August 26, 2008


Title: Keeping up with the American Joneses

Sub-title: Canadaís housing market continues to outperform that of its southern neighbour. Continued lending by mortgage lenders is one reason.


Sociologists have long puzzled over one interesting fact that has long baffled economists. Many people donít measure their wealth in absolute terms, but rather by how well they are doing relative to their neighbours. For example someone living in a $500,000 house tends to be prouder of it, if his neighbours are all living in $300,000 houses than he would if they are were all living in castles.


This theory explains in part why Canadians homeowners seem pretty satisfied with their lot these days. Thatís because while housing starts and home prices may be slumping here, those numbers are still a lot better than they are south of the border. Part of the reason for that is that unlike U.S. financial institutions, Canadaís banks are continuing to keep the credit spigots open.


ďOn the surface there are no indications that the credit crunch ha(s) impacted the mortgage market in any significant way,Ē writes Benjamin Tal, a senior economist at CIBC World Markets, in a note to clients last week. ďOverall mortgage(s) outstanding are still expanding by a strong 13.4 percent on a year-over-year basis.Ē


Weaker selling prices and new home construction

Tal goes on to say that things may not continue that way indefinitely. And recent data suggest that he may be right. For example although according to the Canadian Real Estate Association, existing home sales edged up slightly last month, the average selling price for those new homes was 3.6 percent lower than during the same month of last year.


Selling price data for recently built housing isnít looking that great either. According to Statistics Canada, the average price of new homes sold during June increased by just 3.5 percent relative to the same period last year, the smallest jump in six years.


With house prices moderating, it should come as no surprise that builders are no longer stampeding to get their shovels into the ground. According to the Canada Mortgage and Housing Corporation, housing starts should slow to 215,475 units this year, compared to 228,343 in 2007.


One group though should be happy with the news: first time home buyers. According to according to a report by the Desjardins Economics Studies team, housing affordability has once again improved in Canada, in part due to falling mortgage rates and slumping housing prices in Western Canada.


Staying ahead of the Joneses

As Adrienne Warren, an economist with Scotia Bank Group notes though, the price declines in Canadian existing homes sales  remain far more moderate than the 15.8 percent year-over-year drop in the Case-Schiller index of sales in U.S. major markets recorded in May of this year.


Data from the National Association of Realtors arenít much better: according to the real estate agents lobby group, the median price of a previously owned U.S. home fell to just $212,400 in July, from $215,100 the previous month.


That said, Scotia Bankís Warren does see encouraging signs in recent weeks that the U.S, housing slide may be coming to an end. For example, she notes that although combined new and existing home sales have hit a fresh cycle low of 5.4 million units (on an annualized basis) and are now 35 percent lower than they were at their peak in 2005, the rate of decline has moderated. This she says may be an indication that deep discounting and the expectation that prices are bottoming is attracting the interest of some first time buyers.


Waiting for a turnaround in the U.S.

Ironically, although Canadians are happy that their housing positions appear stronger than those of our southern neighbours, a turnabout there would help us greatly. Thatís because America remains the largest customer for Canadian goods and if U.S. consumers start to feel better about their household wealth, they will be more likely to boost their consumer spending.


Frankly, the U.S. economy has shown surprising resilience in the face of its slumping housing sector, which had been the source of much of its strength in recent years. In fact CIBC World Markets expects that U.S. second quarter real GDP growth could be revised upwards to as high as 3.0 percent. However experts expect that number to fall sharply during the current quarter. So if the U.S. housing market is bottoming out, this could not have come at a better time.


In his recent report the CIBC`s Tal noted some other potentially good news for Canadaís housing sector. According to Tal, the fact that because Canadian household credit growth, adjusted for inflation, was slower than it has been during previous credit cycles, the expecting softening in the pace of household borrowing in the coming six to 12 months will not be as dramatic either.


Thatís a big plus, because it Canadians can continue to borrow to finance their housing related expenses, it will make it a lot easier for our real-estate market to outperform that of those Joneses south-of-the border. 


Peter Diekmeyer ( is Bankrate.caís Quebec correspondent.






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