In Brief: When the New Brunswick Telegraph-Journal was looking for informed comment on the worsening economic climate, it turned to AIMS executive Vice President Charles Cirtwill. Speaking specifically of housing prices, he points out the scenario is completely different in Canada than what happened in the United States.
As the global economy reels in the wake of the American sub-prime mortgage meltdown, questions have arisen whether a similar crisis could unfold as housing markets heat up in New Brunswick.The average residential housing price in the province was expected to rise by about seven per cent overall this year, according to Peter Pappas, president of the Saint John Real Estate Board. In the Saint John region, where the bulk of the developing energy hub projects are based, city planners have predicted demand for housing will spike by more than 25 per cent.
Projects include the Sussex potash mine, refurbishment of the Point Lepreau nuclear generating station, the new liquefied natural gas terminal and pipeline, and potential second oil refinery and nuclear unit. A report studying the impact of these projects suggested they could generate up to $44 billion in spending and 33,000 jobs over 10 years.
Pappas said there is “no question” housing prices will continue to shoot up as the province approaches the peak of the energy boom.
But if the potential projects fail to come through, how will that affect a housing market that has already started to react?
According to University of New Brunswick economics professor David Murrell, the situation in Saint John is typical for a province preparing for major developments. As more people are attracted to the promise of new jobs and prosperity in New Brunswick, housing prices have followed suit by climbing.
“Suppose something bad happens – the cancellation of a major project,” Murrell said. “We will have a dramatic drop in demand. … (Homeowners) sometimes have to go through gradual rises and falls in prices.”
But those who purchased when the market was hot will have made a long-term mortgage commitment and should be able to weather that, he added.
Deferment of some of the energy-hub projects is likely in light of the recent financial turmoil, as construction money in general becomes harder to come by, noted Charles Cirtwill, executive vice-president of the Atlantic Institute for Market Studies.
Major setbacks in the projected energy-hub growth would likely lead to a “correction” in housing prices, Pappas said. But over the past three years, prices have risen consistently by about eight per cent, and even if there was a correction, it would not be high enough to negate that amount of growth, he said.
“There’s nothing in our near, foreseeable future that indicates we’re going to slow down too much,” Pappas added.
In addition, fundamental differences in lending practices north and south of the border will serve to insulate New Brunswickers from anything on the scale of the U.S. mortgage crisis. The situations are not even comparable, said Tom Workman, a political scientist at the University of New Brunswick in Fredericton.
“The mortgage crisis and housing crisis in the States is due to the fact that through the sub-prime lending market, they were artificially – very myopically, shortsightedly – stimulating new housing starts by offering easy credit,” Workman said, noting the lending was based on the scenario of the value of the homes continuing to increase, whereas the reality was the opposite, which spurred massive defaulting.
“There’s more caution in the Canadian context. Any boom, however significant, is not stimulated by reckless lending policies,” Workman said
The two environments are very different, Cirtwill agreed. In the United States, mortgages were given to those who could not afford to pay them. In Canada, both lenders and buyers tend to be more conservative and avoid “creative practices” such as sub-prime lending.
In addition, the United States was missing the key ingredients that would explain recent housing price run-ups, noted TD Bank Financial Group economist Pascal Gauthier.
“When you see a housing boom built upon an underlying economic boom, it’s certainly less worrying,” Gauthier said. “When you have population and labour-force increases, it’s normal for prices to play catchup.”
New Brunswick’s housing prices will be kept in check if incomes do not keep up, he said, adding a lag in the energy boom would put a crimp on demand and result in a price decrease.
Few “NINJA” stories in the context of mortgage borrowing – people with “no income, no job, (no) assets-” have been seen on the northern side of the border, another indication of the higher level of caution exercised in the Canadian marketplace, Cirtwill said.
But in light of the tumultuous financial climate, he said it is likely we will see a slowdown in housing in response to a “check” on people’s enthusiasm for the emerging boom.
“Probably across the board we will see tightening in the housing market,” Cirtwill said. “We’ve seen a nice growth in value throughout the region. That’s going to slip a bit, but how far it slips will depend on what happens in the U.S. to some extent.”