The real estate sector’s not going to drive economic growth, Avery Shenfeld, chief economist at CIBC World Markets, said Thursday at a conference in Toronto.
Over the next two years, more condos will be finished than started. And that means fewer people working in residential construction two years from now. “This paints a picture of an economy that, if it’s going to start to do better, needs to do better in the parts that depend on our exports and the capital spending tied to that,” says Shenfeld.
He pushed aside concerns about a bubble. “I know people drive in from the airport in Toronto or even Vancouver and look at this wall of condos and say, ‘How can it possibly be that you have a need for all those units?’ The reality is we didn’t build any rental accommodation for a very long time.”
Shenfeld says demographic and immigration data suggest demand in these cities over the next few years aligns well with the number of units being built. Vacancy rates may go up a little, “but nothing that’s going to cause a big crash in rents.”
He says that while building can’t continue at the same pace as a couple years ago, we shouldn’t worry about a U.S.-style housing crisis. “Not only did they lend money to people who didn’t have the income to pay it back, they also built at a ferocious rate— almost double the trend rate in household formation in the 10 years leading up to their crash.”
Canada isn’t building “empty houses that are waiting to be sold to some non-existent customer,” says Shenfeld, adding we’re just above the 180,000 starts per year that are sustainable long-term.
Western Canada strong
The commodity outlook bodes well for parts of Canada’s real estate market. “While we’re not expecting another supercycle…we see oil remaining [around] $95 a barrel, and natural gas above $4.00. That’s very favourable for Western Canada. Those with real estate activity in [those] provinces can expect that underlying growth fundamentals will be better than those in central and eastern Canada.”
But overall, real estate fundamentals are in good shape, says Shenfeld. “Industrial property vacancies are still a bit below [those in] the U.S., but office vacancies are miles below the U.S. average,” he says. Current building will put some upward pressure on vacancy rates, which may bring rents down.
He adds that bond yields of around 3.5%, which mean poor income investing returns, have led pension funds and other institutional investors to see real estate as “a favourable place to park their money.”