August 26, 2011


Title: Canadian housing

Sub-title: Despite a lacklustre economy, residential real estate continues to look surprisingly strong.


News on the Canadian economic front has been grim in recent days. Consumer confidence is at a two-year low, growth in the country’s gross domestic product is near flat and according to TD Economics the chances of a recession are rising.  With all of this depressing information, you’d expect the country’s housing sector to be facing tough times. But you’d be wrong.


According to the Canadian Real Estate Association, existing home sales activity remained stable during July, with the average price of homes sold during the month actually increasing to $361,181, up 9.3 percent compared to the same month last year.


Furthermore, as Gregory Klump, the association’s chief economist notes, while the average selling price total is the lowest it has been since January, there are good reasons for this. “Earlier this year (prices were) being skewed up by sales in some expensive Vancouver neighbourhoods, but this factor is now diminishing,” says Klump. “Even so, the stability of Canada’s housing market will likely to continue to stand in stark contrast to further expected volatility in financial markets.”


Affordability takes a hit

Not surprisingly, recent price gains, coupled with increases in mortgage rates have hit housing affordability in Canada, which declined during the second quarter, according to a recent report by RBC Royal Bank. “Affordability measures rose at national level rose for all housing categories that we track,” notes Craig Wright, the financial group’s chief economist. “(Yet) despite the erosion so far this year, most local markets in Canada continue to be reasonably affordable, or at worst slightly unaffordable.”


Part of the reason that housing has got gotten totally out of reach for first-time buyers is that supply continues to be strong. For example according to the Canada Mortgage Housing Corporation, the seasonally adjusted annual rate of housing starts rose to an impressive 205,100 units in July, up from 196,600 units in July. The increase was sparked by a broad-based rise in condo starts throughout the country, with the exception of Quebec.


Housing starts are expected to moderate somewhat during coming months says a CMHC projection, and will level out at a still strong 183,200 units this year. That pace should continue throughout 2012, due to the county’s relatively strong employment picture, continued demand from new immigrants to Canada and mortgage rates, which remain extremely low, despite the recent bump.


Much of the credit for Canada’s strong housing sector relates to the fact that the country’s economy has outperformed that of many other G-7 nations on a variety of fronts. For example Canada bounced back from the 2009-2009 recession and regained lost jobs quicker than most. Furthermore, the country’s strong banking sector made fewer bad loans than those in other countries, particularly the United States, which continues to suffer from the aftershocks, particular its strong residential real estate slump.


Where else to put your money?

That said there other factors at play too. That’s because with the United States economy teetering on the brink of a double dip recession, and Canada, tied at the hips to our southern neighbour, those with a little cash on their hands have few real options.


With interest rates this low, it little sense to put money into bonds or other savings instruments, where the returns are almost all eaten up by inflation or taxation. The stock market too has its problems. While share valuations relative to projected earnings are low from a historical perspective in both Canada and the United States, nobody really knows how well those projected earnings would hold out if the economy slows.


Furthermore, with its policy interest rate currently near zero, the US Federal Reserve, which has been artificially pumping up asset prices for many years by printing money by the bushel, is approaching the limits of what it can do, without letting loose considerable inflation pressures.


Gold too has its problems. While prices for the ore have been rising parabolically during the past few years, they can also go the other way, as investors noticed during a three-day period this week when they fell by close to $200 an ounce in inter-day trading.


In short, investors today have few good options as to where to put their excess cash. And in that kind of environment, putting it into their homes by paying off their mortgages seems like as good an option as any.



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