Bust or Balance?

The most common question I get asked these days is "Will the real estate market crash soon?".

Without a doubt the U.S. is sparking a lot of these concerns. Some reports from the financial industry and recent stock market performance are also fuelling the speculation.

I am not going to be overly optimistic but I also don't agree with the 'prophets of doom'. I hope to give you a balanced view based on the facts...

Canadian Business magazine recently published an article by Andy Holloway that offered some great insight. Consider the following...

"Unemployment is near its lowest levels ever, the dollar is near par with the greenback, and our resource-rich economy is doing well by most measures."

He shares feedback that negative indicators such as an abundance of properties on the market and the length of time they are on the market have not really started to increase. It is softening but we need to remember that the market has been in serious overdrive for a while now.

Nesbitt Burns just released a report that states:

"So far this year, national home sales are down 11% year after year, and prices are up a moderate 4.8%. The sales drop and the modest price gain are well down from years of double-digit increases, and further confirmation that the boom days are over. Notably, no city in the country has reported a price decline from year-ago levels over the first four months of the year, so the slowdown is still far from mimicking the U.S. experience.

However, we would point out that new listings have climbed more than 8% this year, even as sales have slid, pointing to “a more balanced market” according to CREA (i.e. much more of a buyer’s market), and even less upward pressure on prices looking ahead."

In comparison to the U.S...

Of course, driving a lot of the paranoia is the state of the market and economy in the U.S. With media reports of major price crashes and a glut of property supply it feels like every market is going to follow suit.

Canadian Business shares some important differences and actual facts to consider...

- More than 25% of all new U.S. mortgages were sub-prime in 2006, compared with 3% in Canada, and all high-ratio mortgages here (those with less than 20% down) are secured by the CMHC or other insurers.

- The U.S. mortgage delinquency rate was 5.8% at the end of last year, compared with only 0.26% in Canada. The States is the breeding ground of the “ninja loan” — No Income, No Job and no Assets.

They say that’s not to suggest the threat of a housing downturn in Canada isn’t real, but it’s unlikely to reach the epic proportions it has in the States.


What's been happening in the Canadian Market?

Holloway discusses some interesting market activity...

"Prices are still rising in most major Canadian markets, even if the number of sales is dropping. Housing sales in the Top 25 markets fell 5.6% to 38,365 units in February, according to the Canadian Real Estate Association.

Nationally, the average sale price rose 6.2% to $313,065, the smallest year-over-year increase since November 2004. Is that the sound of a bubble bursting? More likely it’s a long hiss, as the market loses some of its buoyancy. “It’s still a seller’s market.

Price increases should be higher than inflation,” says Warren. “But 2009 will be more of a balanced market — the first time we’ve had one since 1998.”

Focus on the market in the GTA...

Check out the latest market report from the Toronto Real Estate Board:

GTA resale housing market moderate in April, but prices up.

With 8,762 houses sold in the Greater Toronto Area, April’s resale housing activity was down seven per cent from the record 9,452 transactions from the same timeframe a year ago, Toronto Real Estate Board President Maureen O’Neill announced today.

“The market is showing signs for a healthy 2008 compared to the diminished activity we saw in the first quarter of the year,” said Ms. O’Neill. “We continue to experience a supply and demand situation and to-date, it remains a sellers market."

Sales activity however, was markedly different in the 416 and 905 regions. With 3,467 transactions in the City of Toronto, sales were down 10 per cent from a year ago. The 905 region was down five per cent from April 2007 sales, with 5,295 homes changing hands.

April’s GTA average price was $398,687, up five per cent from the same period a year ago. In the City of Toronto, the average price was $446,781, up six per cent from last April. In the 905 region the average price increased five per cent compared to a year ago, to $367,196.

"The number of listings on the Toronto Real Estate Board’s Multiple Listing Service has increased to 24,539, up seven per cent from a year ago, which is good for homebuyers, who will find a greater range of options in the market,” said Ms. O’Neill. “With prices continuing to appreciate and increased listing inventory there are favourable factors in today’s market for consumers.”

For the full April Market Watch Report, click here.



At the end of the day...

Like most investments, a downturn in the market is the biggest issue when you have to get out. If you are planning on selling in the next year, the sooner the better is my call but you'll still hold on to solid value in the coming years.

If you are considering buying, and are not planning to flip or resell in the short term I would not feel concerned about major drops in value. And it is starting to become a more balanced market which will make the buying process more appetizing compared to the past scenarios of crazy bidding wars.

For those home owners who plan on sticking around, resist the temptation to max out the lending potential against your home.

Holloway points out that Canadians are pretty averse to debt, "Nearly four of every five Canadian homeowners say they want to pay off their mortgages as fast as possible, according to Canada Mortgage and Housing Corp. Almost 85% make weekly or biweekly payments to speed up amortizations, while a third have made a lump-sum payment against principal. "

For 2008 I would look forward to a more balanced market and greater supply of properties, which I believe is a good thing.

It's a healthy correction after the insanity of the past few years.

Regards,
Mark

For the full article "Safe as Houses?" by Andy Holloway, click here.