Here's an interesting great article from Scott Barlow of The Globe and Mail's Advisor on the correlation between commodity prices and real estate values. I've never heard of this before, but I think it's a unique "global" perspective. What Scott doesn't reference is the key factors that influence the real estate cycle such as demographic (net migration, vacancy rate, employment, new construction, local supply and demand), financial (incomes, affordability, finance availability) and emotional. These would be more relevant for local real estate values.
Commodities' fall threatens homeowners, too
sbarlow@globeandmail.comEven if you don't own gold bullion or mining shares, the recent meltdown in commodity prices may affect your personal bottom line. The reason: Canadian home prices seem to echo moves in global commodity prices.
Granted, the relationship is far from perfect. But consider this: Canada is one of only a handful of developed nations where housing prices remain well above 2007 levels. While real estate prices fell in the U.S., Spain, Britain, Ireland and Japan, the domestic market has escaped the carnage and is actually up by 20 per cent since the financial crisis.
Another market where home prices are still showing double-digit gains since 2007 is Australia, also a resource-rich nation. Is it mere coincidence that two countries to so spectacularly avoid a housing bust are both beneficiaries of the commodity boom? That seems unlikely. And the relationship raises the question of what comes next, now that commodity prices have come off the boil.
The accompanying chart shows that Canadian home prices have followed a similar path as world commodity values over the past few years, as measured by the S&P/GSCI index, which tracks global commodity prices. The correlation between homes and commodities is 0.53, where 1 would mean a perfect one-to-one relationship and 0 would mean no relationship at all.
A 0.53 correlation suggests the two markets are somewhat linked - a point driven home by the chart, where you can see periods where the two moved closely together and other times when they diverged.
Both Canada and Australia were spared from the worst effects of the financial crisis by China's enormous economic stimulus plan in 2009 and 2010. As China's infrastructure boom accelerated, the increased demand for commodities allowed Australian iron ore miners and Canadian copper producers to restore profitability long before the average U.S. corporation. During this period,
Canadian home prices moved roughly in line with commodity prices.
But the relationship broke down in 2010 as growth in home prices slowed while commodity prices spiked higher. The U.S. Federal reserve was largely to blame for the gap. Commodities climbed after the Fed announced a second round of quantitative easing and investors positioned themselves for a weakening U.S. dollar and stronger U.S economic growth. When the Fed's strategy failed to produce the desired results, commodity prices fell back.
Home prices and commodity prices now seem to be moving in the same direction again and that should give pause to people who think that the only threat to the domestic real estate market is higher interest rates.
As departing Bank of Canada Governor Mark Carney is fond of reminding us, Canadians' household
debt has reached precarious levels that threaten future economic growth. In 2007, the debt-to-disposable-income ratio for U.S. consumers peaked at 134 per cent. The average Canadian household now owes 160 per cent of its disposable income.
Interest rates are low enough that Canadians can carry large amounts of debt. But a sustained slide in commodity prices could ignite a housing correction if unemployment rises, paycheques shrink and
Canadians find it harder to manage their large debt loads.
A commodity bear market would be felt throughout the Canadian economy. Oil and gas companies would cut back on construction, reducing the need for workers. Mines would reduce shifts. Banks that depend on investment banking and trading revenues would see slower earnings growth. So would suppliers to the oil patch and heavy equipment dealers.
Canadians should be alert to the dangers posed by the commodity slide. With global growth slowing, there has rarely been a better time to start chipping away at personal debt.
