Has anyone heard of the consumer confidence surveys that are announced on new radio stations and written about in the business section of the newspaper?
I used to think “who cares”. Is it a big deal if some consumer confidence survey says that people are more or less confident than they were 3 months ago?
However, when you examine the real estate markets around the world, you can see how important consumer confidence is to home prices.
Here is an example to explain the importance of consumer confidence: If you called up a Canadian relative and told them that you just bought a home in the suburbs for $600,000, they would say “Great! Excellent decision”. Now if you called up an American relative and told them the same thing, they would say “You’re nuts. What a waste of money. Why would you do that?”.
The difference is that Canadians have confidence in the real estate market in Canada. They have seen values increase for more than 15 years. In Canada, it makes perfect sense to buy an expensive home in Canada because homes keep going up in value. People are willing to buy an expensive home and take on large mortgages because they are confident in Canadian housing prices.
The opposite is true in America. Americans have seen housing prices drop by 30% over the past 4 years. They have seen friends and relatives lose equity every year. House prices continue to decline even though homes are inexpensive and mortgage rates are at all time lows. They have no confidence in their housing prices.
This is the importance of confidence in the housing market and the economy. Once confidence fades, or turns from positive to negative, it affects everything. People who are not confident in their home values do not want to pay for renovations. They don’t want to pay for home services. They don’t want to spend any money on their home because their home declines in value every year. This is a “negative spiral” because, by not spending on their home, the home services and home depots go out of business. More jobs lost and more people who are forced to sell their homes, resulting in a decrease in home values…
The opposite is true in a positive spiral. When people think that their home is increasing in value, they have no problem with spending money on renos. When people see the same home sell up the street for $100,000 more than they paid for their home, they think that they are $100,000 richer. This causes them to spend more money on iphones, ipads, new clothes, new furniture and other discretionary expenditures. This spending creates jobs and drives the economy.
Consumer confidence has an enormous effect on the economy and housing prices. Let’s hope that there is no event that causes Canadians to become unconfident. The Canadian economy is doing very well compared to other countries. Unemployment is at a manageable level. With the US economy on the verge of a recession, it appears that interest rates will remain low for a long time.
These factors all reflect well on the future of the Canadian housing market. It’s true that Canadians debt to income is at an all time high. Perhaps this will prevent housing from increasing significantly in the near future, but is there an immediate threat to Canadian Real Estate market? Is there anything that might break our confidence?
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