Prepare for lower real estate prices
No guarantee that U.S. meltdown won't spread here
David Berman
Financial Post
Wednesday, April 11, 2007
It's hard to find experts in Canada who are concerned that the real estate chaos swirling around next door could hop the border and rattle the housing market here. Well, not yet anyway.
Those who believe the Canadian market is on solid ground will find evidence to support their views when they get a look at housing starts for March (released this morning) and the new housing price index for February (tomorrow). Both are expected to show that Canada's housing market is holding steady amid the downturn to the south.
But if you're the sort of investor who can't help but wonder if Canada must eventually follow the U.S. lead -- a natural instinct given that Canada follows on so many other issues -- you may want to skip the Canadian figures.
Instead, head straight for the words of U.S. central bankers and get their take on housing: The worse it is in the United States, the more reason to worry about the situation here.
This afternoon, the U.S. Federal Reserve releases the minutes from the last Federal Open Markets Committee, on March 21. At that meeting, the committee left short-term interest rates unchanged, but said in its statement that "the adjustment in the housing sector is ongoing."
That is likely code for "quite frankly, the housing sector scares us" -- and the minutes will say more about it.
They have good reason to be scared. In the United States, home prices are tumbling, foreclosures are rising and few are confident the downturn has hit bottom yet. It's a rough time to contemplate buying a home.
Just as worrying, tightening credit conditions and the fact that current homeowners can no longer count on an appreciating market could wreck consumer confidence, which can hit economic growth.
Most Canadians are fully aware of our neighbour's problems. However, the prevailing wisdom is that real estate is a local market and it all boils down to the ''location, location location'' mantra, which should protect us from any sort of copycat debacle.
"Can we say that there are ominous parallels between what is happening in the U.S. and what will happen in Canada? I doubt it," said Bart Melek, senior economist at BMO Capital Markets. "It is a fundamentally different market. The structure is different."
U.S. consumers had to ride an upswing in interest rates from 1% in 2003 to 5.25% today, a much more volatile ride than that experienced by Canadian consumers.
At the same time, U.S. loan requirements -- which included 0% downpayments in some cases -- were far looser. And lastly, the Canadian economy is in better shape.
But there's at least one important factor Canada shares with the United States: overvaluation. House prices here have risen to a point where BCA Research believes they are 28% overvalued, based on comparisons with gross domestic product and competing assets, just as house prices were once widely believed to be overvalued in the United States.
With U.S. prices now coming down, it's not hard to envision a similar price-chop here. Few see it now, but that's the best time to prepare yourself.
dberman@nationalpost.com
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7 comments:
Good Article.
This time next year the Canadian Market will be showing obvious signs of weakening.
Anyone who thinks real estate in Alberta is going to go down anytime soon is dreaming. Yes the US housing is in trouble big trouble but what is impressive is the US economy is still in decent shape despite this. Too much to go into here but think about this. A poll of nations throughout the world revealed Canada as the #1 place to do business. A poll in Canada revealed Edmonton as the #1 place to do business. So basically Edmonton is rated the #1 place in the world to do business. This sentiment has taken years to build and it is because of Ralph Klein. Massive business investment and sentiment like this does not just change overnight. You'd better expect Alberta to be very strong for at least 4 years if not longer. Alberta will lead the Canadian economy for many many many years to come.
HOUSING will adjust by 30 % at the least.
Keep in mind that a lot of greedy speculators grabbed themselves 3 or more houses thus depressing supply.
People tend to be like sheep, if everyone is rushing to buy everyone follows - no common sense.
Obviously it sounds like the second Anonymous post has been conived by someone who has a lot at stake if the housing prices tumble and believe me they will...You can't even find a decent house for under $400K in D'Edmonton. $400K house equals to $2400/month payments to your biggest landlord, the bank. I make $100K/yr and $400K for a starter home seems to be unreasonable. After taxes and other deductions I come home with a little over $5K/month. Do you think I feel like paying $2400/month for mortgage + $200/month TIPP + $200 utilities if not more + house insurance $45/month + auto insurance, telephone, cable, cell phone, $ 500/month for food, etc. Now geniuses tell me how many people even make 6 figure income in Edmonton... For me it doesn't even matter if the housing falls or not as I bought a house(2140 sq ft) 2 years ago for $270K. Now people are paying that amount for neighborhoods like Eastwood or for "pay me $300/month for no land" condos.
Another point to make, everyone seems to say that housing is affordable b/c of low mortgage rates.
Do you people think the all time low mortgages at 4.5 - 6 % will last forever.
Avg mortgage rate over years is arond 8%.
I think it was safer to buy in the 80s when mortages were even as high as 18% b/c you only knew it couldn't go any higher.
I am bemused by the above quote claiming international polls show Canada is the #1 place to do business, and Edmonton #1 in Canada? Unless you are joking, I think you need to put down the bong and consider leaving Edmonton once in a while. I am in London UK at the moment, and I can guarantee that if you spouted that nonsense to any European businessperson (once they stopped to look up Edmonton, and then looked it up again when they realised you didn't mean the Edmonton suburb of London) they would fall over laughing.
Canada has many pluses buddy, but major business centre (beyond extracting commodities) is not one of them!
Sam
What you don't know is, many Albertans have never seen the ocean, never mind another country....
They do live in a little bubble here in the colonies, the word holiday is not their life plan forthemselves or their children.
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