The Canadian housing boom looks as though it has ended, and you can't fault U.S. commentators for taking some pleasure in our real estate woes. But is there more to their pleasure than mere schadenfreude?
Canadian observers are not yet predicting a cataclysm along the lines of the U.S. downturn (National Bank Financial said in a note that the market is “normalizing” here). But that's not stopping Michael Shedlock, who writes the Mish's Global Economic Trend Analysis blog, from piping in with his own view: “The party's over, Canada,” he said. “Look at the U.S. for what's to come.” Yikes.
The talk of a Canadian downturn began on Thursday, when the Canadian Real Estate Association reported that sales of existing homes fell 13 per cent in the first quarter, year over year, even as new listings continued to rise. This has created a situation where inventories are on the rise.
According to Mr. Shedlock, prices will be sticky for a while – just as they were in the United States for six to nine months after its own market turned – and then one local market after another will begin to turn. “Meanwhile, denials will run deep with all kinds of ‘It's different here' logic. Rest assured, it's not different in Canada,” he said.
Canadian economists counter that the economy is still relatively strong here and that employment – which they believe is a fundamental foundation for the housing market – is fine. Mr. Shedlock believes these economists are “dead wrong” and points to the fact that employment in the United States is still relatively high, even as it suffers through its worst housing market in decades.
“What matters is affordability. People cannot really afford the prices here, and it is a mistake to think that 40 year amortizations in Canada will make things affordable up North,” he said.
Cutting interest rates will not do the trick. Lower rates haven't helped in the United States, where the Federal Reserve has cut its key rate to 2.25 per cent from 5.25 per cent in 2007, with more cuts are likely on the way. The reason why the housing market has shrugged off the rate cuts is that default risks have risen, keeping mortgage costs stubbornly high.
“So even as [Ted Carmichael, chief economist at JPMorgan Canada] thinks rates need to come [down] so mortgages are more affordable, Canadians would be advised to not hold their breath waiting for that pass-through,” Mr. Shedlock said.
