Update on the Canadian Real Estate Bubble IV

 

By Philippe Bérubé

 

The following is my annual update on the state of the Canadian real estate situation.

 

As for many countries of the developed world, residential real estate prices have declined in Canada for the past year. New housing prices declined by 3% year-over-year in April, due primarily to declines in Western Canada.  Prices declined 12.5% in Edmonton, 8.8% in Calgary, and 9.0% in Vancouver for the period. Among other large Canadian cities, prices declined 0.5% in Toronto, but increased 3.6% in Montreal and 4.0% in Winnipeg (4.0%)*.

 

Analysts at the Canada Mortgage and Housing Corporation are expecting existing home sales to decline 14.6% during 2009. Housing starts had from 228,343 in 2007 to 211,056 units in 2008. The CMHC seasonally adjusted annual rate of housing starts decreased to 117,400 units in April of this year from 146,500 units in March.** Our real estate decline again seemed like a minor inconvenience compared to the steep drops experienced within the US housing market. According to US Commerce Department data, housing starts fell 12.8 percent last April, the lowest since records began in January 1959. The US Labour Department also reported in June that their Consumer Price Index (CPI) fell 1.3% in the past year, the sharpest decline since April 1950.***

The global recession/deflation and low interest rates are the main culprits for the tepid interest in new home purchases in North America.  The Bank of Canada followed once again the lead of the US Federal Reserve and lowered its key lending rate in April by one-quarter of a percentage point to 0.25 per cent, its lowest effective rate. The rate was maintained at 0.25% on by the BOC on June 4^th and is expected to remain at the level until the middle of 2010.

Rates for fixed mortagages have remained high, at around 5% for 5-years, so we may have to wait another year until demand for new loans picks up again. The Canadian dollar is edging closer to parity with the US dollar once more. After seeing their value cut by more than half in the past 6-8 months, many commodity prices are now back on the path to growth.

As a long time gold bug, I agree that the shortages we have experienced last year will continue throughout 2009 and prices should reach $1500US by early 2010. World gold production is still in decline, but coin/bar production is in steep increase to meet “safe-haven” demand, including that of central banks, a few of which have recently turned from sellers to buyers of the metal. A local example of gold shortages happened in early June when the media reported that the Royal Canadian Mint is missing gold bars worth in the “double digits” of millions.

My suggestion for Canadians readers is to keep accumulating gold mining stocks (which currently are a better bargain than bullion). Potential homeowners should still consider condos, townhouses or semi-detached properties and keep avoiding purchases of large single unit homes. Demographic projections for the next five years continue to indicate that the cohort of retiring baby-boomers will favor smaller over larger units.  The lack of easily available credit will make the market for such homes unattractive.

My recommendation for people living outside of Canada, especially those who are trying to cope with political instability in the context of the current financial crisis is to have a “plan B” for your place of residence. You may wish to consult such indices as the Economist’s Political Instability Index for the best countries to move to or read books such as the best-selling “Emergency: this book could save your life” by Neil Strauss. On top of numerous survival strategies, it details the author’s work in securing citizenship in another nation.****

 

Philippe Bérubé, M.A. Political Science, Ottawa, Canada

 

*http://www.statcan.gc.ca/daily-quotidien/090610/dq090610b-eng.htm

** http://www.cmhc-schl.gc.ca/en/corp/nero/nere/2009/2009-05-08-0815.cfm

***http://www.reuters.com/article/ousiv/idUSTRE54I2QL20090519

****http://www.economist.com/markets/rankings/displaystory.cfm?story_id=13349331