23 May 2008
The sky is not falling. (At least not here anyway.)
Posted by Ryan Coffey under: Nanaimo Real Estate Market .
I really thought I should post this because despite all the stats out there, despite what the majority of economic experts are predicting, including the big banks, there are still so many people I talk to who think that real estate prices here are falling, or will soon start to plummet and we’ll wind up just like our neighbours to the south.
It’s simply not happening, prices are not falling here in Nanaimo and the economic experts that I’m aware of are predicting that it’s unlikely that we will end up in the same boat as the Americans. Have a look at this recent release from Scotia Bank for example.
The U.S. sub prime mortgage fiasco is something that is having an economic impact on the world at large and from what I’ve read is also affecting real estate values in certain other countries, the U.K. for example, but here in Canada real estate values continue to rise thus far this year and our economy is still doing rather well in case you haven’t noticed. Nationally our real estate market is still doing well, though admittedly it’s not as wildly exuberant as it has been in recent years. As an analogy, it has been taken off boil, and put on simmer.
The prices of real estate are higher in Canada than they were at the same time last year, however they are rising slower than they have in six years which was quite the boom. The Average sale price in Canada in March 07 was $299,924 and in March 08 it was $314,279 according to the Canadian Real Estate Association. The rise in prices in B.C. has also been a little slower than in recent years mind you, but a rise nonetheless.
In Nanaimo, the average sale price was up 15% this April from the same month last year. (Interestingly, there was only an 8% increase from April to April the year before, which was fairly typical for 2007 until October through December where the increases really started to speed up to an average of about 19% for those months. ) Yes, numbers of sales are down, yes housing starts are down, so yes there are certain things that are not the same which are factors that cause a cooling of the market. Read into them if you like, but don’t forget that last year was a record year for real estate sales in this area as was the year before. A little less than smoking hot is still hotter than warm.
An important thing to keep in mind for people looking t selling their property is that we’re seeing more price reductions. The consensus among Realtors is that a lot of people are still pricing their homes as if they were in a boom market rather than this more moderately rising market. In any market, you have to price your home realistically, but sellers have been spoiled these past few years.
If you read this blog regularly, you will have heard me say before that unless you’re a real estate investor, you probably don’t need to worry about the real estate market a whole lot. Look for older articles I’ve written for buyers and about markets to explain my position on this. In essence, it does make some difference to you, particularly if you made the mistake of buying a home that you can’t afford to pay for, but I think people who aren’t investors typically put way too much emphasis on it. (Buy a new home when you can afford it and/or need it. Investing is another game. Combining the two can be done, but unless you intend to move a lot and are into doing constant renos, it’s probably not for you.)
Below is something I came across in the Canada Realty News this month that explains the U.S. prime mortgage fiasco and how it relates (and doesn’t) to Canada’s real estate market. It’s really worth reading if you have any interest in real estate markets at all and aren’t exactly sure what the deal is with this whole sub prime mortgage thing. Twice even. After all, it’s not like the mainstream media has done much of a job explaining it to people, so you might as well start here. Educate yourself.
Ryan Coffey
Understanding The Sub Prime Mortgage Market Crisis 
Despite the fact that the U.S. sub prime mortgage market has gained much media attention, only some of us know what is this means while many are worried about it’s affect on our market. In this article we shed some light on this issue and it’s effects on the Canadian market.
What is a sub prime mortgage?
A sub prime mortgage is a loan that is risky in nature. If the borrower has poor credit or a low income, then he/she would not typically qualify for a mortgage. This is why sub prime mortgage was created. Sub-prime mortgages are mortgage loans to borrowers who have bad credit history. While the terms and conditions of sub-prime mortgages can vary, an introductory two-year term interest rate before resetting to a much higher interest rate, which is the combination of the index rate plus a margin is always offered.
If the borrower in subsequent years couldn’t meet their financial obligations, the higher property prices would largely insulate or negate losses for the lender. The lenders usually offload these sub prime mortgages to institutions who would package them as mortgage backed bonds. The high returns offered by these bonds make them very attractive for investment funds as there is always an incredible amount of money flowing into them largely from Canada, Europe, and Asia.
Many consider this a profitable business like brokers who sell the bonds and the debt rating agencies who receive substantial fees for making the bonds appear to be solid investments.
The market crisis!
The countdown began on June 2004, when the Federal Reserve (the central bank in the US) began a cycle of interest rate hikes that raised the cost of borrowing from the lowest levels registered since the 1950s. It increased the interest rates seventeen times and paused only in June 2006 when the borrowing cost touched 5.25 percent.
The US housing market began sliding in August 2005 and that continued through 2006 when building rates and housing prices tumbled.
The high spending of the American government on the war in Iraq and many other factors played major role in the shrinking of the U.S. economy and affected the employments rate. This combined with the high interest rates and low home values have left many of those borrowers unable to meet their mortgage obligations an led to a crisis in the sub prime mortgage market.
By the end of 2007, the number of foreclosures went up 93 percent comparing to 2006. Some lenders have been forced out of business because of the unconquerable losses.
What affect will this have on Canada?
Canadian sub-prime mortgages represent less than 5 per cent of mortgage origination’s, and less than one in four of them have more risky variable rates. While US home prices are falling on average, home prices in Canada continue to rise. The economic fundamentals in Canada remain strong. Lenders here in Canada may tighten up lending practices globally which would not be immune to the Canadian marketplace. Also, if the US is heading into a recession, it may have an impact on the Canadian economy.
Are there similar risks to the market in Canada?
In Canada, a prime mortgage is known as a conventional mortgage. A home-buyer with a down payment less than 20 percent (high ratio mortgage) needs to secure mortgage insurance like the kind provided by Canada Mortgage and Housing Corporation (CMHC). Conventional and high ratio mortgages in Canada and the United States use similar underwriting practices.
There are some key differences between the sub prime markets in Canada and the United States. In Canada, there is less emphasis on gaining market share for the risky sub prime mortgage business. In the U.S., clearly the war for the sub prime mortgages, may have been a reason for some careless and reckless loan granting.
Also, the lending practice in Canada is not to use option adjustable rate mortgages for the sub prime borrower. This usually reduces the risk with any loan. The Canadian housing market has been less speculative than the U.S. market. A strong job market and lower interest rates will help sustain the Canadian real estate market.
Furthermore, mortgage interest is tax deductible on an American principle residence. This is another significant reason why Americans are encouraged and motivated to buy a home (sometimes prematurely). The U.S. housing affordability is at its worst level in two decades. In Canada, affordability is still very much present as the overall real estate picture is better than the 1989 period when there was a significant spike in prices. Currently, the U.S. household debt is a staggering 25 percent higher per capita than that of the Canadian household.
The real estate market in Canada has been going strong for 9 years. It is difficult to predict when the market will show signs of a slowdown. Given the demand for real estate in our current market, the low unemployment figures and the availability of affordable housing, the market will continue to flourish despite the struggles of our southern neighbour.
