Stock market volatility has wide-ranging effects. No one knows that better than those who invest in real estate and those who work in the industry.
To get a better sense of what is happening in that area, Global News spoke to Jason Mercer, senior manager of market analysis at the Toronto Real Estate Board, and Adrienne Warren, senior economist at Scotiabank.
Global News: Overall, how will recent developments on stock markets in the U.S. and Canada affect the real estate market in Canada?
Jason Mercer: Overall volatility suggests uncertainty about the economic outlook, and that affects consumer confidence. If people remain confident in their ability to purchase homes, sales will remain strong.
If there is a downturn in the real estate market in the near future, it will likely be temporary. For example, last summer some factors – new lending guidelines, interest rate hikes and uncertainty surrounding the HST – caused a drop in demand for housing, but that turned out to be temporary.
Adrienne Warren: The negative wealth effect from stock market losses is likely to dampen consumer confidence and big-ticket spending in the months ahead. For the housing market, I’d expect to see fewer ‘move-up’ buyers. First-time buyers typically wouldn’t have a significant equity portfolio, though to the extent that it limits their ability to tap into RRSP holdings or spills over to a softer job market, demand here too could slow.
The volatility could lead to low interest rates. How would that affect the real estate market?
JM: Stock market volatility could make sales drop but that would likely be temporary; lowered interest rates would make homes more affordable and that would lead sales to rebound. The turnaround in 2009 was quite quick because people moved from the sidelines into the housing market.
AW: The increased likelihood that interest rates will remain lower for a longer period of time is supportive of housing demand. However, if accompanied by slower economic growth and hiring, the net effect is still likely to be negative. For current homeowners, continued low interest rates are good news.
Has market volatility prompted Canadians to shift their focus to real estate investment?
JM: That could very well happen. Money moving from equity to government securities pushes yields down. That affects borrowing costs, which makes housing more affordable.
AW: There’s no strong evidence of a rise in investor-related property demand. Indeed, many investors appear to be favoring the safety of bonds and cash over higher-risk equity or real estate investments.
The high degree of volatility in financial markets is likely to reinforce the perceived safety of real estate investments. Nonetheless, high home prices should act as a deterrent to many investors contemplating adding real estate to their portfolios.
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