Cana­dian Press: Tal­bot Boggs

Cana­dian investors and home­own­ers wor­ried about a melt­down in the real estate mar­ket here in Canada can relax.

The sub­prime mort­gage cri­sis in the U.S. isn’t like to hap­pen up here in the cooler, more fis­cally con­ser­v­a­tive north. The Cana­dian real estate mar­ket is not a bub­ble wait­ing to burst and own­ing a home is still a good invest­ment and wealth man­age­ment strat­egy, finan­cial experts believe.

“You have a bub­ble sit­u­a­tion when there is a lot of spec­u­la­tion and lever­age in the mar­ket,” says Patri­cia Lovett-Reid, senior vice-president with TD Water­house. “We are not see­ing that in Canada now.”

Lovett-Reid says Cana­di­ans don’t need to be wor­ried about the sub­prime mort­gage cri­sis in the United States spilling across the border.

An August fore­cast by the Cana­dian Real Estate Asso­ci­a­tion shows that the aver­age price of a res­i­den­tial home in Canada is expected to rise 10.4% dur­ing this year and national home sales will increase 8.1%, set­ting new annual records in most provinces. In the U.S., how­ever, the National Asso­ci­a­tion of Real­tors in its Sep­tem­ber out­look pro­jected a drop of 8.6% in exist­ing home sales and 1.7% in home prices dur­ing the year.

Many of the con­di­tions that led to the sub­prime mort­gage sit­u­a­tion in the U.S. don’t exist here in Canada.

Inter­est rates in Canada have not gone up as much as they have in the United States and mort­gage financ­ing here is much more con­ser­v­a­tive than it is south of the border.

Amer­i­cans can get a tax write off of their mort­gage inter­est pay­ments, which encour­ages them to bor­row and assume larger mort­gages to buy a home.

“The deductibil­ity of mort­gage inter­est pay­ments in the U.S. causes peo­ple to take on more debt because of the tax break,” says Paul Tay­lor, chief invest­ment offi­cer of BMO Har­ris Invest­ment Man­age­ment Inc. “Cana­dian home­own­ers are gen­er­ally less indebted than Americans.”

At the peak of the hous­ing mania in the U.S., sub­prime lenders were offer­ing home­own­ers “dubi­ous” instru­ments such as NINJA (No ver­i­fi­ca­tion of INcome, Job sta­tus, or Assets) loans, Lovett-Reid says.

“As the mania for home own­er­ship grew in the U.S., sub-prime lenders made homes seem afford­able to a sec­tion of the pop­u­la­tion which would hot have qual­i­fied under con­ven­tional mort­gage terms,” Lovett-Reid says.

Over­all, the real estate mar­ket in Canada looks healthy although a cor­rec­tion might be coming.

A TD Eco­nom­ics report says the sales of exist­ing homes in Canada could decline by four per cent next year com­pared to its pro­jec­tion for this year.

“The prob­a­bil­ity of the real estate mar­ket bust­ing is small,” says Lovett-Reid. “A cool­ing of the Cana­dian real estate mar­ket (likely will) pro­ceed in an orderly fashion.”

Tay­lor says condos-for-sale/propertysearch.htm” title=”toronto real estate”>real estate prices and starts will flatten out over the next few years, but real estate should continue to be a good investment strategy as part of a diversified portfolio.

Canadians can invest in con­dos–for-sale/propertysearch.htm” title=”toronto real estate”>real estate in sev­eral ways – by own­ing real estate that is their pri­mary res­i­dence, own­ing rental prop­erty, land, or invest­ing in real estate com­pany stocks or Real Estate Invest­ment Trusts (REITs).

REITs were exempted from the con­tro­ver­sial tax on income trusts announced by fed­eral Finance Min­is­ter Jim Fla­herty in Octo­ber last year.

REITs make up about 11% of the S&P/TSX Income Trust Index. The S&P/TSX REIT Index rose 24.7% in 2006 and the pop­u­lar invest­ment vehi­cle has not had a down year since 199, says the Guardian Group of Funds.

Another pos­i­tive omen for real estate remain­ing a good, long-term invest­ment is that the mar­ket is being dri­ven by fun­da­men­tals, not spec­u­la­tion. Com­mer­cial real estate devel­op­ments such as con­do­mini­ums and hous­ing sub­di­vi­sions, for exam­ple, are being done a pre-sold basis, Lovett-Reid says.

And TD Eco­nom­ics expects national aver­age home prices will rise by an aver­age annual rate of four per cent over the next 25 years.

“While real estate pur­chased for spec­u­la­tive or income-generating pur­poses is a finan­cial invest­ment, home own­er­ship offers the oppor­tu­nity for cap­i­tal gains through ris­ing prices over time,” Lovett-Reid says. “There could be con­sid­er­able vari­a­tion at the indi­vid­ual city or neigh­bour­hood level and volatil­ity from year to year, but as one of, if not your largest asset, a home should be a part of your finan­cial plan,” she says.

Tal­bot Boggs is a Toronto-based busi­ness com­mu­ni­ca­tions pro­fes­sional who has worked with national news orga­ni­za­tions, mag­a­zines and cor­po­ra­tions in the finance, retail, man­u­fac­tur­ing and other indus­trial sectors.

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