It would be naïve to suggest there are not still substantial challenges ahead. Economists and pundits of whatever stripe continue to question whether the U.S. economy is permanently damaged. Is its GDP growth potential impaired for decades to come versus what it was a decade or two ago, or is it still just working through the recovery cycle from the recession? October’s government shutdown, as well as the negative PR for American tech companies resulting from the NSA PRISM-Edward Snowden affair, obviously did nothing to put a positive spin on 2013, but were these just bumps in the road?
I, of course, consider the economy, be it Canada’s, North America’s or further afield, from the context of what this means for real estate. And I’ve seen a number of trends and indicators in recent months that give me reason to be optimistic about the overall resilience of the marketplace.
To truly gauge the health of a market, you have to look at the fundamentals. Is there still a market for the product? Take Ottawa, for example, where the commercial office vacancy rate is a little high at seven to eight per cent. Still, the market overall is healthy and generally stable with overall occupancy over 92 per cent. New leases are being done, perhaps a bit slowly, but nevertheless they are being done. Even in those markets where negative economic conditions have led to fire sales of property, a loss for one group of stakeholders usually creates opportunity for others. This year’s sale of the former Black & Decker plant in Brockville is a perfect example.
Across Canada …
Canada’s housing market continues to generate a lot of buzz, most recently, from the Office of the Superintendent of Financial Institutions, which warned that the market requires vigilance to keep it from becoming overheated.
It’s true that incomes versus housing costs ratios in many Canadian cities remain distorted. But Federal Finance Minister Jim Flaherty’s repeated interventions in recent years to tighten mortgage rules and prevent Canadians from overextending themselves with cheap credit appear to be working. Banks continue to lend and buyers continue to be able to qualify to borrow the amounts they need to purchase homes. Most pundits agree Canada’s housing market is headed for a soft landing. Concerns about higher interest rates so far have proven hollow.
And let us not overlook the growing power of the echo generation. We hear again and again of how Canadians under the age of 45 are being squeezed financially, doomed to suffer a quality of life that can’t match that of their boomer parents. But Canada Mortgage and Housing Corp. recently forecast that this group is poised to hit its financial stride over the next decade as the boomers leave the workforce en masse.
Ottawa’s housing market in particular, is expected to benefit from the roar of the echo generation. Nor should we forget the transformation to come as all those retiring boomers change over their housing as they adapt to a new senior’s lifestyle. The impact on the housing market of this growing group of retirees can’t be underestimated; even without job growth, if every person who retires has their job replaced and if they stay in their community, every retirement leads to the demand for one new dwelling.
And south of the border
Then there is the auto sector, the humbled engine of the Ontario economy. The average passenger car in the U.S. (and the numbers for Canada can’t be much different), is more than 11 years old. Yes, this is a testament to the quality of today’s automobiles, but it also suggests there is substantial pent-up demand as a result of consumers curbing their spending over the past five years. Quality or not, you can only keep a heap on the road for so long before it becomes more economical to trade it in. Auto sales are poised to jump.
And while there is already chatter about the U.S. hitting another debt ceiling in the spring, raising the spectre of another government shutdown, that’s only part of the story. If we measure U.S. debt by its size relative to the nation’s economy, rather than the dollar amount, it is in fact starting to decline, which could serve to put downward pressure on interest rates and keep inflation at a healthy level.
U.S. public debt currently stands at about 75 per cent of the nation’s GDP and will remain at about the same level next year, according to the latest projections from the Congressional Budget Office. After that, it is expected to fall to around 71 per cent of GDP in 2018. Long-range forecasts suggest a tick up after that, but in the short term their deficit seems to declining and is down by one-third this fiscal year from last. And while it’s a common perception that China has the U.S. on the ropes because it holds so much U.S. debt, it in fact holds only 7.8 per cent of it.
The cloud of doom has abated somewhat in Europe as well, even if there is still a risk of deflation and legitimate concerns about consumer and business debt levels, and the impact of a strong euro.
Is the future so bright we have to wear shades? Hardly. But you have to look past the hype of today’s headlines and look at the fundamentals to get an accurate bearing on what is really going on and what direction the trends are headed.
Don’t take my word for it. Do your own due research and diligence before making decisions that could have drastic consequences for your real estate portfolio.
To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.