Saturday, June 27, 2009

Macleans Magazine: Don't believe the housing hype!

Back on June 7th, I made a post that questioned the validity of the 'affordability' argument being used to hype homes. That post (So what happens when it's time to renew?) can be seen here.

This week Macleans Magazine has come out with an article reminding Canadians that "there are plenty of signs that the Canadian housing market is still on some very shaky ground."

And just like my July 7th post, Macleans questions the affordability argument as well. (see the Macleans article here)

Looking at the PR coming from the Real Estate Associations, the magazine notes the Industry is trumpeting how sales are up 16% this year and how, in May, sales hit an all time monthly high.

The article pinpoints exactly what is being insinuated by this statement; "that Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed."

Macleans isn't buying into that malarky, and neither should you.

The magazine notes that there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

Just like we have profiled in yet another post, the magazine notes household debt is still an astonishing problem in Canada. "There is one particular statistic that suggests trouble could be brewing. Unlike in the U.S., Britain and most European countries, household debt in Canada is, incredibly, still growing."

The magazine notes that the rising debt being accumulated by Canadians is being driven largely by record-low interest rates.

"Canadians have been buying homes not so much because they can afford them, but because many believe there’s never been a better time to buy, with lending rates so low."

Macleans sees what we have been harping about... that real estate is not more affordable, but that cheap money is more plentiful. "Houses are barely more affordable now than they were during the market peak. And as people keep buying, houses may only become less and less affordable."

The article also notes that not everyone agrees with the Canadian Real Estate Association figures that suggest the market has managed such a quick and painless turnaround. According to the Teranet-National Bank housing price index, Canada’s housing market is not recovering yet. Home prices have been falling for the past eight months, according to its latest statistics. Vancouver, Calgary and Toronto have each experienced significant price drops compared to last year. This would seem more in line with what one would expect after an unprecedented six-year housing boom in which home prices shot up 80%.

And what is the doomsday scenario looming on the horizon?

"If mortgage rates go up sharply then affordability will get crunched. Things could get much, much worse. And that’s not an unthinkable scenario. Some banks have already boosted interest rates twice this year. Then there is the possibility that job losses continue and the economy doesn’t recover quickly, putting further strains on household finances. The low interest rates and continued debt problems mean that Canadians could find them themselves badly over-exposed."

BMO economist Sal Guatieri, in a newsletter last week wrote, “it’s worth remembering that the further house prices go up and the longer household finances get stretched, the greater the risk of a painful correction. Anyone who doubts that should talk to an American or British homeowner.”

The article headline says it all. "Don't believe the housing hype!"


Click 'comments' below to contribute to this post.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

No comments:

Post a Comment