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Economy

More Mixed Signals On The Housing Economy

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I grew up in the 80s, a period of time when inflation and recession were common language. At the end of the 70s inflation was raging and so the Federal Reserve dialed up interest rates, a recession followed. My memory of 1982 includes endless reports about layoffs and economic hardship and big midterm wins for Democrats. Then things turned around. Today, the story isn’t so simple, and it never is as events are unfolding. The Ringer has a great podcast called Plain English and I found their episode The Housing Recession is Coming informative and interesting. I speculated last month on what’s happening with the housing economy, but the podcast got me thinking again about what might happen to housing in 2023.

Host Derek Thompson starts with the weird signals coming from data sources reporting on various economic trends especially housing. Some measures show housing prices and rents falling beginning earlier this year while the so called “headline inflation rate,” the one reported by the government shows inflation up, driven largely by increased housing costs. A broad category called “shelter” is a third of the CPI calculation, and when that indicator gets hot, then overall inflation goes up. Meanwhile, in the broader economy, Gross Domestic Production (GDP) is down and has been two quarters in a row, yet employment numbers are holding strong.

Thompson hosts Mark Zandi of Moody’s Analytics to tap his brain on what’s going on, especially with housing. First, there is a good conversation on methodology. The rent tracking platforms like Zillow are must faster with their surveys of rent data, while the Bureau of Labor Statistics lags, using a survey instrument that uses a unique sampling methodology. The point Zandi makes is that the BLS numbers lag behind other measures of rent, so rents actually probably, overall, started falling early in the year and continue to fall or flatten. Those changes won’t show up in the BLS tallies until later, perhaps easing inflation toward the end the year.

Zandi takes on the Thompson’s question about whether “this is 2007 again,” with housing teetering on the edge of a precipitous crash. I found Zandi’s answer sensible. Probably not. We are not on the verge of crash but more of a correction; because of lagging production of housing over the last decade, supply still has not caught up after the 2008 housing crash. Therefore, even though prices for housing did rise steeply, the lack of supply creates a ceiling. He echoes my point about people that may have bought houses in places like Boise and Austin at the top of the market with cheap money, but now are seeing the market value of their purchase falling back to earth.

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He also echoes my concern that if there is a real and sustained recession, those households who went all in on buying housing may face big challenges. If a Fed driven recession hits in early 2023 to correct for inflation, and hours are cut or jobs are lost, the mortgage payment might be more difficult to make, leading to foreclosures. This all depends on how deep and lasting any recession may be, and Zandi posits that we’re not in a recession now and because of strong job numbers, may not really tip into a deep and lasting one in 2023.

To Thompson’s question about the construction industry and whether jobs will evaporate there, Zandi bets on multifamily housing construction to keep that sector at least flat since that housing type seems to be doing well even while single-family construction is lagging. I’m skeptical for no good reason about Zandi’s view of multifamily other than I think it remains to be seen what happens with job growth and income and growth.

And that’s where I’ll jump in with my own thoughts as we move toward the end of 2022. I’m no economist of course, but I’d revise my early thoughts and guess that we will be entering a period of recession in 2023, one that will see many of the housing purchases of 2021 seem like a big mistake. I also think that building of multifamily projects, especially townhomes, which are for-sale products, will see high vacancy rates. Many townhomes and condominiums will be sitting on the market for months before they get pulled off the market or sold at big discounts. Interest rates are high, and I think people – investors and buyers – are going to stay out of the game through the first quarter of 2023.

The psychology of 2023 is going to be key as it always is an economy. Will people feel happy that we made it through a relatively Covid-free 2022, and will that lead to an exuberance that will keep production high? Won’t that lead to more inflation and thus more pressure from the Fed on interest rates? How will those things work in combination? How will all this impact housing policy, something I know much more about that economics?

That last question depends on something Thompson and Zandi discuss, the nature of our measures of monthly housing costs. Unlike gasoline, prices for housing don’t go up and down perceptibly on a daily, weekly, or even monthly basis. Generally speaking, if the news reports big spikes in rents, most people’s rent stays the same. And mortgages don’t move at all. If the market remains volatile, with “corrections” or “collapses” or “spikes” (choose your adjective or adverb), people will have to compare their own experience with signals in the economy.

I’ve often thought we’d be better off if rent and mortgages were paid on a weekly or even daily bases, or withheld from each pay check. This might ease the sting of fluctuations in prices, making them less perceptible. If people had to write a check for their taxes every month or every quarter like small business owners do, attitudes about taxes might be different. I wonder if people would be less panicked and thus less inclined to call for rent control if they didn’t have to write a huge rent or mortgage check every month. Right now, broad economic volatility in the housing economy doesn’t feel abstract; it makes people worry and crave things like rent control.

Volatility in the housing economy is going to continue well into 2023, and depending on the outcome of the election, there will continue to be pressure on policy makers to regulate the ups and downs out of the market. Whether that pressure pushes us further toward more and more government intervention or better policy will depend on whether policy makers can keep their heads and whether they can find better alternatives like less regulation and more efficient subsidies.

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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Business leaders say housing biggest risk to economy: KPMG survey – BNN Bloomberg

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Business leaders see the housing crisis as the biggest risk to the economy, a new survey from KPMG Canada shows.

It found 94 per cent of respondents agreed that high housing costs and a lack of supply are the top risk, and that housing should be a main focus in the upcoming federal budget. The survey questioned 534 businesses.

Housing issues are forcing businesses to boost pay to better attract talent and budget for higher labour costs, agreed 87 per cent of respondents. 

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“What we’re seeing in the survey is that the businesses are needing to pay more to enable their workers to absorb these higher costs of living,” said Caroline Charest, an economist and Montreal-based partner at KPMG.

The need to pay more not only directly affects business finances, but is also making it harder to tamp down the inflation that is keeping interest rates high, said Charest.

High housing costs and interest rates are straining households that are already struggling under high debt, she said.

“It leaves household balance sheets more vulnerable, in particular, in a period of economic slowdown. So it creates areas of vulnerability in the economy.”

Higher housing costs are themselves a big contributor to inflation, also making it harder to get the measure down to allow for lower rates ahead, she said. 

Businesses have been raising the alarm for some time. 

A report out last year from the Ontario Chamber of Commerce also emphasized how much the housing crisis is affecting how well businesses can attract talent. 

Almost 90 per cent of businesses want to see more public-private collaboration to help solve the crisis, the KPMG survey found.

“How can we work bringing all stakeholders, that being governments, not-for-profit organizations and the community and the private sector together, to find solutions to develop new models to deliver housing,” said Charest.

“That came out pretty strong from our survey of businesses.”

The federal government has been working to roll out more funding supports for other levels of government, and introduced measures like a GST rebate for rental housing construction, but it only has limited direct control on the file. 

Part of the federal funding has been to link funding to measures provinces and municipalities adopt that could help boost supply. 

The vast majority of respondents to the KPMG survey supported tax measures to make housing payments more affordable, such as making mortgage interest tax deductible, but also want to maintain the capital gains tax exemption for a primary residence.

The survey of companies was conducted in February using Sago’s Methodify online research platform. Respondents were business owners or executive-level decision makers.

About a third of the leaders are at companies with revenue over $500 million, about half have revenue between $100 million and $500 million, with the rest below. 

This report by The Canadian Press was first published March 27, 2024.

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