Canada’s Real Estate Market: The Cracks Of Price Deflation Are Forming

A number of real estate boards across the country have recently released their June sales numbers and the news is not good. Sales are down across the board with a whopping 30.2% drop in June sales numbers (compared to a year earlier) in the previously frothy Vancouver real estate market near the front of the pack.

While the news for Vancouver homeowners trying to sell is bad they are not alone in feeling the pain. Toronto saw it’s sales numbers drop 23% over the same time a year earlier and Calgary saw their existing home sales drop a whopping 40% over a year earlier and is down 16% compared to May. Other markets are also feeling the pain albeit more moderately such as Ottawa which saw a 15% drop in sales in the region in June.

Air Is Coming Out Of Home Sales

It doesn’t take a brain surgeon to realize that some of the air is coming out of the sails of the housing market in Canada. It’s a bit of a mystery what has taken things this long to slow down given the slowdown in the economies of Canada’s top trading partners the US, Europe, Japan and China. The demand for Canada’s commodities especially from China and Asia has helped Canada avoid much of the pain that the global economic slowdown has wrought but there are signs the stimulus efforts in China and the US are running out of steam.

On the Canadian front interest rates near record lows and seemingly upbeat numbers being touted by Canada’s major news outlets daily has not been enough to keep the real estate bubble from starting to burst. The question quickly becomes after two straight months of disappointing sales numbers since the institution of the new tighter mortgage rules issued by Finance Minister Flaherty have we seen the peak in the Canadian real estate market and are we in for a mild or deep correction in the coming months and years.

It’s Different Here (Again)

Flipping on our speculation cap if you were to read the information coming out the real estate industry and the mainstream media in Canada you have nothing to worry about if you are a homeowner trying to sell your house right now. This slowdown is “expected” and will bring moderation in local markets leading to “opportunities for both buyers and sellers in a balanced market”.

“What we see here is a return to the stable, steady market conditions that Ottawa tends to experience,” said Pierre de Varennes, president of the Ottawa Real Estate Board. Source: Ottawa Citizen

I’m not as optimistic as Pierre and I think in general Canadians are massively over-leveraged right now having gotten drunk on easy credit and low interest rates not realizing that they are quickly becoming debt slaves under the yoke of the big banks (enabled by the Canadian government). With a record $1.48 in debts for every dollar earned Canadians have never been more in debt in the history of Canada. Yes, record low interest rates are attractive and it seems the real estate and banking industry have done a good job of brainwashing the average Canadian into thinking they “deserve” to be a home owner.

There is nothing wrong with the goal of home ownership but your goal should not be getting a home at all costs because as homeowners in the United States are learning home prices do not always rise. Over-leveraging can trap you in a home as a glorified renter with a small dip in the market making it so you can’t sell the unit trapped with a debt larger than the home is worth. The dream of homeownership can quickly become a nightmare for the underwater, 95% leveraged “home owner” who can’t sell but can’t afford his mortgage as interest rates rise.

Unless of course you live in Ottawa and listen to Angie Zarysky of Royal LePage:

“I expect it to continue to be strong, and prices in Ottawa continuously go up. They don’t seem to have the ups and downs that other cities have.” Source: Ottawa Citizen

A real estate industry favorite is the mantra that “things are different here”. Well, the math doesn’t lie and home prices in Canada are now north of 5 times an average families annual income which is almost double what the long term sustainable average has been in the Canadian real estate market. Canadians are taking on more mortgage than they can afford and as interest rates continue to rise more and more of these marginal borrowers will begin to default in the coming months and years.

Will The Canadian Real Estate Market Get As Bad As The United States?

Will things get as bad as they did in the United States? No one can know that answer for sure but if someone tries to tell you our banks didn’t gamble like US banks on sub prime mortgages. Well, guess again. The Government of Canada is currently insuring upwards of $600 billion in “sub prime” level mortgages for the big banks in Canada. That’s quite a gamble the Government is taking to prop up the real estate market and try to keep the bubble building. The math says they can’t continue this game forever.

Make no mistake May and June sales numbers were huge declines and they portend a deeper correction is coming to the Canadian real estate market. We can’t know how long it will last or how deep it will go but with lousy global economic prospects, rising interest rates and rising budget deficits requiring tax increases to plug the holes there is little to drive a continued rise in housing demand or prices. With more houses coming on the market and less buyers to buy them a natural price correction to the downside should be the likely by product.