New trade agreement unlikely to disrupt Canadian real estate market

The United States-Mexico-Canada Agreement (USMCA) has the potential to restore clarity to the trade relationship between the three countries after a period of uncertainty, bringing stability that may support consumer sentiment and economic growth. Although the long-term implications have yet to be determined, the agreement may support key sectors of the Canadian economy and maintain job stability, which are critical factors to drive a strong real estate market.

Demand unfazed by price increases, interest rates and tariffs

Current and prospective homeowners in Canada have witnessed price increases in most large cities over the last five years, notwithstanding recent softening in some markets. Since early 2017, the market has remained resilient despite several interest rate increases, the implementation of Ontario’s Fair Housing Plan, a foreign buyers’ tax, and stress testing buyers’ affordability.

The housing industry has also experienced some cost increases driven by tariffs on construction materials such as steel, though the impact on prices and demand has been muted. For instance, the 25% tariff on steel increases the cost of building high-rise condominiums.

However, since steel only accounts for approximately 4% of total construction costs, the actual cost increase for consumers would be approximately 1%.  Given the current environment of strong demand, a 1% increase in condo prices is not likely to have a major impact in affordability or demand. Therefore the fact that USMCA does not address those tariffs should not have a significant impact in the near future.

The Canadian real estate market is driven by many factors, notably the job market. If prospective home buyers feel confident about their job stability and income, price changes become less of a barrier to buying. This is why, by protecting key sectors of the Canadian economy, the new free-trade agreement may be a net positive for the real estate sector.

Stability for the auto sector

The U.S. government had previously threatened tariffs on the Canadian auto sector, which created significant uncertainty because the Canadian economy is heavily dependent on the auto sector.

Indeed, this sector directly employs over 125,000 people, with an additional 400,000 employed in aftermarket services and dealership networks. The auto sector contributes $19 billion to Canada’s GDP, or approximately 1.2%. Simply put, there are very few industries that would not be impacted – directly or indirectly – by a dramatic slow-down in the auto sector.

USMCA’s updated rules of origin could actually end up providing a boost for Canada’s auto sector, because at least 40% of a vehicle’s value must be made by workers who are paid at least $16 dollars per hour. The U.S. has preserved the right to impose auto tariffs on national security grounds, but Canada would have an exemption of 2.6 million passenger vehicles, which sits well above current production levels.

Longer sunset clause to support foreign investment in Canada

Foreign investors require long-term stability to make major investments, so it comes as good news that the USMCA’s sunset clause (which determines the expiry of the agreement) is set at 16 years.

The agreement is renewable following a six-year mandatory joint review during which USMCA can be extended for an additional 16 years. The U.S. government had previously proposed a five-year expiration clause, which would have caused significant uncertainty and had the potential to dampen foreign investment in Canada.

Interest rate increases likely to continue

Interest rates have been steadily increasing for over a year and they may increase at an accelerated pace under USMCA. In fact, some banks are already speculating about the possibility of increasing rates again. This will have an impact on the affordability of homes in Canada.

It is worth noting, however, that home buying demand has not been materially dampened by the recent spate of interest rate increases, and there is reason to believe that rates may have some additional room to grow before they have a significant impact on demand. After all, those interest rate increases are coming in response to an expanding Canadian economy, and as the economy expands it tends to boost employment and consumer sentiment.

As this new commercial environment is evolving, your Grant Thornton advisor is monitoring trends to help you make strategic decisions and take full advantage of growth opportunities.