Garry Marr – Financial Post

Just sit back and do nothing. It doesn’t sound like the most proactive advice when it comes to the housing market, but it might just be what everybody needs to hear.

Panic is the worst thing that could happen because when that mentality sets in and people become irrational, it’s hard to forecast how low prices will go, says Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce. He is among the many who predict that prices will fall but by a moderate level that does not resemble the U.S. crash.

Comment: But with almost every article calling for the sky to fall, it is hard for the average person to know what is really going on. They are fed half-truths and mis-information. Some economists think that prices might fall – but they have no real data to back it but. They quote debt levels and rent-to-price ratios, but those values mean nothing. Low rates, high demand, steady immigration and a solid economy – those are the reasons that things will not fall. Toronto might see prices flatten, but that is unlikely. And in the event that prices ever go down, everyone who is waiting in the wings for that to happen will pounce and they will just drive prices back up.

“There is nothing to fear but fear itself,” says Mr. Tal, paraphrasing the famous quote from U.S. president Franklin D. Roosevelt before his election. The economist’s worry, and that of others, is that we are now talking ourselves into a housing crash by creating a scenario in which every new statistic is interpreted in the most negative way with an eye on trying to constantly compare the Canadian housing market with what our neighbours to the south experienced just before their housing prices plummeted by as much as 50% in some markets.

Comment: It is truly bizarre, this addiction to making every number look as bad as possible. Never have I seen such sustained bad news about something good for so long. It is truly insane.

A study this summer by Environics Analytics WealthScapes found the average net worth of a Canadian was $363,519, with $269,024 of that figure the net equity in real estate.

When you see headlines screaming that Canadian household debt has reached a record level, an eerily similar spot to where Americans were before the market crashed there, it adds to concern. But the similarity ends with the headline-grabbing number, Mr. Tal says.

In the second quarter of this year, the debt-to-income ratio rose to 163.4% from 161.8% in the previous quarter. The previous quarter had been revised from 152% using a new measurement.

Comment: So we had to change measurement methods to make the number look worse? And do we not mention that debt levels had been dropping for 2 or 3 quarters? Nope, that isn’t bad enough news!

“The quality of the debt is much different here,” says Mr. Tal, who is the process of writing a report that will put that thesis to the test. He maintains the people who have taken on more debt have a much higher credit score than the Americans who did the same prior to their market crash.

Another key factor that is ignored in the discussion is how much of that debt is locked in for longer terms and not subject to the vagaries of rising rates. Mr. Tal says 70% to 80% of Americans were in variable products at the peak while the Canadian figure is 29%, according to the latest survey from the Canadian Association of Mortgage Professionals.

Comment: Hey, solid data! And it is not bad news! How are you going to spin this to make people scared?

Still, he worries the wrong message is getting out. “The distraction of [hearing about these debt levels] is more of a concern than the debt,” he says.

Comment: Debt used to buy TVs and vacations is bad debt, the money essentially disappears. Debt used to buy a house creates equity and rising values. We need to have a talk about the different kinds of debt, people need to know the difference.

But could people actually talk themselves into a housing correction? Moshe Milevsky, a finance professor at the Schulich School of Business at York University, doesn’t rule out that scenario.

“Collapse is too strong a word when it comes to housing prices. You can’t talk yourself into that but you can talk yourself into a slowdown or a delay. It is one of the things behavioural economists are starting to appreciate that classical folks didn’t,” Prof. Milevsky says. “Attitudes matter. It used to be that just facts matter, but sentiment is going to be just as important. If people start to believe real estate prices are slowing down, they’ll slow down their purchases.”

It doesn’t help with confidence when the federal minister of finance says he has his own worries about the housing market and then imposes a set of new rules to make it more difficult to borrow.

Comment: He had to implement 4 different rule changes before things actually slowed down. Shows the strength of the market and the desire of people to buy and sell real estate. It took a LOT of effort to actually slow it down.

“I remain concerned about parts of the Canadian residential real estate market, particularly in Toronto but not only in Toronto. So that is why we are intervening once again,” Finance Minister Jim Flaherty said before imposing his latest changes on consumers, which included a lowering of amortization lengths to 25 years from 30 years.

Comment: Thus, all purchase moving forward should be rock solid, right?

