Andrea Hop­kins – Reuters

It’s look­ing like an unset­tling spring in Cana­dian hous­ing, a mar­ket that has proven far more even-keeled and less scary for investors in recent years than in the United States.

In what is tra­di­tion­ally the best sea­son of the year for real estate agents, Toronto agent Ecko Jay says the indus­try is see­ing far fewer buy­ers, a result of tighter lend­ing rules, high prices and fear of a bub­ble. In Toronto alone, sales dropped 40 per­cent in the first quar­ter from a year ear­lier, mak­ing home­own­ers and investors jumpy.

Com­ment: That is total BS. Sales dropped 17%, NOT 40%. Please, try to keep the exag­ger­a­tions from sound­ing like out­right lies.

“Some peo­ple want to cash in and pull out now,” said Jay, a 26-year vet­eran of the Toronto hous­ing mar­ket, not­ing some are spooked by worst-case pre­dic­tions of a 20 per­cent drop in prices from cur­rent levels.

Com­ment: And those who did that before lost a lot of money. The sin­gle pre­dic­tion of a 25% drop was made over a year ago – and prices ROSE 6% since then. So do you really believe that when it has been shown to be wrong?

“They say, ‘Before it gets low, let’s sell,’” Jay added. “And some of my clients want to sell and rent, hop­ing that when it goes down they will pick up some­thing at a bet­ter price. Nobody has a crys­tal ball.”

Com­ment: But prices are ris­ing, every month. Why would any­one sell? There are no indi­ca­tions of a drop com­ing, noth­ing at all. Sup­ply is less than demand, demand is strong, rates are low, rentals are tight, immi­gra­tion is high, incomes are ris­ing – where is the trig­ger for any­thing to fall? Nowhere!

But then there are Cana­dian pol­i­cy­mak­ers, econ­o­mists and mar­ket watch­ers who have the next best thing to a crys­tal ball. Their data and analy­sis point not to a burst­ing of the bub­ble like in the United States in 2007-08, when prices from peak to trough dropped 35%, but rather a gen­tle eas­ing in Cana­dian hous­ing prices, or per­haps just a momen­tary pause.

Com­ment: And there you have it, the voice of rea­son. Some areas of the coun­try will see a lit­tle drop, some a flat­ten­ing, some just slower growth. But over­all, the trend will be flat or small increases. Over any 5–10 year period, prices will only ever go up.

Naysay­ers believe Canada may be too opti­mistic and rely­ing heav­ily on that old saw that Canada is not nearly as reck­less as the United States. After all, the debt-to-income ratio of Cana­di­ans is at a record high, close to the lev­els expe­ri­enced in the United States before its mar­ket crashed, and home own­er­ship is at nearly 70%, also a record and five points more than its neigh­bors to the south.

Com­ment: Debt to income really does not influ­ence house prices. It only comes into play if things go south – which they are not going to do. What hap­pened in the US was due to lying banks, preda­tory lend­ing and out­right crim­i­nal activ­ity. That cou­ple with dumb buy­ers who did not read the fine print and mort­gages whose rates tripled from one month to another. There are no sim­i­lar­i­ties, none.

But Canada does have some things going for it, most notably a move by the gov­ern­ment to tighten mort­gage lend­ing rules four times in five years, most recently in July 2012, which has taken some buy­ers out of the mar­ket, damp­en­ing demand.

Com­ment: And made sure that those who did buy were put through very strin­gent guidelines.

“If you look at the devel­op­ments over the last year in Canada and com­pare them to the sit­u­a­tion in the U.S. before the cri­sis, there is a clear dif­fer­ence,” said Julien Rey­naud, an econ­o­mist at the Inter­na­tional Mon­e­tary Fund who fol­lows Canada.

“It is not just a ques­tion of hous­ing sup­ply and demand; it is rather a dif­fer­ence in the sys­tem of mort­gage finance.”

Cana­di­ans have more equity in their homes than Amer­i­cans did, the default rate is lower, the sub-prime mar­ket is tiny, and mort­gage inter­est is not tax-deductible, so there’s no incen­tive to build up debt.

Com­ment: Their default rate hit 35% in some areas, fully 1 in 3 mort­gages were not paid. Our rate in Canada is 0.34%. Barely a third of a per­cent. To put that in per­spec­tive, their rate is 100x higher than ours. And in absolute num­bers, with 10x the pop­u­la­tion, it means the US had 1,000 times more mort­gage defaults than Canada. Three orders of mag­ni­tude. So yeah, our default rate is just a lit­tle lower.

Finally, mort­gages are struc­tured as recourse loans in which assets other than the house are held as col­lat­eral. That makes Cana­dian home­own­ers less likely to walk away than their Amer­i­can cousins.

“What makes Cana­dian hous­ing dif­fer­ent makes it stronger,” says Tom Lewandowski, who analy­ses Cana­dian banks for Edward Jones in St. Louis.

LEARNING FROM THE NEIGHBORS

Lewandowski believes Canada will not suf­fer a U.S.-style hous­ing crash sim­ply because pol­i­cy­mak­ers had the ben­e­fit of watch­ing it hap­pen next door.

“What we expe­ri­enced here in the U.S. with hous­ing mar­kets and reg­u­la­tors goes directly to the atti­tude and changes the min­is­ter of finance has made in Canada. A reg­u­la­tor who is being proac­tive is tak­ing Step One in mak­ing sure the hous­ing mar­ket doesn’t find itself in a bub­ble,” Lewandowski said.

Both Bank of Canada Gov­er­nor Mark Car­ney and Finance Min­is­ter Jim Fla­herty have been on the march against a hous­ing bub­ble for years, aware how low rates and loose lend­ing stan­dards in the United States ignited a boom and bust there.

The cen­tral bank has held rates low since the global finan­cial cri­sis because growth remains tepid and global woes weigh on Canada’s export mar­ket, and Cana­di­ans can find a five-year mort­gage rate below 3%.

But the government’s grad­ual tight­en­ing of rules for bor­row­ers – a firm admis­sion that the mar­ket was hot­ter than any­one was com­fort­able with – has taken some steam out of the mar­ket, and econ­o­mists, like Car­ney, seem to believe a soft land­ing may be at hand.

“We’re encour­aged by the fact the level of hous­ing starts has come down to slightly below demo­graphic demand, as we see right now, there’s still more adjust­ments to go,” he said in tes­ti­mony to Par­lia­ment last week. “We’re encour­aged by the evo­lu­tion of house prices in a num­ber of mar­kets. We’re on the path to a bal­anced evo­lu­tion of the house­hold sec­tor and we all have to con­tinue to be vigilant.”

—————————————————————————————————–
Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
—————————————————————————————————–

hous­ing mar­ket in canada analysis

Related posts:

1. Is it a bub­ble or a soft land­ing? Exist­ing home mar­ket con­di­tions will remain bal­anced dur­ing the next…
2. Fears of a Cana­dian hous­ing bub­ble unfounded: BMO report Despite sig­nif­i­cant price hikes the last 10 years, house prices…
3. Cana­dian hous­ing mar­ket will have a soft land­ing Aver­age prices for three com­mon types of hous­ing were up…
4. Is There a Hous­ing Bub­ble in Toronto? Funny, every­one pre­dict­ing a crash for the past decade has…
5. Canada Hous­ing: Cor­rec­tion Ahead Or Soft Land­ing? House prices in Canada do not exceed lev­els sup­ported by…