Will Canada Have a Housing Slump?

For the past year, Canada’s housing market has been steadily rising.

Prices for condos, two-story properties and detached bungalows all rose more than 11 percent last quarter from 2006, according to a Royal LePage Real Estate Services report released this week. The Canadian real estate company, which has more than 600 locations in the country, said the fourth quarter saw large housing gains, The National Post reports.

"The fourth quarter 2007 was surprisingly strong with unseasonably high price increases and unwavering demand," Royal LePage CEO Phil Soper said.

In addition, the Toronto Real Estate Board said 2007 was its best year ever, with the average sale price increasing by 7 percent to $394,931 last month from a year ago, The Financial Post reported Tuesday.

Basically, pretty much the opposite of what’s going on in the U.S. And yet, our housing slump has undoubtedly affected Canada; the U.S. and Canada have the world’s largest trading relationship, according to the BBC.

Canada’s housing situation eerily echoes the U.S. market of years past. Could Canada suffer the same fate?

Things were rosy for the U.S., too–until the residential industry began to collapse under the pressure of mortgage defaults, property value decreases and a national home sales slowdown.

Which has left us with an awful lot of property: Although the NAR said in December that the housing supply had dwindled slightly, we still have enough to last for more than 10 months at the current rate.

For now, Canada’s residential rise continues. However, the nation would be well advised to consider the U.S. housing decline a valid learning experience–and to carefully monitor and control its own housing expansion. Some thoughts for our neighbor to the north:

  • Watch regional growth. Areas like Orange County, Calif. and Las Vegas saw some of the largest home value increases during the boom and some of the biggest drops after. They’re now seeing high office vacancy rates, indicating the slump is continuing to spread, according to The Wall Street Journal. Keeping an eye on areas with rapidly rising home prices and values may help identify an oncoming bust once those prices begin to waver.
  • Lend carefully. It’s hard to say if home prices could have continued rising if risky lending practices going on at the same time hadn’t prompted so many defaults and foreclosures; the lending frenzy was undoubtedly influenced by the rush to buy housing as residents across the country began to view it as a sure-fire investment.

However, the U.S. now is encouraging lenders to more carefully do their homework. The recent Fed guidelines offered what may seem like simple logic–requiring proof of resources and ability to pay, among other things–but it isn’t always.

Thanks to the current U.S. foreclosure situation, we’ve all learned that getting someone into a house they can’t afford isn’t helping them–or the economy. (What are we going to do with 10 months of homes to sell if we keep adding repossessed properties to the pile? It’s certainly not going to spark residential building.)

  • Hold on to equity. Homeowners are more easily able to weather market fluctuations if they haven’t cashed out some of their home’s equity. Consider homes an investment; not a way to fund a lifestyle.

Will Canada see a housing bust after its boom? It’s hard to say.

However, consider the U.K.’s current situation. Average home prices soared by 182 percent over the past decade, according to Halifax, a U.K bank. The country now seems poised to get a severe housing correction along with its daily tea and crumpets. (Or whatever they’re serving with tea these days.)

The situation is so dicey that the Bank of England recently cut interest rates for the first time in two years. Lenders gave out the fewest mortgages in three years in November. Home prices just rose in December for the first time in four months–and by only 1.3 percent, according to Bloomberg.

Home prices could fall up to 10 percent in 2009, according to Morgan Stanley economist David Miles, who advised the Treasury on the British property market.

Commercial property values are even suffering in the U.K., falling at a record rate in November.

As a result, lending options have tightened. Consumer spending has started to drop off.

Phil Soper, chief executive of Canada’s Royal LePage Real Estate Services, recently said prices are expected to rise more modestly in 2008, leading to a strong, stable market. Hopefully, he’s right.

But just in case he isn’t, keep a close eye on your neighbors and friends, Canada: It could save your economy some serious distress.