Housing Headlines: Are Oil Prices Housing’s Kryptonite?

Will lower oil prices hurt our housing market?

The Canadian housing market’s supercycle seems to have met its kryptonite in oil’s price slide. Several headlines this week underscore the forecasted negative effects to come for the market, and Canada’s overall economic health.

Also read: The Jury is Out on Rising Rates>

Royal LePage: National Price Pace to Slow

The effects of lower oil prices was a main theme in Royal LePage’s annual House Price Survey, which compares the pace of price growth for homes with the previous year per region.

“For our 2015 forecast, we could not ignore the potential impact of the steep decline in the price of oil on housing markets across Canada,” stated Phil Soper, president and chief executive of Royal LePage. “In the immediate term we anticipate that the natural slowing of home price appreciation we called for in the third quarter of 2014 will be delayed in Central Canada and accelerated in the West by recent developments in the energy sector.”

Royal LePage finds growth in Canada’s housing market is in for moderation, to increase only 2.9 per cent nationally this year compared to between 4.5 – 6.7 per cent in 2014. The national average resale price is forecasted at $419,318 in 2015, up slightly from last year’s average of $407,500.

It’ll be Worst for the West

Last year, Vancouver, Toronto and Calgary led the pack on urban price gains, with the latter bolstered by steady migration to the city and high income levels. Wild rose country is expected to take the biggest short-term hit to its market in the wake of oil’s drop, as the effects will be acutely felt for businesses and the workforce. Royal LePage calls for only a 2.5 per cent increase to prices for the region.

However, local real estate experts predict that the initial slowdown will be countered by the consumer reaction to lower prices, and that prospective homeowners will revel in a temporarily soft market. Prices are expected to return to previous levels should oil recover in a timely manner.

“Oil is a major economic influence in Calgary, says Ted Zaharko, broker and owner of Calgary-based Royal LePage Foothills, “so the recent price drop is worrying,” However, he adds, “While we believe there may be some immediate term impact on the local housing market in the form of slowed appreciation, there would need to be prolonged low oil prices for any spillover into the housing market to be significant.”

There’s no price relief in store for Toronto buyers, however, as that market won’t be feeling the pinch of lower oil; Ontario’s export market will remain propped up by improving trade with the U.S. and the lower Loonie. The prices in the GTA will experience the greatest price gains of the year at 4.5 per cent, with the average sale price for houses and condos combined of $592,000.

Talk of a Rate Cut Returns

The Bank of Canada hasn’t yet formally released a forecast for oil’s impact – that will be included in their next interest rate and Monetary Policy Report announcement on January 21. However, Deputy Governor Timothy Lane has sparked speculation that the Bank may cut central interest rates. In a speech given this week in Wisconsin titled Drilling Down – Understanding Oil Prices and Their Economic Impact, Lane outlined the risks oil presents to the Canadian economy. While he noted that the initial impact would be positive for consumer spending power, he stated, “… lower oil prices are likely, on the whole, to be bad for Canada. Estimating the magnitude of that overall impact requires carefully analyzing the interplay between the various effects as they work through the economy.”

But it was his closing line that has most stirred the pot: “ We will continue to work to bring the Canadian economy back to its potential and return inflation sustainably to our 2 per cent target. However things play out, we have the tools to respond.” (emphasis ours).

This has led economists to read into whether the Bank of Canada will wield central rates as a protective measure should oil’s decline be long-lived. Already, analysts pricing overnight swap rates have assessed the risk of a rate cut to be 4 per cent – an abrupt about-face from the 8 per cent likelihood of a rate hike just last month.

Do you think the economic effects of low oil will outweigh the savings benefits for consumers? Tell us in a comment, or visit us on Facebook and Twitter.

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