TORONTO ? 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% in the first quarter from a year earlier, making homeowners and investors jumpy.
Here?s how to play it really safe in the housing market ? but it?ll cost you
You can?t get any more conservative than this, when it comes to the housing market.
You want lock in that mortgage? How about knowing what your rate will be for the next 25 years? Such a product actually exists at the Royal Bank of Canada, and it comes with a hefty interest rate of 8.75%.
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?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.
?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.?
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$, but rather a gentle easing in Canadian housing prices, or perhaps just a momentary pause.
Naysayers believe Canada may be too optimistic and relying heavily on that old saw that Canada is not nearly as reckless as the United States. After all, the debt-to-income ratio of Canadians is at a record high, close to the levels experienced in the United States before its market crashed, and home ownership is at nearly 70$, also a record and five points more than its neighbours to the south.
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.
?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.
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 NEIGHBOURS
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.?
PATRIOTISM MASKS PROBLEMS?
Recent history shows, however, that even the top policymakers can make huge miscalculations on housing. The most notorious case might be that of Federal Reserve Chairman Alan Greenspan, who failed to see the U.S. housing catastrophe on the cards before he left in 2006.
Carney may be on to his next job in Europe before any hard downturn in the market proves him wrong. He leaves the Bank of Canada in June for a job heading the Bank of England.
Vancouver is no tamer than San Francisco, and San Francisco is one of our bubbliest cities
The latest figures suggest Canada?s housing market is slowing rather than collapsing. National sales of existing homes were down 15% in March from a year earlier, but they edged up from the prior month as spring buyers breathed a little life back into the market that had been cooling all winter.
Prices, which rose 84% in the last 10 years, are still rising, though they were up less than 3% from last year in March ? a slowdown welcomed by everyone but sellers. But bidding wars remain commonplace in hot markets like Toronto, where immigration and low supply fire demand.
Interest rates are stuck at historic lows, so affordability is actually improving as the market cools, though it still takes about 42% of pre-tax income to cover the typical costs of owning a detached home. Canadians have $1.65 in debt for every dollar they earn, a ratio that makes policymakers shudder.
The notorious debt-to-income ratio, at a record high, has been cited time and again by Finance Minister Flaherty and Carney as a sign consumers have taken on too much debt.
But while many economists are reassured by the differences between the Canadian and U.S. housing markets, there are some who care more about the similarities.
Yale economist Robert Shiller, one of the few to predict the U.S. housing crash, sees the same thing happening in Canada ? just in slow motion.
To Shiller, whose Case-Shiller Home Price Index is widely recognized as the best measure of U.S. house prices, the parallel between the U.S. bubble and Canada?s run-up in home prices measured by the Teranet index is obvious.
?I just plot. I plot the Vancouver Teranet index with my own San Francisco index. It looks the same. Vancouver is no tamer than San Francisco, and San Francisco is one of our bubbliest cities,? said Shiller, who looks at psychology as much as data to draw his pessimistic conclusions.
He?s an outlier. A February Reuters poll of 15 forecasters, including most of the major Canadian banks, predicted Canadian house prices will fall just 7.5% in the next few years. None believe the correction will result in the devastation seen in the United States five years ago.
?It?s not even this time that is different, it is that this place is different,? said David Onyett-Jeffries, an economist at Royal Bank of Canada, the nation?s largest lender.
But Shiller said the psychology and patriotism of bubbles ? the idea that a national can?t spot the problems that an outsider can ? are not represented by Canada?s low default rates and a system of mortgage insurance that protects banks from default.
?Patriotism needs to be researched more in economics,? said Shiller. ?There are psychological and sociological factors as well. Maybe we need a sociologist here.?
? Thomson Reuters 2013
Source: http://business.financialpost.com/2013/05/03/canadian-housing-bursting-bubble-or-gentle-landing/
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