Rob Car­rick – Globe and Mail

It looks like a mirac­u­lous resurrection.

In the midst of reces­sion, the aver­age national price of Cana­dian real estate hit a record level in May, and sales activ­ity increased for the fourth con­sec­u­tive month. While U.S. res­i­den­tial real estate prices have been falling for almost three years, Canada seems to have stum­bled and picked itself up again in a span of 12 months.

To some real estate agents, the mar­ket looks as good as it did before the global finan­cial cri­sis began to bite last summer.

Lau­rin Jef­frey — Toronto Real Estate Agent

“With­out get­ting nit­picky, yes it does,” said Toronto real estate agent Lau­rin Jef­frey. “I just lost out on a mul­ti­ple offer last night on a house, and my client asked me to have a look at what’s going on with that sort of a house. In that price range and style of home, 14 out of 19 sales in the past 30 days have been at or above the ask­ing price.”

The aver­age national resale home price in May reached a record $319,757, up a tick from the pre­vi­ous record set in May, 2008, the Cana­dian Real Estate Asso­ci­a­tion (CREA) reported this week. The group noted that the sales activ­ity behind this increase was skewed by expen­sive mar­kets such as Van­cou­ver, Cal­gary and Edmon­ton, but it nev­er­the­less declared that the “national resale hous­ing mar­ket activ­ity returned to pre­re­ces­sion lev­els in May 2009.”

Cri­sis averted in the hous­ing mar­ket? For­get it. Prices may be climb­ing in some mar­kets, but so are the inter­est rates that have fed the recent rise in sales. Mean­while, incomes are stag­nant, and jobs are dis­ap­pear­ing in bunches.

If you’re think­ing of get­ting into the hous­ing mar­ket right now, mind the cracks in its foundation.

The house that Mr. Jeffrey’s client failed to get was a semi-detached, two-storey, all-brick home in the leafy mid-town neigh­bour­hood of Lea­side. With three bed­rooms, one bath­room, a detached garage and a mutual drive, it was listed at $529,900 – and went for $551,000. Accord­ing to Mr. Jef­frey, houses in that price range have sold for an aver­age of 105% of their ask­ing price in the past 30 days.

And Toronto, where the num­ber of homes sold rose 1.9% last month, wasn’t even one of the hottest mar­kets in terms of sales activ­ity. CREA fig­ures show that sales in Vic­to­ria, Van­cou­ver, Cal­gary and Edmon­ton were up between 11.3% and 18.7%.

It would be rea­son­able to expect that hous­ing sales would be in a slump dur­ing a reces­sion. But strangely, the eco­nomic down­turn has actu­ally helped to pro­pel the real estate mar­ket higher.

For one thing, many peo­ple were too unnerved by the global finan­cial cri­sis to buy late last year. So pent-up demand for hous­ing in the first sev­eral months of 2009 played a role in the spring numbers.

“The kind of month-over-month increases we’ve seen in the last four months can’t go on for­ever,” said CREA chief econ­o­mist Gre­gory Klump.

The Bank of Canada has also helped to juice the mar­ket, though inad­ver­tently. By ratch­et­ing inter­est rates lower to stim­u­late eco­nomic growth, the cen­tral bank has cleared the way for mort­gage rates that remain at his­tor­i­cally cheap lev­els even after recent increases.

Fixed-rate mort­gages with a five-year term can be had for about 4.25% with a top dis­count right now, com­pared with 5.5% to 6% in spring, 2008. A cou­ple of months ago, five-year mort­gages were less than 4%.

But low rates are also one of the rea­sons ana­lysts are wor­ried about the sur­pris­ing surge in the hous­ing mar­ket. “It’s all hap­pen­ing because of the crack cocaine of hous­ing, which is rock-bottom inter­est rates,” said Garth Turner, author of Greater Fool: The Trou­bled Future of Real Estate. “They’re so irre­sistible, espe­cially to inex­pe­ri­enced first-time buy­ers. That’s what’s pro­pelling the market.”

Mr. Turner’s con­cern is that ris­ing rates will even­tu­ally pro­pel the mar­ket lower by mak­ing houses less afford­able. His level of con­fi­dence that the boom will last? Zero.

In his book, pub­lished in early 2008, Mr. Turner warned that the Cana­dian hous­ing mar­ket was in a bub­ble just like its U.S. coun­ter­part. After a peak-to-valley decline of almost 14% in Canada’s national aver­age price, he’s pre­dict­ing another plunge for home prices that will be trig­gered in large part by ris­ing inter­est rates.

Com­ment: So the book came out last year, mean­ing he wrote it before that. So right now, the infor­ma­tion in that book is 2–3 years out of date. Were we in a bub­ble, would it not have popped by now? Turner has been preach­ing the same thing for­ever, it just isn’t hap­pen­ing. Like all the pun­dits who pre­dicted the crash of the Toronto condo mar­ket – in 2004.

“We’re now into the hous­ing bub­ble, Part Two,” said Mr. Turner, a for­mer mem­ber of Par­lia­ment who now gives finan­cial sem­i­nars and pro­motes his books. “I think this bub­ble is going to burst later this year. It’s going to be short and intense.”

Com­ment: Oh, so since we didn’t have a hous­ing bub­ble, now he pre­dicts The Bub­ble Part Two? Right… Will we have Bub­ble Part Three next year?

In the near term, though, he sees ris­ing rates being used to get buy­ers to jump into the mar­ket imme­di­ately. “Peo­ple are being told, ‘Your afford­abil­ity is going down if you don’t buy now, you’re going to be for­ever shut out of the mar­ket.’ It’s the eter­nal siren song of real estate.”

Many econ­o­mists doubt that the prime rate – the rate banks use as a base to cal­cu­late other lend­ing rates – will increase before next spring, but it’s a dif­fer­ent story with the longer-term rates that influ­ence fixed-rate mort­gages. They’ve already bounced off the lows they hit in the depths of the global finan­cial cri­sis, and more increases are expected.

Ris­ing rates make houses less afford­able, but this can be off­set if hous­ing prices are falling and incomes are ris­ing. In many cities, though not all, prices are actu­ally ris­ing. As for income gains, they’re con­strained by the recession.

Robert Hogue, senior econ­o­mist at Royal Bank of Canada, said wages are still creep­ing higher, but many fam­i­lies have been affected by job losses. “Over all, house­hold income has at best increased very slowly, if not kind of stalled for a bit,” he said.

Com­ment: But where are these job losses? I do not know any­one who has lost their job. And Stats Canada released a report as recently as last month show­ing job CREATION, not losses. So if jobs are being cre­ated, why is every­one cry­ing about all of the lost jobs? I guess bad news sells bet­ter than good news…

For Mr. Hogue, ris­ing rates and house prices are a threat to a hous­ing mar­ket that appears to be sta­bi­liz­ing. But his out­look isn’t all neg­a­tive. When the job mar­ket improves, he believes that house­hold income will rise and help make houses more affordable.

“The moment we have the labour mar­ket pick­ing up, to me that would be the sign that says we’re in the clear now.”

Com­ment: So jobs are up, stock mar­kets are up, home sales are up, home prices are up. And this is all bad how? Oh right, this is the “fool’s peak”, the decep­tive rise before the real crash. I guess we should all lis­ten to the talk­ing heads and run for the hills. The world is end­ing. Beware of Bub­ble Part Two!

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Con­tact the Jef­frey Team for more infor­ma­tion  -  416−388−1960

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