Real estate faces correction, not crash

While its southern neighbour teeters on the verge of collapse, Canada’s resale real estate market should see only modest price and unit sales corrections throughout 2009, predicts Royal LePage.

The real estate company’s 2009 Market Survey forecasts that average house prices will dip by 3% from last year to $295,000, while transactions are projected to fall to 416,000 (-3.5 %) unit sales in 2009.

According to the survey, most consumers are not aware that nationally, Canadian housing market activity peaked in 2007 and has been trending lower since. “We are well into this inevitable cyclical correction.”

Phil Soper, president and CEO of Royal LePage, assured Canadians in a press release that despite the cooling trend, price and activity gains are anticipated in some provinces.

“Emotional reaction to recent economic and political instability did much to dampen consumer confidence during the latter part of 2008, causing a marked slowdown in house sales activity. However, as a more rational understanding of the issues gains ground, together with a wide range of announced corrective measures, consumer confidence is anticipated to recover, prompting real estate activity to pick up once again in the latter half of 2009,” he said.

Going by the survey report, prices in many mid-sized cities such as Regina and Winnipeg are expected to increase moderately through 2009. The most significant price decreases are forecast for Canada’s most expensive city, Vancouver, which has experienced above-average price increases for most of the decade. By contrast, real estate in Montreal and Ottawa is poised to remain stable, while both Calgary and Edmonton’s housing markets are anticipated to grow.

While most homeowners would be relieved by the survey’s buoyant tone, Garth Turner, author of Greater Fool: The Troubled Future of Real Estate , says he’s disturbed by it. “The downturn only started for Canada two quarters ago, and Soper predicts it will be over in three quarters. How’s that possible when the U.S. will see a fifth dismal year before it hits bottom?” he questioned.

Royal LePage has been off the mark with past predictions, however. In 2007, the firm predicted momentum would carry over into 2008 and position Canada’s real estate market for steady, yet moderate growth.

“People who followed that report and bought homes — especially with zero-down and 40-year amortizations — would be in serious financial trouble today. The odds are, one year later, they’d have negative equity,” Turner said.

Turner predicts ’09 might bring better tidings for the financial markets but it will be dismal for real estate. “Canada is following an identical trajectory to the U.S., just with a two-year lag. It will collapse, though more gently than the States.”

Tsur Somerville, associate professor at the University of British Columbia’s Sauder School of Business, and director of UBC’s Centre for Urban Economics and Real Estate, takes a stand somewhere between that of Soper and Turner. He agrees with Soper that it’s unlikely Canada will go the same route as the U.S.

“Conditions here are not the same. There isn’t nearly as much sub-prime lending, or as much speculative building here,” he says. But he’d be surprised if the downturn isn’t greater than real estate companies are predicting. “They have an incentive to predict the forecast will be less severe. Independent analysts are predicting a more severe downturn.”

Tsur says there still remain a lot of risk factors for Canadian real estate. For example, condominiums under construction with presales could face problems. “If buyers made 5% down payments and prices fell 20%, I’m not sure they will come through on the contract.”

If markets turn, these investor-buyers might behave in a manner akin to other asset markets, dumping their units to avoid future greater perceived price declines. Further, investor-buyers who find themselves in a have-to-sell situation might not be able to refinance as lenders tighten their purse strings. Tsur also anticipates problems for commercial real estate buyers who might also struggle with refinancing their property. “If lenders squeeze up it could be a problem.”

While analysts and real estate forecasters slug it out, there’s one group that has actually seen a spurt in consumer activity following the downturn — the reverse mortgage lenders.

Greg Bandler, senior vice-president of sales and marketing for Canadian Home Income Plan (CHIP), says the downward trend has given a boost to business. “The option of selling seems less attractive to seniors right now. These are people who bought homes 20 or 30 years ago. The values have considerably increased since.”

(01/09/09)