Grexit Wounds

The issues with Greece are dominating headlines globally. To put the Mediterranean country’s financial woes into perspective, Greece’s gross domestic product would place it as Canada’s fourth largest province, but on the international stage represents less than 0.4 per cent of the global economy. Yet relative size notwithstanding, new developments in the Greek saga can be felt globally. Greek debt remains well in excess of €300 billion, held mostly by the International Monetary Fund, European Central Bank, European Commission. Greece’s (now outgoing) left-wing Prime Minister, Alexis Tsipras, revolted against the austerity supposedly imposed on the nation by creditors by putting their proposal to referendum, to which the Greek public responded with a resounding 61 per cent “no” vote. Following the referendum’s conclusion, Greece had a marathon negotiation with their creditors in a desperation attempt to reach an agreement. Tsipras’ plan to put additional pressure on Greece’s creditors failed miserably, as the new deal struck by Greece is even worse for the Greek public than the deal that was rejected in referendum.

It’s not getting better anytime soon.

Despite a temporary agreement being reached, this Greek odyssey is far from a resolution. The new deal will implement heavily opposed reforms, such as pension cuts and value-added tax (VAT) hikes. Tsipras won a January election on the platform of anti-austerity, and has since been forced to unwind most of his election promises to the Greek public in humiliating fashion.

Although a Greek default has been moved off the table in the short-term, long-term systemic issues with Greece’s debt burden will continue to impact markets in the coming years. With the financial crisis of 2008 catalyzed by the default of a single firm (Lehman Brothers), the question on many minds is what would the impact of a potential Greek default be on the Canadian real estate landscape?

Impact on the Dollar

The direction the Greek debt crisis moves in the coming weeks will impact the Canadian dollar in a predictable fashion. The main reason the Greek debt crisis affects the world’s major economies so intimately is the uncertainty it causes. When there is negative sentiment about the Greek debt crisis, markets react commensurately to the increased uncertainty in the market. The inverse also holds true.

Recent talks on the subject of a potential Greek default have shown that European Union participants are comfortable letting a country exit the Euro should circumstances dictate that being a necessity. The precedent that would be set by a Greek exit from the Euro would have a widely felt impact, as debt problems for other European nations such as Spain, Portugal, and Italy become increasingly salient.

“In the event of a Greek default, the Canadian dollar is likely to weaken relative to the U.S. dollar, and flows will move in to that safe haven. As global uncertainty increases, money will flow to government bonds, lowering their yield. U.S. treasuries will be amongst the most highly sought after, which will widen the spread between U.S. and Canadian government bonds,” says Rahim Madhavji of Toronto-based Knightsbridge Foreign Exchange Inc. “A perceived weakening global economy will also put downward pressure on commodity prices, which for a resource-heavy country like Canada, would further suppress the dollar. This lower dollar will serve to cushion the recessionary impact by helping exports.” We can therefore expect that the more uncertainty arising from Europe, the lower the Canadian dollar will be pushed.

Impact on the Canadian Real Estate Market

The debt crisis in Greece affects Canadian interest rates, which in turn have a multitude of implications for the Canadian real estate market. Since interest rates are intimately related to economic development (the Bank of Canada uses monetary policy to ensure inflation falls near its target rate of two per cent), any action that affects the Canadian economy has an impact on interest rates. Essentially, a crisis in Greece could lead to even lower interest rates in Canada, while a sustainable agreement would make stabilizing the economy a simpler task for the Bank of Canada. What does that mean for Canadian real estate?

Resale Homes

Grexit Scenario

For residential resale homes, a Greek exit from the Eurozone would trigger the Bank of Canada to cut interest rates through monetary policy as the economy suffers from suppressed commodity prices and potentially softer European exports. This also means a lower dollar, which would make home purchase in Canada increasingly attractive to international investors. The combined effect of these two factors would be home prices in Canada continuing to rise. Supressed oil prices create uncertainty surrounding real estate in Western Canada, as both home prices and construction usually fall when oil prices are low in regions heavily impacted by the oil industry. In eastern Canada, home prices will continue to rise. Greater access to financing (lower interest rates), combined with lower oil prices (generally benefitting the consumers in eastern Canada) will make home purchase more accessible for eastern Canadians.

 Status Quo

In the event the Greek debt odyssey is settled amiably through some combination of debt forgiveness and agreeable payback schedule, there would be an impact on Canadian residential real estate. The Canadian dollar would go back to trading on the basis of fundamentals instead of headlines, the economic uncertainty in Europe would dwindle, and global commodity prices wouldn’t be artificially suppressed.

We would see interest rates begin to rise over the medium-term, which would raise the cost of borrowing and financing new homes. The effect on the Canadian residential real estate market would likely remain status quo, depending on the rate of interest rate hikes, as an improving economic picture will increase the wealth of Canadians, and rising interest rates making financing increasingly expensive.

New Builds, Construction, Building

Grexit Scenario

The macroeconomic effect of a Greek exit from the Eurozone profoundly affects the demand side of the equation for construction and new builds. With interest rate cuts becoming a common theme for Canada in 2015, access to financing has become increasingly easy. Construction of residential homes would see a boost in Eastern Canada as demand for housing will increase, with international purchasers and greater access to financing helping to contribute. However, supressed commodity prices will influence construction in Western Canada, especially with respect to investment in oil infrastructure. Lower interest rates will soften the pernicious impact of low oil prices, but it’s likely that the construction industry in Western Canada will continue to struggle.

Status Quo

With Greece remaining in the EU, global market uncertainty will decrease, leading to a smoother recovery for the global economy. Interest rates will rise at a faster pace, which would taper demand for housing in Canada at the expected rate. Like the Canadian residential real estate market, construction of residential real estate would remain status quo. Global commodities will be given a chance to recover once the Greek debt crisis is resolved, which will further help construction in Western Canada rebound.

How Can You Prepare?

In the event that Greece is able to reach a sustainable agreement with its creditors, there will be very little impact on the Canadian economy. We would begin to see economic recovery take place as usual, in which the Canadian economy should recover in tandem with the U.S. economy, as U.S. economic recovery will greatly help Canada’s exports.

Contrastingly, in the event of a Greek default, there are a number of factors you should be prepared for. You should make sure you’re sufficiently hedged against fluctuations in the dollar, which are inevitable. Bidding contracts that require international sourcing could become more expensive. Additionally, financing terms could change in the event Greece catalyzes a pseudo-recession, as rates go lower. Persistently low interest rates will bring the cost of borrowing down even lower, meaning that investing in new developments becomes increasingly affordable for both the residential and commercial real estate.


Rahim Madhavji is the president and co-founder of Knightsbridge Foreign Exchange Inc., an online currency exchange company. He is a frequent financial guest on BNN, CTV News and in a variety of print media. He can be reached at www.knightsbridgefx.com

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