Why the housing market is not set to melt down

[androiduk]

I disagree. No one is really sure where the market is going to go in the next couple of months, to a year. One thing is for certain though; we're not going to see high% increases. At most, you'll see prices keep pace with inflation.

A first time buyer has more to gain from waiting a year than he stands to lose: most likely he'll see lower house prices, but at worst prices will stay the same and he'll really only have lost a year's progress on his mortgage.

Opec has stated they're going to cut oil production next week. Are you surprised? They were getting big bucks for their oil and now they're not. The price of oil will go up as soon as they cut production. An increase in the price of oil is an increase in the price of everything related to it and that means inflation could rear it's ugly head. If that happens we could see interest rates slowly rise and that of course is the biggest enemy of the first time buyer. OPEC has a great gig going with $120bbl oil, why would they want to settle for $70bbl.

 

[northstar]

Now that the oil bubble has burst, we must hold our breath and hope it doesn't burst the real estate bubble, too. Watching CNBC tonight, it was said that the price of oil dropping as much as it has in the past month has injected $250 billion into the American economy - and has possibly staved off a catastrophic rise in heating oil prices for the coming winter.
How deep this recession becomes (and how much it affects us Canucks) will depend on what kind of a rehabilitative effect (if any) this rapid drop in energy prices will have on the greater economy.

That, my fellow fear-mongerers is the wild card.

How can a drop in the price of oil inject $250B into the economy? I guess this means the US economy.
I guess this presumes all those SUV drivers can start slurping through gallons of fuel again.

Ironically, this increased demand will probably drive up the cost of fuel again, thus negating the $250B boost to the economy.

*

Here's my prediction for house prices in Toronto: either they stay flat or modestly decline. Oshawa, Oakville and the suburbs might be in a worse situation if GM and Ford continue to lay-off workers.

Rationale for this conclusion: Lower prices for fuel will decrease inflationary pressures, thus allowing the Central Bank to lower interest rates.

Anyone with half a brain and knowledge of basic economics will tell you that the Toronto housing market crashed in 1989 because interest rates soared, thus affecting affordability of houses. Also, thousands of baby boomers in the job market caused unemployment to soar to around 12% or 14%. People were compelled to sell because they couldn't afford higher interest mortgages, especially with one spouse out of work.

Flash forward to today. There is little upward pressure on interest rates. Therefore costs of financing a mortgage will likely stabilize, or even go down a bit. Also, as someone posted earlier, unemployment is unlikely to soar to 12% to 14%, because there are fewer Gen X'ers and Gen Y'ers to replace the retiring baby boomers.

I'd agree with the fearmongers if the facts seem to hold true, but I honestly don't see how this compares apples to apples to 1989 (i.e. today interest rates are lower and unemployment is lower).

The fearmongers on this site seem like the same people who like to drool over deathcounts after the latest tsunami to hit some impoverished lowlying area of the world.

My 2¢

 

[Hydrogen]

How can a drop in the price of oil inject $250B into the economy?

I think what he means is that $250 billion won't be going to purchasing oil (and largely going out of the country). That money can now be diverted to other uses by consumers.

 

[Quanttrader]

Anyone with half a brain and knowledge of basic economics will tell you that the Toronto housing market crashed in 1989 because interest rates soared, thus affecting affordability of houses. Also, thousands of baby boomers in the job market caused unemployment to soar to around 12% or 14%. People were compelled to sell because they couldn't afford higher interest mortgages, especially with one spouse out of work.

Nope. It crashed because there was a massive housing bubble and then the economy tanked and burst it. Interest rates were already high. The property bubble killed even the biggest fish- Campeau, Reichmann, etc.

Same concept now, slightly less flippin', though not much!

 

[cdr108]

There is little upward pressure on interest rates. Therefore costs of financing a mortgage will likely stabilize, or even go down a bit.

This is a common misconception.

Mortgage rates are not based on the Fed Funds Rate / Bank of Canada rate unless one has a variable rate geared to prime.

Fixed term mortgage rates are based on long-term bond rates/treasury yields/LIBOR. With the increased insecurity from the financial crisis, higher risk = higher rates.

 

[lowesthangingfruit]

This is a common misconception.

Mortgage rates are not based on the Fed Funds Rate / Bank of Canada rate unless one has a variable rate geared to prime.

Fixed term mortgage rates are based on long-term bond rates/treasury yields/LIBOR. With the increased insecurity from the financial crisis, higher risk = higher rates.

Agreed.

And from a big picture point of view, please remember it was ridiculously low rates (remember 9/11 and the Greenspan era) that got us here in the first place.

The inevitable does eventually occur and no one "enjoys" this as some on this forum seem to indicate. Pain will be felt, no doubt, but it's simply part of the natural market cycles that occurs globally, regionally and sectorally.

 

[cdr108]

My house's value was appreciating, on average, 4%/year since the mid 90's.

Roy, you should get your house appraised because there's no way your house's value has only doubled since the mid-90.

