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In Canada, there are fears that the housing market may follow the American market from years of boom to a sudden bust. Worry not. Data suggest we’ll get through any slowdown almost pain-free.
U.S. housing sales are tumbling as interest rates rise. Reports from Dow Jones show sales of existing homes fell in July 4.1% from June and 11.2 % from July, 2005. Sales of single-family homes fell even harder to a rate of 5.51 million units in July, down 11.4% from a year earlier.
U.S. sales of new homes look even worse. Inventory of unsold new homes rose to 7.3 months from 6.8 months in June. Bob Curran a housing market oracle at Fitch Ratings, predicts that existing home sales will fall another 9%, new, single family homes to fall another 12 %, and single new family home starts to fall another 12%.
In Canada, the situation is not so dire. Bertrand Recher, Senior Economist with the Canada Mortgage and Housing Corporation in Ottawa, explains, "What we see in Canada is a housing market that continues to be supported by strong fundamentals. We continue to have rising levels of disposable income."
Manitoba may be one of the safest places for homeowners to maintain resale value. With a steady economy, affordable market prices and less speculative building than there has been in Vancouver, Calgary and Toronto, prices should be relatively stable.
Canada will not be entirely unscathed if there is a recession in the U.S. According to Michael Burt, senior economist at the Conference Board of Canada, an Ottawa think tank, "We expect to see a slowdown in Canada in the next couple of years, but not anything like what has happened in the U.S."
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The main difference between the U.S. and Canada is the way housing is financed. "The options available to U.S. home buyers exceed those available in Canada, Burt says.
"It is very easy to get interest-only, highratio mortgages in the U.S. What’s more, they have been more adjustable-rate mortgages. As many as a half of all U.S. residential mortgages have been financed on floating rate terms." One U.S. report found that one in four homes purchased in the U.S. was for investment purposes, Burt notes. Translation: they were speculative buys.
In Canada, research shows that only a quarter of all new mortgages have been on variable rates. In the U.S., a third of all mortgages are interest-only, he says. Rising interest rates there could force owners with high-ratio mortgages to flee, leaving lenders with unsaleable properties.
Canadian mortgage markets are already correcting with slowdowns in construction in places such as Toronto, Ottawa and Montreal, Burt notes. If there is going to be a price trend reversal, it would be in the hottest markets like Calgary, where house prices have risen by as much as 50% in the last 12 months, Burt explains. House prices in Winnipeg have risen at about 12% to 14% per year, strong for the prairies, but really just a catchup after years of single-digit gains.
"We are forecasting a 12% price rise in Canadian existing homes for all of 2006," Bertrand Recher says. "There is strong job growth in the west in particular, while there may be some slowing in eastern Canada. After two years of interest rises, there will continue to be higher rates. But in comparison to historic mortgage levels, carrying charges will remain low. In Winnipeg, it will be
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relatively easy for new buyers to enter the market."
Any economic slowdown in the U.S. is going to translate into falling home prices as some buyers rush to sell. U.S. consumers have been spending 50% of disposable income on financing debts, including mortgages. In Canada, the situation is not so dire. Canadian buyers still have spending power. Canadians spend 40% of disposable income paying their debts, including mortgages, Burt notes.
Canada, with less use of dicey borrowing mechanisms, is not likely to show major housing price declines, Burt adds. Canadian homeowners are less risk-tolerant than their American counterparts, he explains. House price collapses can happen when interest rates rise. Yet there is no indication of an interestrate spike now and, most economists forecast lower inflationary expectations and declining interest rates.
Will Canada suddenly become a buyer’s market, as the U.S. appears on course to be? No, Burt says. The data doesn’t support that. Western Canadian house and condo markets, other than Vancouver, Victoria and Calgary, are going to be much as they have been. On the prairies, and especially in Winnipeg, markets should not vary much from their traditional moderate growth.
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