Positive perspective to real estate downturn in report

Warning: the following article contains positive information from an independent third party.

I hate to be the bearer of good news, but there's actually some out there, although you'd never know it most days. For example, the "Real Estate Trends" report recently released by the Scotiabank Group was remarkably positive once you got past the first line.

The opening line of the Global Economic Research report by Adrienne Warren of Scotia Economics bluntly declared that "Canada's longest housing boom of the postwar period has come to an end."
We all know that, but the balance of the report put that opening statement into some healthy perspective, something that has been sorely lacking in most recent media reports on the state of the housing market.

"We argue against taking an overly alarmist view to domestic housing prospects," says Warren. "This is not a U.S.-style bust caused by overbuilding, speculative buying and imprudent lending, but rather a cyclical slowdown accompanied by a valuation adjustment in several large centres (out West) where booming demand conditions and temporary supply constraints led to an overshooting in prices."

Driving home the U.S. comparison, Warren writes that "Canada's mortgage market is significantly different than its U.S. counterpart, with a much smaller subprime exposure, less interest rate reset risk, lower use of home equity withdrawal and investor mortgages and more conservative lending criteria.

"Canadian households are far less leveraged than those in the United States, and less exposed to any erosion in underlying asset values," Warren continues.

"Record unsold housing inventories, mounting foreclosures, overbuilding and credit constraints are bigger factors behind the continuing and steep slide in U.S. home prices than overvaluation, none of which are major concerns in Canada."

She goes on to note that apart from mortgage and balance sheet considerations, there are other key differences between the U.S. and Canada including the fact that the inventory of for-sale homes on both the new and resale market, while moving up, is still well-contained relative to prior cycles.

"With builders in most jurisdictions beginning to slow the pace of new construction, and with a low risk of widespread foreclosures, the Canadian market does not face the massive inventory glut underlying record-setting U.S. price declines."

Warren tracked real estate price increases over 10 years in 10 different countries to find that home price appreciation in the U.S. and Canada has actually been "relatively modest" by international standards, rising 50 per cent and 61 per cent respectively.

Based on the International Monetary Fund's housing valuation model, which estimates the extent to which house price increases are unexplained by fundamentals, Canada's housing market is the "least overvalued."

Warren does see a down side risk to home prices in Canada, but sees it out West more than here in the GTA.

"We expect that the correction in national average prices from their late 2007 peak will probably be in the range of 10-15 per cent, well below the ongoing U.S. retrenchment.

"Much of this realignment will occur in Canada's three Western provinces, and will leave intact most of the significant price appreciation of recent years."

I would like to repeat the line above – "leave intact most of the significant price appreciation of recent years" – because it speaks to the reason that it's always a good time to buy if you are buying for the right reasons, namely shelter and long-term financial security.

To read the full Scotiabank report, visit newhomes.org and click on news and issues.

Michael Moldenhauer is President of the Building Industry and Land Development Association. His column appears Saturdays in New in Homes. The views expressed are those of the president. Email: president@bildgta.ca.

David Pylyp I have been reporting these same if not similar facts for almost a year now, but my circulation is not at 3-500 Thousand per day. Please read and inform yourselves of the factual data available to you and your family as you make investment choices.