If you're in cabbagetown, the value should be 2.5-3.0x your original. you will be pleasantly surprised.

 

[TrickyRicky]

Northstar,

Fearmongering is declaring this the new depression. It won't be. It's just that we haven't faced recession for so long we seem to have forgotten about it in our collective memory. But failing to except the seriousness of the potential downside we are facing strikes me as denial and in some cases makes one wonder about some poster's vested interests. Also, note that this isn't a forum dedicated to people jumping on the bandwagon with an axe to grind on this subject as you seem to imply in your last comment. Many posters including myself have been posting for years on this site. Personally, I calls it like I sees it and my opinion has come around sharply to the pessimistic only over the last 6 month period. Real Estate value, commodity prices and stock values have fallen, this is fact. They will fall further, this is almost certain. How many jobs will be lost when all these companies with damaged values and evaporating bottom lines trim up? We don't know yet.

 

[Roy G Biv]

Roy, you should get your house appraised because there's no way your house's value has only doubled since the mid-90.

If you're in cabbagetown, the value should be 2.5-3.0x your original. you will be pleasantly surprised.

"Should be", but it isn't.

Maybe it was orginially purchased at an inflated price, but I doubt it...

 

[realestateguru]

I really don't understand about the concept "meltdown"...

 

[daveto]

I really don't understand about the concept "meltdown"...

This may help.

http://seekingalpha.com/article/100789-worldwide-housing-declines-u-s-halfway-down-the-list

 

[w.ll.am]

This chart is useless... What are the percentages based off of? Wasn't the US already declining last year so the percentage decline was based off an already declining market while Canada had a huge increase the last couple years so the decline is based of an incline.

I may be wrong with the above but a good chart would show previous years so that you could see the overall trend of each country.

Useless chart.

 

[cabbagetowner]

Print E-mail Share License Text SizeWiden this Page
Breaking News from The Globe and Mail

Home price slide may be overstated, TD economists say
Lori McLeod


Wednesday, October 22, 2008

Canadian home prices cooled last month, but the depth of the correction may have been exaggerated by distorted data, says a research note released Wednesday by TD Securities Inc.

The average price of a resale home across the country's 25 major markets fell by an estimated 6.2 per cent year-over-year in September, according to a report last week from the Canadian Real Estate Association (CREA).

The decline was larger than many market watchers had expected, and added to fears the Canadian housing market could go into a U.S.-style freefall.

However the price drop was led by a 43 per cent plunge in the number of homes sold last month in Vancouver, the country's most expensive market.

“The crux of the issue is that unless the underlying cities are properly weighted...the results can be biased by dramatic changes in the volume of the sales in certain cities,†said the report by TD economists Millan Mulraine and Eric Lascelles.

Currently, the average existing home price is calculated by using an average that gives each city a weighting based on its contribution to overall sales, Mr. Mulraine said. TD recalculated the data by fixing the weighting to last year's data instead, which is a more standard method of calculating year-over-year comparisons for economic data, he added.

Under the new weighting system, last month's average existing home price decline would be a more moderate 1.3 per cent from Sept. 2007, the TD report said.

“As a result, concerns that the Canadian housing sector may follow its U.S. counterpart into a major correction may be overblown,†it added.

However, there are already some early signs that October could be a weak month for the resale housing market, and not just as a result of falling sales in Vancouver.

In the first half of October, sales fell by 18 per cent and prices by 11 per cent year-over-year in the Greater Toronto Area, the country's largest housing market.

In Calgary in the past 14 days, there have been 1,598 price reductions. Listings are still far outpacing sales, with 8,450 active listings compared with 809 sales so far this month.

© The Globe and Mail

 

[daveto]

This chart is useless... What are the percentages based off of? Wasn't the US already declining last year so the percentage decline was based off an already declining market while Canada had a huge increase the last couple years so the decline is based of an incline.

I may be wrong with the above but a good chart would show previous years so that you could see the overall trend of each country.

Useless chart.

Good point.

After all, it is from the IMF's Oct 2008 World Economic Outlook showing housing prices decreasing thoughout the entire developed world (and the data predates the recent financial markets chaos).

wtf does the IMF know?

 

[bornandbredinto]

I'm an optimist when it comes to housing...but you can't deny that the market is different today than last year. However, the market is not tumbling. There is downward pressure on sales in many areas, but various pockets are still healthy. Some numbers distort the overall picture. The very high end market is most affected and that has distorted the price decrease picture. Commuter areas such as Richmond Hill and Markham are being hit the hardest. I believe that once a bottom is hit in the GTA, prices will end up about 15% to 20% below their peaks of 2007. All in all.....a much healthier correction than most of the rest of the world.

Either way, housing is a superior long term investment. If you think in terms of the long run and don't want to put up with the daily ups and downs of stocks, then RE wins hands down....close your eyes, enjoy your home/rental property, and open your eyes in 10 years when prices everywhere are surely to be up.