Nothing New is Good

Since my last note to you in October, nothing significant has happened in the Guelph Real Estate Market. Given the woes of our American neighbours, nothing significant is not to be considered a boring way to open an article, but a good attribute.

Americans continue to lose their houses in record numbers. And the “teaser” mortgage rates are not going to work their way through the system for another 18 months. More people are going to lose their homes as their payments balloon to current interest rates, up from the artificially low introductory rates of 1%, or less. Some are walking away from their houses even though they can afford their mortgage payments. For example, one lady interviewed said she bought her home in California 2 years ago for about $550,000. Today it is worth less than $300,000. She feels it will be far cheaper in the long run to hand the keys back to the bank and let them take the hit for the decrease in value, rather than make payments for years and years on about a quarter million dollars of equity that has evaporated. She is prepared to endure the resulting poor credit rating for several years, and then jump back into the market at much reduced prices. Not a bad strategic move for her.

The U.S. housing crunch is the most visible result of extreme overspending by the nation as a whole. In 1995 the U.S. personal savings rate was 8-9% of disposable income. Today it is negative – the average U.S. citizen is spending more than their disposable income each year, borrowing for the shortfall. Per capita consumer loans are at $22,500 of which $8,000 is on credit cards bearing interest rates that approach the trajectory of the space shuttle!

Figure 1 shows that 2008 sales in Guelph opened slower in January than 2007, but a nudge above 2006. February was off compared to the last two years, I suspect due to the atrocious winter weather. My sense is that people were not in the mood for house hunting. They were nursing sore backs after snow shovelling throughout the month!

Figure 2 shows that the distribution of sales for January by price category is typical as well; the bulk are in the quarter million dollar range, with sales tapering off significantly over $350,000.

Given the woes south of the border, what are we in for in the next year? Three factors from the U.S. melt down may come into play for us northern cousins. First, tightening credit markets have already impacted on the ability of some borrowers to obtain financing in Canada. There is simply less money to go around.

Second, the high Canadian dollar is affecting some of our manufacturers, a large part of the Ontario economy. Third, high debt levels, recession, and lower consumer confidence south of the border result in less consumer spending in the U.S.; meaning they buy less of our manufactured product. However, it is by no means doom and gloom for Canadian housing. To quote the Canadian Real Estate Association’s Chief Economist, “the Canadian housing market will slow down a bit in 2008, but that slowdown will be nothing compared to what happened in some U.S. markets in 2007. In Canada, the housing market has been setting records for volume and units sold for five consecutive years. We believe things are just moving back towards a more “normal” growth pace, but that still means the 2008 MLS® home sales activity will be the second highest on record, second only to the overall record set in 2007.” And to echo these sentiments, Craig Alexander, deputy chief economist at TD Canada Trust says,” the housing market is expected to grow at a more moderate pace this year. However, this will be the result of decreasing affordability rather than the impact of U.S. sub-prime woes.”

So what does the average consumer take from the “Economics 101″ synopsis? Buy if you want to buy, sell if you want to sell. In the long run real estate has always been a sound investment. Don’t try to time the market because you will always miss the peak, or the valley – just like the stock market.