At a conference in the First Quarter of 2009, Phil Soper (President and Chief Executive Officer of Brookfield Real Estate Services Fund and Royal LePage Real Estate Services Ltd.) gave a presentation to Royal LePage realtors that provided an overview and forecast of the real estate market in 2009 with an emphasis on how Canada is positioned compared to other countries in the world, the U.S in particular.
As we approach the end of Q4 2009 and a growing number of economists, media outlets and politicians have started to collectively indicate that, at a minimum, it appears the worst of the global recession is behind us (Canada’s economic recession officially ended in the Third Quarter of this year with GDP growing at an annualized 0.4% in the Quarter and an increase of 0.1% in Q3 on a monthly basis), I thought you might be interested in seeing some highlights from the presentation to help provide some context and insight into past, current and future media soundbytes and headlines.
At the beginning of 2009 there were a number of different forecasts predicting how 2009 would play out. Some were unrealistic, some optimistic, some fatalistic. The overall consensus – including Phil Soper’s prediction – was that the housing market would start to improve on a year-over-year basis in the second half of 2009, which, with 20/20 hindsight, was largely correct (in some areas it started to improve in Q2).
What wasn’t predicted was just how robust certain Canadian real estate markets would be this past year – in a number of hotspots, Toronto in particular, there have been a record number of home sales and an appreciation in market values due in large part to simple laws of supply and demand: mortgage interest rates at historic lows plus pent up pressure in the first-time buyer segment largely fuelled demand in a housing market with an overall lack of inventory (as prospective sellers catch on to the prime listing opportunity at present, supply will hopefully be increased and more equilibrium brought to the market).
Here are the highlights:
US House Prices and Income Back in Balance
As you can see in the above slide, in the U.S. through the 1990’s home prices lagged incomes but at the turn of the decade they shot up and created a bubble that has, as we know, subsequently burst. A large reason for the super-inflation was due to an irrational financial system which artificially stimulated the real estate market via the aggressive marketing of financial products – including “NINJA” loans (No Income, No Job, No Assets) – to consumers.
U.S Housing Rebounds
The economic world is a cyclical one, and real estate is a prime example. As you can see from the data collected above by the National Association of Realtors in the U.S., historically downturns tend to be relatively short, followed by longer periods of growth. For example, in 1980 there was a 2 year market correction with an average decline in transactional dollar volume in U.S. housing by 14%, followed by 6 years of strong growth. Recovery does happen, and when it does, historically it has tended to be quite long and substantial.
Canada Relative to the Rest of the World
Relative to the rest of the world, Canada was well positioned as we underwent a correction and economic turmoil affected countries and consumers worldwide. The above graph comes from statistics collected by the International Monetary Fund for their National Bank Financial Report for the second Quarter of 2008. Zero percent represents the level at which house prices are in line with what economies can support. Based on this information, Canada and Austria are among the most affordable, with economies supporting the underlying value of the housing stock.
Canada Compared to The U.S
As we all know, the U.S and Canadian markets are very similar but also have a lot of differences.
From the above left graph which shows U.S and Canadian mortgage debt as a share of income, we can see that Canadian mortgage debt is approximately half that of U.S consumers. The above right graph shows the amount of speculative activity in the Australian, British, U.S and Canadian housing markets. According to CIBC, speculative activity (ie/purchasing properties to try and make a profit with no intention of actually living in the property) in Canada has been much less prominent. Canada has had a more conservative housing expansion and as a result we were not set up for the type of fall that some of the other countries in the world have had to endure.
The Actual Canadian Real Estate Market
It is of course a different situation between regions – as a fixed product, real estate fluctuations can be very localized – but as you can see above, towards the end of 2008 and into the start of 2009, we moved nationally into a more balanced market where buyers and sellers had a more equal shot at negotiating a good deal after spending most of the decade above the line in the territory of being a seller’s market. One thing was certain, in Q4 2008 and Q1 2009 markets across the country cooled as we went through the inevitable cycle of growth and correcting markets.
Since the above slides were presented at the beginning of 2009 a lot has certainly happened. In some areas market corrections ‘recorrected’ and essentially never happened, and we currently find ourselves back into a seller’s market in many cities and certain regions across Canada. As mentioned earlier, an increase in inventory/listings in 2010 would bring some equilibrium to the market. And as soon as the Canadian economy starts displaying indicators of inflation, Mark Carney and the Bank of Canada will likely be quick to act and increase lending rates which will in turn likely slow down consumer demand. The Bank of Canada has indicated that rates won’t be increased until at least the Summer of 2010, but if the economy heats up before then, you can be sure rates will be on the rise shortly thereafter.
Myles Slocombe is a Sales Representative with Royal LePage R.E.S./Johnston & Daniel Division. Myles is also a contributor to the Muddy York Blog. Myles’ web site is located at www.keystoneconnect.ca .