In Spite of Waning Consumer Confidence, Housing Environment Still Robust

Canadian consumers are losing confidence in the economy. While consumer confidence was near an annual high at the beginning of December, it has since slipped. The weekly consumer sentiment index increased to 59.3 for the week ended December 6, up from 58.9 a week earlier. (Source: Mayeda, A., “Consumer confidence nears year high as Canadians put faith in rising house prices,” Financial Post, December 9, 2013.)

In early December, the number of people who thought real estate prices would increase over the next six months also increased from 40.0 the week earlier to 40.3—the highest level since March 2012. (Source: Ibid.)

But as we headed into the final weeks of the holiday season, consumers became less optimistic. Canadian consumer confidence levels declined for the second straight week on the heels of growing pessimism about the economy and real estate prices.

The weekly consumer confidence measure dipped to 57.8 for the week ended December 20, the lowest level in nearly two months. Canadians lost confidence in all four subjects tracked by the Bloomberg Nanos Canadian Confidence Index: personal finances, the economy, job security, and real estate. (Source: Mayeda, A., “Canada Consumer Sentiment Falls a Second Week on Housing,” Bloomberg, December 23, 2013.)

What a difference two weeks can make. On December 20, the share of respondents who thought Canadian real estate prices would rise over the next six months dropped to 34.8—the lowest level since August and a sharp drop over the 40.3 indicated just a couple weeks earlier. (Source: Ibid.)

Consumer confidence is an important economic indicator. For starters, it reflects our optimism in the state of the economy, which is echoed in the way we save and spend. When Canadians are more optimistic, they spend money; when confidence levels are retreating, Canadians spend less money, indicating unease. The more confident we feel about the stability of our incomes and jobs, the more likely we are to spend.

Despite avoiding the housing crash that decimated the U.S. market and being one of the few countries to steer clear of the Great Recession, Canada has a stubbornly high unemployment rate. In January 2013, the unemployment rate was 7.1%, and by the end of the year, it had dipped only marginally to 6.9%. (Source: Statistics Canada web site, last accessed December 31, 2013.)

Unfortunately, weak consumer confidence and high unemployment are not the best ingredients for an economy that generates roughly 60% of its gross domestic product from consumer spending. (Source: “Household final consumption expenditure, etc. (% of GDP),” The World Bank web site, last accessed December 31, 2013.)

In spite of waning consumer confidence, the fact of the matter is that the Canadian economy is getting stronger, with demand in the Canadian housing market expected to remain robust across most provinces in 2014.

The Canadian Real Estate Association has projected that resales in 2014 will come in at 475,000 homes nationally, up from a previous 2014 forecast of 465,600. On top of that, it expects the national price for a home to rise to $391,100 from $382,200 in 2013. (Source: “Canadian Real Estate Association predicts a strong year in 2014,” December 16, 2013, Toronto Star.)

In an effort to help shore up the economy and prevent a housing market crash and recession (like the one experienced in the U.S.), the Bank of Canada has held the overnight lending rate at an artificially low one percent since late 2010. The low interest rate environment is supposed to make it easier for consumers and businesses to borrow.

In fact, thanks to the Bank of Canada keeping its policy rate at one percent (which impacts variable mortgage rates), more and more potential homebuyers are able to get mortgages. And the Bank of Canada has hinted interest rates will remain low for at least a couple more years.

So in spite of declining consumer confidence, the Canadian housing market remains robust. And with artificially low interest rates expected to stay put for the foreseeable future, 2014 will continue to be an excellent environment for potential homeowners.

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