Thursday, January 10, 2008

Canada not linked to US real estate market troubles

The melt-down of the U.S. real estate market has left many homebuyers wondering if and how it may affect the housing market in Canada. But market analysts say the problems in the U.S. will have little impact on Canadian real estate.

For example, according to a recent House Price Survey report released by Royal LePage Real Estate Services, Canada's resale housing market remained on solid ground during the third quarter as high consumer confidence, strong employment rates and stable interest rates led to robust buyer demand and a rise in house prices. “Much like the Canadian dollar, the Canadian housing market is charting its own course, quite independent from the United States and its currency and housing climate,” said Phil Soper, president and chief executive, Royal LePage Real Estate Services. “The strength of the Canadian dollar, and the fact that the country is adjusting well to its value, will continue to keep interest rates at their existing low-to-moderate levels, boding well for buyers looking to enter the market.”

Statistics Canada also recently reported that the home ownership rate stands at its highest on record. “With the combination of the cost of borrowing money remaining relatively low, the availability of longer mortgage amortization periods, and the fact that Canada's population continues to grow, it is no surprise that more and more people are entering the real estate market,” the report states.

Fundamental differences
The Emerging Trends in Real Estate Report 2008, recently released by U.S.-based Urban Land Institute and PricewaterhouseCoopers, suggests the real estate market will remain upbeat in Canada over the coming year. The report is based on interviews with real estate executives in both Canada and the U.S. Some of the reasons why Canada is not expected to experience the same downturn as the U.S. in its real estate markets according to the report include:

-Canada benefits from a simpler economy and a more conservative investment environment than the United States, avoiding the consequences of lax underwriting and speculative building.
-In Canada, institution-dominated markets appear to be avoiding "transaction mania," but real estate values have reached record highs and a strong economy has accelerated tenant demand for space.
-Canadian federal surpluses have given consumers more confidence which has led to increased spending on homes, retail goods and business expansion.
-Canada is naturally rich in areas such as energy and resources and benefits from huge global demand, which fuels both the economy and demand for all forms of real estate.
-Housing prices continue to skyrocket toward new highs without overdoing mortgage financing.
-Canadian metropolitan areas boast below 5% vacancies, and rents have room to push higher. -Rental apartments are doing well in major cities with high immigration flows.
-Canada's economy continues to be healthy and the soaring dollar brings benefits to importers and any company looking to make capital purchases, which are almost always priced in U.S. dollars.

No sub-prime lending market

Finally, another big difference between the U.S. and Canada has to do with mortgage loans. Unlike the U.S., the Canadian housing market has not been artificially driven by bad lending practices. In the U.S. lenders with liquid assets or investment money were making loans to almost anyone who asked. When U.S. housing prices started to slide and interest rates began to rise, many borrowers ended up in trouble and defaulted which in turn, initiated the credit crunch. However, by June 2007, only 5 per cent of mortgages in Canada were sub-prime as compared to more than 21 per cent of U.S. mortgages. As well, all mortgages in Canada are insured which is not the case in the U.S.

Canada's long-term fundamentals are solid. Canada has a growing population, our energy and commodities are in high demand, and job creation is strong. All of these attributes seem to have created a buffer shielding Canada from some of the problems in the U.S. real estate market.