Prof. Milevsky says the government calling the market overheated could be having as big an effect as the rule changes themselves.

“The rule changes only affect people actually going out and getting a house but Flaherty saying prices [might be] inflated affects anybody who hears it,” he says.

So what can you really do about to deal with your worries? Not much.

“It’s almost as if you have to sit back and watch this unfold and say, ‘Gee, I wish I could capitalize on it,’ ” says Prof. Milevsky, adding you could potentially short some real estate stocks and indexes. “But they are so broadly based and illiquid. The bid and ask on them is wide.”

The issue might be a little more simple for people who don’t have a house and are waiting and contemplating whether it’s time to buy one, or considering whether to buy a big or small house.

“The conventional wisdom was to buy the biggest house you can afford because you are going to make a lot of money. But maybe this is telling us you shouldn’t buy the biggest house,” Prof. Milvesky says.

Comment: No, the conventional wisdom was to buy the biggest house you could so that you could fill it with kids and a dog. It never used to be about selling for profit until HGTV and the media got into it. People need to buy a house the like, that they can afford, in an area they want to live. Forget the rest.

But Gerald Soloway, chief executive of Home Capital Group Inc., says the rules really haven’t changed much for buying a house: Don’t time the market and buy what you can afford, he says.

Comment: You can’t time the market. Everyone who ever told me they were going to wait for prices to drop before they bought is still waiting. Those who decided to sell at the top of the market, cash out and rent – well prices are still rising, we are not at the top. They lost $100-200,000.

But he acknowledges there seems to be an insatiable appetite for all information about the sector. Mr. Soloway says he’s become the most popular guy at cocktail parties.

Comment: But the media gives skewed information. And everyone thinks I am biased and lying. How does it benefit me if prices get too high and my clients can’t buy? Then I get no business and make no money. Trust me, I would be much better off if prices dropped 20% tomorrow, I would sell twice as many houses!

“Constantly, I’m always asked,” he says about people wanting to know his opinion about where the market will go next. “This has been going on the last four or five years, everybody believes something might be happening but so far it has not affected their conduct.”

Comment: Because people have been saying the market is going to crash for 10 years now – and it hasn’t. People are becoming immune to the constant barrage of bad news and naysaying.

His own data show the fears appear overblown and he agrees with CIBC’s Mr. Tal that the credit quality of Canadians is better than Americans. “You look at our portfolio, half is insured [and backed by the government] and half is uninsured and people are paying their bills. Year over year, our arrears are down slightly and not dramatically,” Mr. Soloway says. “They were not very big to begin with.”

Mr. Soloway just doesn’t believe negative talk is enough to derail the housing market, just as negative sentiment is enough to drive us into recession.

“It can move the market but it’s not enough to change the fundamentals,” he says.

Comment: Imagine if all the news had been positive the last 5 years… how high would things be then?

Like others, he thinks we might see a 5% to 10% easing in prices across the market but he believes builders can still make strong profits at that level. It’s also no reason to sell, especially when you factor in transaction costs that can be as much as 10% in some cities.

Comment: Still unlikely in Toronto. And those calling for a 25% drop are just looking to get their name in the paper.

Besides, are you really going to pack up your home, move your kids and start renting as you try to ride out a potential downturn in the market?

Comment: The smart ones won’t.

Phil Soper, chief executive of Royal LePage Real Estate Services, says there is little benefit to timing the market.

“Potentially in some markets you could save a few bucks moving into a rental situation but it’s not as easy as you think,” he says. “If you live in a single-family home, the inventory of properties can be limited if you want your kids to stay in the same school or area. If you live in a condo in a large city, sure you can move into renting that same condo.”

Mr. Soper sticks by the notion that, over the long run, house prices rise and he thinks the consumer will stick it out and ignore the negative news. “People pay more attention to the reality of low interest rates than the hyperbole that finds its way into the discourse about housing,” he says. “There has been so much see-sawing in the economy that people are immune to whipsaw reactions now.”

Comment: In Toronto, there have only been 4 years since 1966 where annual prices dropped. And they were all around the recession of the early 1990s. Houses, like cars and chocolate bars, go up year over year. Inflation is very real and affects all monetary values. My grandmother bought her house for $5,000 in the mid 1950s – and granddad told me about going to the movies for a nickel. How times have changed…

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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.
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