Be forewarned.  This is a long post.  I hope you’ll find the use of space worthwhile.

Recently, I was reading a dialogue between American REALTORS® on a real estate weblog and was kind of surprised to see how strongly they felt about Canada being THE place to invest in real estate.  They pointed to our stable economy, our natural resources and our “sane” government as all being reasons that they were starting to direct their investor clients into our marketplace.  Certainly national statistics have borne out that there is significant strength in our real estate market.  By the end of November, MLS® resale housing activity in Canada’s major markets had already smashed all previous annual records. 

On the other hand, our neighbour to the south is suffering through a high-profile collapse in their real estate market and indicators suggest the worst may be yet to come.  We have high profile people like Garth Turner saying prices are about to coming crashing down (but hey, he’s been incorrectly predicting that for years). We have our own Prime Minister and Finance Minister telling us that we’re in for a rough ride.  (That scares me only because it could lead to a self-fulfilling prophecy.  Naw, who listens to them anyway.  It’s no wonder that the Canadian consumer is confused.

So, what should we expect from the Canadian real estate market in 2008? 
Since we don’t have a crystal ball, let’s just look at the facts available: 

According to research firm Altus Clayton, families in Toronto in 1990 spent 40.4% of their total household incomes on mortgages while today, the level sits at just 27%.  This is a really key point because it suggests that affordability is still better today than in past “speaks” meaning, we are not yet at a peak. Incidentally, real estate forecasting “guru” Frank Clayton says there is no bubble.

Secondly, the gains in real estate values that we have seen in the last decade may seem sky high but in reality, they are not compared to historical trends.  According to an article in the current issue of Maclean’s magazine,  house prices in Toronto shot up 175% over a five year period in the late 1980’s however, in the last five years, prices in the same market have increased just 86%.

Globally, evidence would suggest we have not reached a peak. According to research done by The Economist magazine,  comparing data from 24 countries around the world, Canada’s average real estate price gain of 78% over the last decade pales in comparison to countries like South Africa (393%), Australia (159%), the US (165%), Spain (190%), Britain (213%) and Ireland (240%).

The situation in the US was created by the collapse of the sub-prime mortgage market which is quite different from anything we have in Canada.  Our lending policies are different and more restrictive plus, most low ratio mortgages are insured.  Canadian mortgage insurers such as CMHC and Genworth collectively hold over 4 billion dollars in reserves to back up about 300 billion in low-down payment mortgages.  By comparison, they paid out about 2 billion in claims in the 90’s through the last recession.  Clearly a serious recession in the US would impact our market but first of all, it is not inevitable and secondly, the degree of impact may not be as serious as in past “spin-off” recessions. 

With 2008 being an election year in the U.S. and the Republicans poorly positioned with a looming recession, the U.S. Reserve will be under real pressure to cut interest rates early in the new year.  If they do, and I believe they will, that will put further pressure on the Bank of Canada to cut rates as well in order to put some downward pressure on the high dollar and provide some assistance to Canadian manufacturers.  On the other hand, it’s quite possible that the new governor of the Bank of Canada will want to stay with the same inflation fighting policies of the past.  Either way, it would appear that interest rates are very likely to stay low into early 2009, largely due to uncertainty in the global economy. 

The Canadian economy benefits greatly from commodity trading in emerging markets.  We continue to have strength in almost every economic sector and even Ontario, a manufacturing hotbed, has weathered the high value of the loonie, adding jobs in the last six months.  Interestingly, Toronto has one of the tightest commercial vacancy rates in the world and a very strong commercial market in gear.

Here are some more things to consider: 

Affordability options expanded with the introduction of 40 year amortization periods and reports are that these have been embraced by the Canadian consumer.

Lenders now offer “no money down” mortgages

According to Genworth,  today’s typical home buyer is 25-35, has a combined gross income of 80K and is buying for 220K with 5-10% down.  If you take a look at David Foot’s population pyramids, you’ll notice that the size of this group as a percentage of Canada’s population isn’t shrinking significantly over the next decade and will continue to be a major driving force in the market together with boomers buying secondary homes.

Currently Canada has the highest rate, as a percent of population, of immigration in the world and lenders have recognized this market by offering mortgage prorams for new immigrants that did not previously exist.

GST has been reduced by one point.

The Land Transfer Tax rebate program for first time home buyers has now been extended to resale homes.

So let’s add this all up.
We do not seem to have reached a peak in affordability based on household incomes.  We are very competitive globally.  Our economy is strong and while we face some inevitable risks, we appear well poised to weather small storms.  Interest rates should remain low or even head lower.  Our lending policies and reserves will prevent a melt-down in the mortgage markets and, lenders and governments continue to offer greater opportunities for home ownership through new mortgage products, terms, financial incentives and rebates.  Demographically, Canada presently has an ideal blend of first time buyers, new immigrants and boomers to drive all market segments. 

If you consider all of these factors, I think that in 2008 we will continue to see price increases in property values in most markets.  We may see eased demand due to the increased prices impacting on affordability and also, because of consumer jitters.  We’ll likely see price appreciation of 3-4% in Ontario markets with a lower sales to listing ratio.  Stay tuned for my specific predictions for our local market place next week.

This entry was posted on Sunday, December 30th, 2007 at 2:21 pm and is filed under Buying Real Estate, Selling Real Estate, This and That. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.