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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.
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Remembers 1989 from Canada writes: I'm now changing my name to Remembers 1991!
- Posted 18/04/08 at 12:45 PM EDT | Alert an Editor | Link to Comment
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joe blough from Canada writes: "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,"
And here I thought mortgage interest rates were tied to longer term bonds, not the overnight rate. Am I missing something?
Also banks are keeping any rate difference to act as a salve on their ill balance sheets.
remember the days when corporate losses were in the millions? Ido. Now losing billions every quarter means nothing. Hooray! They only lost 8 billion, not 10. They beat estimates. All is well and good.- Posted 18/04/08 at 1:22 PM EDT | Alert an Editor | Link to Comment
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andy c from Canada writes: the difference between Canadian and US lenders is what prevented Canada from the same housing troubles down south. most mtg's are funded directly by the big banks which all have fairly high credit standards comparied to the US where if you breath and are able to sign your name you would qualify for a mortgage. while i admit the Canadian market will eventually slow down i dont think we'll be seeing the mass forclosures and abandoned homes like we do in the states.
- Posted 18/04/08 at 1:39 PM EDT | Alert an Editor | Link to Comment
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Mike Constantine from Canada writes: Guyus remeber that Real Estate has historically been cyclical...BOOM then BUST....Has always been like that!
- Posted 18/04/08 at 9:28 PM EDT | Alert an Editor | Link to Comment
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Doug Wong from Saskatoon, Canada writes: With places like Edmonton going down in price, according to the Royale LePage survey, places still on the rise, like Regina and Saskatoon seem like they will be next. Maybe not forclosures because of better lending practices (though CIBC was one of the banks that lost huge in the USA) but moderate declines 5 - 10 % in housing prices. Especially since, while Saskatoon is near natural resources, it has only a few headquarters to any decent sized companies, a very non commercial downtown, property that is now more expensive than Edmonton, despite far lower wages and it really is not that nice of a place to live.
It is cold, probably about the coldest of any "major" city in Canada, maybe Winnipeg, leads the country in Sexual assaults, and along with Winnipeg and Regina is near the top in robberies and break and enters (Maclean's and Stats Can). Important, as if you're not making as much as Alberta anyway, why would you pay more to live in a smaller, more dangerous and colder city? The decent places in Canada may keep going up in value slowly, but I doubt people will take the pay cut to move to Saskatoon and live in a city that aside from the river and being close to Potash mines, has not a lot going for it.- Posted 20/04/08 at 3:28 PM EDT | Alert an Editor | Link to Comment
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