Monday, November 10, 2008

Youse Guys Remember When I Told Ya..

Having never been a fan of the Soprano's, I don't like to use the word "Youse". Nonetheless, it seemed appropriate to use it based upon what has been happening in the real estate market.

Real estate markets globally are now feeling the effects of this global recession. We are slowly following the US markets as they head south. Having already seen the US housing market plunge, former federal reserve chairman Alan Greenspan speculates that there is room for a further 5% to 10% reduction in prices before markets stabilize in mid 2009. With prices dropping, the sales of existing homes are also in decline but in a different way. The effects appear to be more regional in nature (likely related to local economies) as noted in Bloomberg, with sales in the northeast dropping by 17.9%

Does this mean the same will happen north of the border? While some people may believe otherwise, the Toronto Real Estate board announced in a recent
Globe and Mail article, that Toronto prices are down 13% and the surrounding 905 region was down 8% year over year. A paragraph from the article bear closer scrutiny.

As of August, there were more condos under construction in both Toronto and Vancouver separately than there were in all Canadian cities combined a decade ago, Mr. Wolf and Ms. Kwan said. “And as in the U.S. two years ago, we are now seeing completed units pile up unsold in Canada, a clear sign of overbuilding and an ominous sign given the voluminous supply still in the pipeline,” they said.

Yet a
study from the University of British Columbia seems to contradict this with respect to Toronto. Their study shows that with the exception of Toronto and Edmonton, houses in Canada’s major cities are overvalued, priced up to 25 per cent higher than they should be to balance with rents -- given interest rates, holding costs and historical rates of price appreciation.

Even with interest rates dropping, the number of houses for sale has swelled to over 27,000. Listings are lasting much longer and we are now fully into a "buyers market". Jason Kerby penned probably the best article in MacLeans about
"Canada's Brewing Real Estate Storm". One paragraph from the article really stood out to me.

And in Edmonton, where prices in July fell 5.3 per cent from a year ago, the city's real estate board felt compelled to urge calm. "Edmonton's resale housing market is not 'plunging,' " the board said in a terse statement. "There is no cause for concern." Of course, when you issue a press release insisting there's no reason to panic, that's often a reason to panic.

The great unspoken fear lurking in the backs of everyone's mind is the kind of collapse of house prices that followed the bubble of the late 1980s. It was certainly a zanier market than today, with national prices climbing at 25 per cent a year, compared to 10 per cent this time around. Also, when adjusted for inflation, prices haven't soared as high this time. The average single family home in Toronto peaked at $420,000 in 1989 whereas in July the city's average stood at $371,000. When the Bank of Canada jacked interest rates as high as 14 per cent to fight inflation back then, the party ended with a squeal of rubber and the sound of shattering glass. In a matter of months many homes lost more than half of their value.

Having bought my first home at the end of that bubble, I often believed I was seeing similar aspects in today's markets. As such, for the past few years, I have been advising clients to remain cautious about having all of their eggs in a real estate basket. More people are reaching the "my bank owns my home not me" stage and when (not it) rates start to climb in a few years, it could lead to the declines of the late 1980's through mid 1990's.

1 comment:

John said...

I Like the new layout