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Canadian Real Estate Prices are Falling - Not the Sky

Canadian Real Estate Prices are Falling - Not the Sky
By David Olive
www.thestar.com


Everything in moderation.

Recent homebuyers can’t be cheered by forecasts of a looming slump in house prices so soon after paying record prices in what may be the tail end of a 13-year-long Canadian housing boom.

But hold the Prozac.

First, while house prices are widely forecast to soften this year, no one’s expecting a U.S.-style crash of the sort that had prices in overheated markets like Florida, California and Arizona plunging by 70 to 90 per cent between 2007 and 2009.

That cataclysm set off defaults, foreclosures, a Wall Street meltdown, and the global Great Recession. By contrast, expect prices in admittedly overheated Canadian markets – conspicuously the GTA and Vancouver – to ease by 5 per cent to 10 per cent this year. And then to recover and begin making gains over purchase prices in 2013.

There’s an unduly alarmist tone to the latest forecasts of declining Canadian house prices. The headlines give one the impression of an imminent sharp fall.

A recent Maclean’s article linking patterns in Canadian residential real estate activity with record household indebtedness is headlined, “Time to panic about the housing market.”

Even a house fire isn’t something to panic over. You’ll just get in the way of the firefighters.

What we’re actually witnessing is a competent effort by the powers that be to prevent a torrid escalation in property sales and prices. Ottawa has been working on this for two years now, with frequent warnings to Canadians by the Bank of Canada and the federal finance minister to ease up on debt-financed consumer spending, including house purchases.

Mark Carney, the Bank governor, must have conspicuously warned at least half a dozen times over the past 18 months that today’s low interest rates “won’t last forever.” He should know, since he and his Bank colleagues set them. And the Bank has been keeping rates very low – a temptation to over-indulge in credit – in order to spur growth in Ontario’s ailing manufacturing sector.

Commercial banks have joined this coordinated effort to tamp down prices, tightening their lending standards to keep folks who can’t afford to carry a mortgage from attempting to do so. Meanwhile, since January they’ve also been engaged in a price war on mortgage rates that has made house ownership more affordable for existing mortgagees and prospective creditworthy buyers.

That’s the opposite of what U.S., U.K. and Spanish banks did in force-feeding mortgages in the 2000s to millions of buyers with no down payment, no collateral, no or little income, and a poor credit history.

The collateral damage from easing the pain with low interest rates for a Canadian manufacturing heartland that has received repeated blows to the gut since the early 2000s, long before the Great Recession accelerated the layoffs, is that money has arguably been too “cheap” for too long elsewhere in the economy.

That was the mistake, one of the biggest in central banking history, that Alan Greenspan, then chairman of the U.S. Federal Reserve Board, made in keeping rates near zero for years after the 9/11 attacks and the mild recession that followed. Which in turn spurred an unprecedented U.S. housing boom that ended in tragedy, with more than eight million Americans abruptly losing their jobs in 2008-10.

It may seem counterintuitive to wish for a slowdown in housing or any other (legal) market.

Yet when you consider that Toronto has in recent years been tied with Atlanta as the fastest-growing city in North America, adding the equivalent of a Calgary to its population every decade, you get a perspective on rising municipal costs that most city councillors and certainly the mayor don’t appreciate.

At 158 structures, Toronto has more skyscrapers and condo towers under construction than any North American city. The three runners-up combined – New York, Chicago and Miami – have 94. Time to apply the brakes.

It isn’t a legacy of wasteful spending that has the GTA in a financial bind. It’s building out municipal services to accommodate so many newcomers.

Cooling-off periods in Toronto property prices have characterized the GTA since the end of the Second World War, making it one of the most stable and lucrative housing markets in the world. What’s happening with prices today is no different. And this has kept Toronto relatively affordable for house buyers even as prices have steadily risen with only brief interruptions over the decades.

All movements go too far. Speaking of which, houses in downtown Detroit have hit rock bottom at $14,000 for a detached three-bedroom. So if the impulse in you to roll the dice on house purchases cannot be denied, think about picking up a six-pack of Motown properties whose price has nowhere to go but up.