Author: CIBC World Markets - Benjamin Tal
Article Date: October 2006
It’s no longer a forecast. It’s a reality. The American real estate market is slowing—maybe too rapidly. All recent U.S. housing numbers were well below expectations and forward-looking indicators such as housing permits and inventories are deteriorating at a pace not seen in decades.
American real estate market is slowing rapidly.
As real estate markets rapidly cool, the extra money extracted from home equity will dry out. We are talking about roughly $250 billion, which over the past year accounted for almost half of the growth in U.S. consumer spending. With consumers potentially stripped of such a large chunk of cash, no wonder the market is getting nervous about the recessionary potential of the current housing slowdown. But that’s not the whole story. In the background wages are rising at an impressive pace. The net result is that the U.S. consumer will be much weaker in the coming 12 months, but the offsetting impact of the ongoing acceleration in wage growth should prevent a consumer-led recession.
In Canada, overall economic growth is projected to average 2.8% in the coming six months, a bit slower than the first half of 2006. Note that we expect consumer spending to start showing some softening in late 2006 and into 2007, reflecting a delayed reaction to higher interest rates and continued softening in the housing market.
Canadian consumer spending starting to soften.
The national economic growth number continues to be irrelevant given the significant regional economic divergence: the west versus the rest. Furthermore, given the different structural make-up of the provinces, higher interest rates are most powerful where they are least needed (Ontario, Quebec) and are much less effective in booming areas (Alberta). Overall, we believe that the Bank of Canada is done raising interest rates in this cycle and if history is a guide, we might see a moderate downward pressure on rates in mid-2007.
