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Domestic fundamentals support strong residential growth, states economist

Don Wall
Domestic fundamentals support strong residential growth, states economist

Canada’s homebuilding sector has thrived in recent years because of our well-educated workforce, our tendency to live in large cities, low interest rates and an immigration policy that entails “poaching” the best and brightest from other countries.

Those factors and others are still in force in 2021 despite the pandemic, National Bank of Canada chief economist Stefane Marion told a recent construction conference, meaning the residential building sector is poised to have a strong year.

“I think 2021 will be a banner year,” Marion said during an economic overview that kicked off the Navacord Challenge and Change construction conference.

“Do I think there is some froth in the market, some speculation? Yes…but the domestic fundamentals are still supportive to the housing market, assuming that we can get the immigration quotas back on track. I still see demand for the housing sector to be remaining relatively strong for the next 12, 18, 24 months, depending on where interest rates are, but 2021 will be a good year.”

Marion forecasted real GDP growth of four per cent for Canada’s economy for 2021 and took stock of a number of factors that are converging to create strength both internationally and domestically.

Driving growth worldwide is the trade in consumer goods, Marion said — COVID-related shutdowns mean there is a poor market for services, thus consumers are spending on goods.

“Just nine months after the start of the pandemic, volume trade flows are already three-and-a-half per cent above the pre pandemic level. Guys, it took more than five times longer than that after the 2008-2009 recession to get to three per cent of the pre-recession level.”

This recession, governments including Canada’s sent money directly to households, Marion noted, helping support consumption of goods manufactured overseas and the overseas economies. Emerging markets now account for 60 per cent of global GDP and those markets did not face a “deleveraging cycle,” so they are spending.

That is impacting commodity prices worldwide, Marion said, which is good for Canada’s non-energy commodities, accounting for 57 per cent of all commodities produced in Canada. This in turn is good for construction demand, he said.

“With rising commodity prices, it means that the construction industry, at least at the residential level, is likely to show good action on a pan-Canada-wide perspective, it won’t be limited to one region. It’s a combination of low interest rates and rising commodity prices that will drive widespread stimulus in the construction sector for 2021.”

Even job losses of 200,000 in Canada during the pandemic will not seriously impact the demand for residential housing, Marion explained.

Most of the lost jobs were low wage and part time, while the economy recently added 72,000 high-wage jobs.

“That drives your credit cycle, that drives your demand for household formation, that drives demand for the construction sector. You get a bigger bang for your buck from industries that pay more than the national average.”

Marion explained the ability to work from home correlates with education levels, and among people with university degrees in Canada, employment is four per cent higher than the pre-pandemic level. Seventy-five per cent of Canadians have post-secondary education, compared with 66 per cent in the U.S., and those working from home have been saving during the pandemic and have more resources to become homebuyers.

Immigration, which fuels homebuying in large markets in Canada, was at 54 per cent of normal in 2020 but most experts expect that to return to normal levels.

“We are the best talent poachers in the world,” said Marion. “We are able to target young, educated people that are willing to settle in Canada.”

Many new immigrants have not been impacted by the recession, and they are supporting household formation in the construction industry, Marion said.

Immigration also impacts commercial real estate. One big difference between Canada and the U.S. is that more of the young, educated people Canada attracts tend to settle in large urban areas — 50 per cent of Canada’s GDP is determined by the five major metropolitan areas of Toronto, Montreal, Vancouver, Calgary and Edmonton.

“So the issue for commercial real estate is, the pandemic has shown that people want to work from home going forward. That’s interesting. And to the extent that we don’t get the immigration policy back on track, you could fragilize the commercial real estate segments. This is something where I’ve been telling the government, you have to focus on that, helping core downtown areas in a way that the Americans are unable to do.”


Follow the author on Twitter @DonWall_DCN.

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