Housing set to really juice economy in spring 2010

The rebound in the housing sector has been a critical element of Canada's recovery from recession but economists expect it start having an even bigger impact next spring as builders catch up to the surge in demand.

"Housing starts have not come close to where they were in the fall of 2008 but they are definitely rebounding so as home builders start to crank up again they of course buy a lot of goods, hire a lot of people," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Sales of existing homes rose 73% in November over the same month the year before and prices have surged about 19% over the same period, figures showed Tuesday. Although the rebound was from the depths of the slump, the numbers add to growing evidence Canada's housing market is working up a full head of steam.

The recovery in existing sales so far has had a narrow direct effect on the wider economy but as the market begins to recover it can lead to stronger prices and convince builders to begin construction on new homes - a key driver of economic activity.

Of the 94,000 jobs created in Canada since July about 40,000 have been in construction, but that includes commercial and public works as well as residential building.

When the Canadian housing market and economy was booming in 2007, all sectors were feeding off each other in a virtuous circle. Job creation stoked housing demand, and retail activity to outfit new homes. Rising house prices reinforced the so-called "wealth effect," encouraging homeowners to borrow and spend against their homes.

Between 2006 and 2008 the average resale house transaction generated an additional $46,000 in spending on such things as furnishing, legal fees and real estate agents, according to a Canadian Real Estate Association report. During the same period, housing sales created more than 200,000 direct and indirect jobs.

Adrienne Warren, a senior economist at Scotia Capital, expects the wealth effect to intensify if the housing sector continues to rebound.

"Retail sales are benefiting from the housing upswing," Ms. Warren said. "One, because people are feeling wealthier from gains in their home prices but also because... retail is related to the home purchases and piggy backs on the strength of the housing market."

Benjamin Tal, senior economist, CIBC World Markets, says however, the economy is stealing housing activity from the future.

"We are doing activity now that we were planning on doing next year because profitability is so great which means in 2010 or 2011 you will see a much more relaxed market," Mr. Tal said. "It's all about interest rates. There is almost a sense of urgency. People think it's almost a crime not to take advantage of interest rates."