September 11th, 2007


Blurb: The gap between residential real estate prices in Canada and the U.S. will likely continue to widen


Residential real estate picture far better in Canada than in the U.S.


By Peter Diekmeyer •


Stories about U.S. residential real estate have always awed Canadians. The oglers run the gamut from “snow birds” who dream of picking up a Florida condo, to businessmen and media wogs drawn to Manhattan scene to celebrity watchers who worship the stars in their Malibu homes.


Since real estate in all three of these areas tends to be pricey by Canadian standards, it’s not surprising that the U.S. residential real estate market has long been regarded as doing much better than Canada’s. But during the last couple of years the average resale price of Canadian homes in major markets has quietly shot ahead of the U.S. average. And lately, spurred in part by the sub-prime loan debacle, that gap has been widening, a trend that experts say is spilling over into other sectors.


“What remains the greatest source of weakness in today’s U.S. economy is a continued source of strength in Canada,” wrote Warren Lovely, an economist at CIBC World Markets in a recent report to clients. “While the U.S. housing market is mired in a deep recession, Canada’s has demonstrated extraordinary resilience.”


Canadian housing data look great

In almost all respects, Canada’s housing picture looks too good to be true. Spurred by a strong job market and moderate mortgage rates, the average price of a home sold via the Canadian Real Estate Association Multiple Listing Service rose to $311,495 in July, up 12.6 percent compared to the same month last year.


The recent existing homes sales data, which cap several years of rising real estate prices, are just icing. Those increases spurred a slew of new home construction. And though the pace of new home construction has been slowing slightly recently as have the total value of building permits issued, contractors’ selling prices for new homes continue to rise.


The bottom line is that Canadian existing home owners, construction workers and real estate agents are all smiling these days. The only ones looking grim are prospective home buyers, many of whom are increasingly worried that if they don’t act fast, an affordable home may never be within their grasp.


American house prices headed south

On the other hand, the picture in the United States is not nearly as neat. Recent data show that U.S. residential real estate prices slipping as never before. During the most recent quarter, the S&P/Case-Shiller US National Home price index fell by 3.2%, compared to the same quarter last year.


There are a variety of reasons for the diverging paths between U.S. and Canadian house prices. Much of it is just plain fatigue. The U.S. economy has gone through close to 16 straight years of economic growth and hasn’t seen a real recession since the early 1990s (the mini-slowdown of the early 2000s did not technically qualify as a recession). During that time the average residential resale home price as calculated by the National Association of Realtors shot up from U.S. $141,965 in 1990 to the U.S. $220,000 range this year.  After those kinds of upwards movements, markets often begin to beg for break.


Another big factor is the debacle in the U.S. sub-prime loan sector. During the good times, U.S. lending institutions fell all over each designing increasingly attractive mortgage packages. Maturities extending out 30 and 40 years and sometimes even longer became increasingly common, as did low introductory rates. But now many homeowners who took out those loans are defaulting. As a result, credit managers are tightening up lending criteria, a trend that quickly took a large number of potential home buyers off the market.


However according to Lovely, financial institutions on this side of the border have been far more conservative. “Canada remains safely divorced from a U.S.-style mortgage fiasco,” said the veteran economist. “Default rates for both prime and sub-prime mortgages in Canada remain well-contained.”


The third reason for the growing gap in Canadian and U.S. residential real estate prices has been rise of the loonie. Five years ago, the loonie was trading in the U.S. $0.62 range. At that level, the average price of a U.S. existing home as measured by the National Association of Realtors in Canadian dollars today would be $220,000/U.S. $0.63 = CDN $354,000. That’s far higher, than the average Canadian home sold in July ($311,495). However these days the loonie now trades in the U.S. $0.95 range, a gain that vastly increases the relative value of Canadian homes.


House price split will continue to widen.

Furthermore, there are no signs that the gap between Canadian and US real estate prices will narrow anytime soon. Some experts are already calling for the Canada-U.S. exchange rate to rise to near parity, a move that would widen the spread. In addition, as a result of the rising numbers of mortgage foreclosures and turndowns by increasingly cautious financial institution loan officers, the number of unsold homes in the United States is rising rapidly, a trend that will surely affect selling prices further down the road.


But here in Canada, everything is coming up roses. Total existing home sales set a fourth consecutive monthly record in July and were so strong that the Canadian Real Estate Association just raised its forecasts for the year as a whole. “Resale housing activity was a juggernaut in the second quarter of 2007,” commented Gregory Klump, the association’s chief economist. “Strong employment numbers will keep sales activity strong, even as prices and interest rates continue to rise.”


If Klump is right those Canadians who look enviously at homes in Manhattan, Boca Raton and Orange County, could soon start feeling a lot better about their current digs.


Peter Diekmeyer ( is a freelance business and economics writer.




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