For all the omi­nous talk of a hous­ing mar­ket col­lapse, the end result could be yet another rebound in prices

Jason Kirby – Macleans Magazine

As the hous­ing mar­ket stalls, sev­eral peo­ple who bought pricey Van­cou­ver con­dos before they were built are suing to get out of the deals. In Toronto, condo sales dur­ing the first half of the year fell for the first time since 1994. And at least one home­owner near Hal­i­fax just offered to give away his house for free, so long as whomever took it assumed the $395,000 mortgage.

Every­where, tales of real estate woe and mis­er­able sales data have prompted pre­dic­tions of a crash. James Grant, a promi­nent U.S. invest­ment newslet­ter author well known for his bear­ish out­look on the Amer­i­can econ­omy, has warned house prices here are primed to fall: “The median Cana­dian house is, in fact, cer­ti­fi­ably unaffordable.”

Even if prices tum­ble, though, as hap­pened in 2008—when the econ­omy was also tee­ter­ing and house prices were at record levels—they could still make another sur­pris­ing comeback.

No ques­tion Cana­dian prices are out­ra­geously high. As Grant points out, com­pared to rental rates, home prices in Canada are more than 60% above the his­tor­i­cal aver­age. And with home own­er­ship rates and house­hold debt lev­els higher than they’ve ever been, Sco­tia­bank econ­o­mist Derek Holt says there’s nowhere for prices to go but down. “This time when we come off the boil, prices are going to stay lower,” he says.

Com­ment: So we aver­age in prices from 1900? What about my grandmother’s house, which she bought 60 years ago for $15,000. Do we aver­age that price in? Heck, movies cost a lot more than a nickel these days – every­thing rises in price over time.

That’s quickly becom­ing the preva­lent view. And another mod­est 8% to 10% cor­rec­tion could occur. But if that hap­pens, there are rea­sons to expect a repeat rebound, as hap­pened pre­vi­ously when the Teranet-National Bank house price index slipped 8% in 2008 and then roared back 18%, reach­ing an all-time high two months ago.

Com­ment: And that is exactly what will hap­pen. Many buy­ers are wait­ing, hop­ing for the sky to fall. If it does, they will race in to scoop up deals, which will push prices back up. Or, prices will not fall (much more likely) and they will real­ize they have to buy before prices get higher. That will just keep any increases on the uptick and pre­vent any sort of drop.

That’s because mort­gages remain wildly cheap and, if any­thing, are get­ting cheaper. True, the Bank of Canada has raised inter­est rates twice since June to 0.75%. That only affects home­buy­ers tak­ing out variable-rate mort­gages, though, which cur­rently sit at 2.75%. The fact is, lenders are furi­ously cut­ting fixed-rate mort­gages. Since May, five-year fixed mort­gage rates have fallen to 3.99% from 4.75%, accord­ing to Canequity​.com.

Com­ment: Vari­able rate mort­gages tend to be in the prime minus 0.x% range right now, with the best rates around 1.9% or 2.0%. Prime is 2.75%, yes, but vari­able rates dis­count that. And since this came up, cur­rent 5-year fixed rates can be had for as low as 3.64%. That is only 0.05% more than the cur­rent record low from early last year, when they hit 3.59%. Check for your­self, my num­bers are more accurate.

Another rea­son house prices rebounded so sharply after the 2008 drop was that there were far more buy­ers than sell­ers. As the finan­cial cri­sis hit in 2008, new home con­struc­tion slowed while sell­ers yanked prop­er­ties off the mar­ket, lest they get caught in a down­ward price spi­ral. But when the Sec­ond Great Depres­sion in Canada turned out to be Just Another Reces­sion, home buy­ers flocked back to the mar­ket before sell­ers had a chance to react, thus dri­ving up prices. A sim­i­lar phe­nom­e­non could play out again.

Com­ment: And it will. Prices will yo-yo for years before we set­tle back into a truly nor­mal and bal­anced mar­ket. When the press calls for the sky to fall, things will slow. But buy­ers are impa­tient and they will not wait, so back up we go. Any eco­nomic issues and things could drop. But when things get bet­ter, back to the mar­ket peo­ple go, and back up we go. This is what has been hap­pen­ing for the past 3 years now. From the highs of 2007 to the lows of 2008, then high in 2009 and pos­si­bly low again in 2010. I bet we go high again late this year or into 2011.

But if another rebound occurs, it will likely be trig­gered by Ottawa. The Harper gov­ern­ment has repeat­edly inter­vened to micro-manage the $2.8-trillion hous­ing mar­ket. Before the U.S. sub­prime mort­gage cri­sis hit, Ottawa dra­mat­i­cally loos­ened mort­gage rules, allow­ing Canada Mort­gage and Hous­ing Cor­po­ra­tion to insure zero-down, 40-year mort­gages. Ottawa reversed course when such loans were shown to be dangerous.

But with the reces­sion, Ottawa swung back into action. It offered first-time home-buyer sub­si­dies, allowed Cana­di­ans to with­draw more from RRSPs to buy homes, and autho­rized CMHC to take $75 bil­lion of mort­gages off lenders’ hands. Finally, as the mar­ket began to over­heat in Feb­ru­ary, Finance Min­is­ter Jim Fla­herty tight­ened mort­gage lend­ing stan­dards. But Holt says Ottawa may loosen mort­gage restric­tions once again if the hous­ing mar­ket craters. And it seems entirely pos­si­ble the gov­ern­ment will use its clout through CMHC to spur banks to lend and peo­ple to buy.

Efforts to halt prices from falling sharply might keep home­own­ers, and hence mil­lions of vot­ers, happy, but it’s bad eco­nomic pol­icy. First-time buy­ers would be forced to take on even more dan­ger­ously large mort­gages. At the same time, if the hous­ing mar­ket con­tin­ues to swing up and down, that even­tu­ally trans­lates into stagnation—albeit at high levels.

Com­ment: Which is what I said above. Though not stag­na­tion, nor­mal and bal­anced. We for­get what those terms mean after the chaos of the past few years. A slow July and August is nor­mal, or at least it was, not a sign of the apoc­a­lypse. It does not mat­ter what the fed, or any of us, do. Prices will not col­lapse – at least not in Toronto.

Which is why many believe it’s time to let the hous­ing mar­ket pur­sue its own trajectory—and, given recent data, that would appear to be down. “There’s a strong case to be made for let­ting the mar­kets fol­low their nat­ural evo­lu­tion, and the U.S. offers a good les­son,” says Holt. “Every time they’ve tried to use stim­u­lus to avoid what’s inevitable in the long run, they end up mak­ing things worse.”

————————————————————————————————————–

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

————————————————————————————————————–

Related posts:

1. Cor­rec­tion, not crash for Cana­dian real estate mar­ket in 2009 His­tor­i­cally low inter­est rates, sta­ble local economies and increas­ing affordability…
2. Canada home resale price index up, no crash seen Cana­dian home resale prices climbed in March for an 11^th…
3. Hous­ing mar­ket braces for cor­rec­tion, not crash While Canada’s hous­ing mar­ket is antic­i­pated to con­tinue to move…
4. Hous­ing credit squeeze likely to keep bub­ble at bay Not that there was much like­li­hood of a bub­ble forming,…
5. Weights and mea­sures The days of excep­tion­ally low mort­gage rates are com­ing to…