Kiyoko Fujimura

Buzzbuzzhome Corp.
August 30, 2010

I wrote a post a couple of weeks ago about what set Canada apart from the US in our real estate sector. However, the discussion in that article mainly focused on monetary policy.

We found an article that was closely related to this discussion. It indicates that while housing starts will slow, it will not be a US-style crash. So don’t believe those crazy bubble fanatics and their scare tactics.

That being said, there is evidence for a slowdown. But not for a massive bubble burst. A list from the Journal of Commerce gives a nice summary of the reasons housing starts will slow:
1. The introduction of the HST has increased costs for developers (i.e. real estate fees, legal fees etc.). That’ll make developers less inclined to build.

2. Existing home sales have already started to slow, which is usually a leading indicator for a slowdown in housing starts.

3. The Bank of Canada has raised key interest rates which, in turn, signals to retail banks to raise mortgage rates (which they preemptively did in the Spring).

4. The past year has seen incredible growth in housing starts, so a decline can only be expected.

5. Finally, a lot of Canada’s recent boom is attributable to foreign purchasers realizing Canada is a great place for investment. Foreign demand, however, is very difficult to project.
Okay, so that’s the bad news. There’s good news too:

First of all, our immigration rate is high which means an increase in new home buyers.

Second, although traditionally Canada has been highly dependent on the US (and still is to a large degree) that trend is reversing. Canada is increasingly becoming a commodity-based economy with the oil sands in Alberta and, now, the oil reserves on the East coast as well. We also have a lot of potash! That means that although the downturn in the US will hurt Canada, our economy, especially in the real estate sector, is more dependent on international demand from countries other than the US.

Maybe you’re asking why Canada’s commodity-based market has any impact on real estate.

The Journal of Commerce explains:

Housing starts are a function of price, affordability, incomes, employment prospects, mortgage rates, population growth, and overall economic prosperity.

That means that even though the US might experience the dreaded “double dip”, if our incomes are not entirely supported by the US, then we could still make it through– not entirely unscathed, but in a better position than in the 1960s when 60% of Canadian industry was owned by the US.

Finally, looking at the fundamentals, the US has seen another downturn because of very specific circumstances. The expiry of the new homebuyer tax credit on April 30 didn’t help and a price drop in existing real estate nearing the 1/3 mark didn’t help either. Those two disincentives are having a massive impact on the US housing market– and Canada suffers from neither of these problems.

So that’s it for now! Canadian real estate growth in the past year has been a bit crazy. And it would be even crazier to expect it to keep being this crazy. But it’s not the same as the US, plus we have an awesome central bank that really has its head on straight (not like the die-hard Ayn Rand fan Alan Greenspan that the US had).

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