent compared to the same period last year. The average home sales price also rose by over six percent compared to 2018.
After a tough 2018 and slow start to the year, the housing market is undeniably gaining momentum. And, as DePratto writes, there is an immediate positive economic benefit to more Canadians jumping into the market through consumer spending typically associated with homebuying, like new furniture.
This is an important benefit, but it pales in comparison to the long term benefit of rising home values and a sustained boost in market activity.
In economics, it’s known as the wealth effect.
“Many estimates, including the Bank of Canada’s suggest that each dollar of net housing wealth increases consumer spending by about five cents, roughly two years later,” writes DePratto. “That may not sound like a lot, but it is important to remember that the effect occurs for all homeowners — not just those that have recently bought or sold — a sizeable base in a country with a nearly 70% homeownership rate.”
DePratto points out that, aside from some red hot markets in Quebec, housing wealth has been fairly flat across the country since 2018 as a result of government policy intervention meant to tamp down what was perceived to be a runaway housing market.
Housing wealth is set to resume its upward march this quarter, but the effect of this trend will not be visible until later in 2020, writes DePratto.
This is because of the roughly two-year lag time the economist says is a defining characteristic of the rise in housing wealth and the corresponding increase in consumer spending.
All that is to say, the situation is looking a lot more encouraging down the line as Canadian consumer spending will likely shake off any remaining cobwebs thanks to a reinvigorated housing market.
Article from WhichMortgage.ca: https://www.livabl.com/2019/10/canada-economy-wealth-effect-2020-home-values.html