One of the advantages of living in a globalized economy is that it's relatively easy to draw lessons from events in other countries. For Canadian housing sector stakeholders, the ideal reference point is the United States, where current residential real estate trends shed light on what is happening here.
During the past five years, housing prices in the two countries have gone in dramatically different directions. The most recent data supplied by the Canadian Real Estate Association show that the average price of homes sold in Canada by its members during April was $372,000, up 35.3 per cent from the $277,000 average price during 2006 as a whole.
On the other hand, the median price (which is slightly different than the average price) of homes sold in the United States fell by 41.7 per cent, from $281,000 (in Canadian dollar terms) to just $163,700 during the same period. In short, during the past five years Canadian and U.S. residential real estate prices have moved in completely opposite directions. So what does this all mean?
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Why the change?
The difference in U.S. and Canadian house price trends largely boils down to the very different way that both countries emerged from the recent financial crisis and recession. For example, both job creation and economic growth have been far stronger here in Canada than south of the border. The U.S. is further hampered by its involvement in costly wars in Libya, Iraq and Afghanistan, which leaves it with less money to provide social assistance to those hit by economic travails.
Canada also weathered the financial crisis better than did its southern neighbour. For example, no major Canadian financial institution went bankrupt or went through major restructuring. That meant mortgage lending here, while tighter than pre-crisis levels, has not tightened nearly as much as it has in the United States.
On top of it all, Canada's housing sector was not nearly as overbuilt as it was in the United States, which continues to suffer from significant inventories of unsold houses. House price declines have hit U.S. households hard. For example, as of the first quarter of this year, 23 per cent of U.S. mortgage borrowers owed more money on their houses than their properties are worth. Worse, eight per cent of the volumes of negative equity homes are currently in the foreclosure process. This will put further downwards pressure on prices during the coming months.
Sadly, the situation down south is unlikely to get better anytime soon, says another expert: "So far we are not seeing any indication that the U.S. housing market is about to start a sustainable recovery," notes Benjamin Tal, an economist with CIBC World Markets. "In fact, given current trends, we do not see the market clearing before 2013-2014, with house prices falling."
Time to buy U.S. real estate?
Anytime there are such broad divergences in the prices of assets in Canada and the United States, there are investment implications. Despite their many differences, the two countries are broadly similar in many respects. Both are rich western nations, with substantial natural resources and comparable per capita incomes. So if home prices are more than twice as high in Canada as they are in the U.S., it may mean that real estate there may be bottoming out — or that prices here are getting out of hand.
That said, the high spreads between real estate prices in the two countries also tell us a lot about the Canadian market, which, by many accounts, is becoming frothy, particularly in areas such as Vancouver.
However, experts are divided on whether prices here will fall slightly or whether they will merely move sideways for some time as homeowners consolidate recent gains.
Peter Diekmeyer is a Montreal-based freelance business writer.
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Sincerely, your friend in the real estate business,
Roland Kym
Remax Select Properties
Cell : 604 970-0393
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