Wednesday, November 22, 2006

Housing market crash not in the cards for Canada

Hi All,

This is a continuation of the last post i wrote and dovetails nicely with my comments. I look forward to hearing your comments!


Globe and Mail Update

Canada's hottest housing markets will not suffer the price crashes seen in some U.S. regions, in part because the speculation and high-risk mortgages that fuelled the activity south of the border are not rampant in this country.

A survey by realtor Century 21 Canada found the massive price increases seen across Canada over the last five years have slowed in all but a few areas. Meanwhile, the U.S. housing situation is dire. U.S. home prices have dropped drastically in recent months, with popular markets such as Florida, California, Nevada and Arizona experiencing the steepest downturn.

Don Lawby, the president of Century 21 in Canada, says there are economic and financial factors that differentiate the housing markets in the two countries.

“There is more speculation in the U.S. than we have seen in Canada,” Mr. Lawby said. “Lenders in Canada don't have the same lending policy as the U.S. For the first time in history we have interest-only mortgages. In the U.S., they've had them for years.”
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The Globe and Mail

Some Canadians are using non-conventional or riskier mortgages — such as interest-only financing — to buy their homes. However, a recent study by CIBC World Markets found that non-conventional mortgages make up about 5 per cent of the Canadian market, a small amount when compared with about 20 per cent in the U.S.

Because Americans can deduct mortgage interest from their income tax, people are using their houses like cash machines, Mr. Lawby said. “Once you start doing that, you treat your home as a different vehicle rather than as a place to live,” he said. “So people try to make money off the value of their homes, and that pushes up the value of homes faster.”

Over the last six months the median price of all existing U.S. homes dropped 11.5 per cent to $200,000 (U.S.) from $223,000, according to the U.S. National Association of Realtors.

Economics is another major factor that will support Canada's housing market, Mr. Lawby said. Even Ontario, where rising energy prices, a high Canadian dollar and a slowing U.S. economy are weighing on the manufacturing sector, is unlikely to undergo a steep decline in prices.

“In Ontario, the bottom line is that the provincial economy will continue to support stable housing prices,” Mr. Lawby said. In his opinion, increased production at auto plants run by Honda and Toyota, as well as government spending on construction of highways, hospitals and schools, will support the provincial economy.

House prices in select Ontario communities have risen between 0 and 6 per cent in the last six months, Century 21 data showed, a sign that price increases are slowing. In the last five years, prices in the same markets for similar homes surged between 27 and 106 per cent.

The Century 21 study found that the hottest housing markets over the past six months was Edmonton northeast, where prices shot up 36 per cent, Red Deer, where prices rose 19 per cent, North Vancouver, where prices climbed 12 per cent, and the west side of Vancouver west side, where prices rose 10 per cent.

The release did not address whether housing prices in British Columbia or Alberta are expected to rise or fall.

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