The front page

Real estate: Start of a new ice age?

Real estate: Start of a new ice age?

Given how long it’s been talked about, it seems inevitable that the housing market would start to cool. And based on all the indicators, that’s exactly what’s happening.

So are the good times over for Canadian homeowners? After the experience of our U.S. neighbours five years ago, economists are now predicting a variety of scenarios: from a soft landing to the bursting of a real estate bubble.

Until events prove who is right, we can look to the current numbers to give us some idea of the current state of affairs.

A closer look at two indicators

The message, at least for the moment, is clear: yes, the housing market is slowing. Let’s take, for example, two of the key benchmarks commonly used by economists. Keep in mind that these evaluate the market as a whole, but that there are also variations by region and type of housing.

Home sales

The first sign that a real estate market is weakening is a decline in home sales. In this regard, figures released by the Canadian Real Estate Association show not only that growth is down, but that there has been a clear decrease since last June.

A note of caution, however: slower home sales does not necessarily mean that housing prices are rising more slowly, and it especially does not mean housing prices are falling.

Housing prices

Homeowners have enjoyed a significant increase (nearly 60%) in home values since 2005. And prices have not dropped in 2012: it is just that the rate of increase in prices has slowed. It is true that prices fell in January 2013, but that could be seasonal, since prices are usually lower at the beginning of the year.

Other indicators, including growth in housing starts and mortgage loans, are also down. So there can be little doubt that the market is losing speed. It remains to be seen whether this trend will continue, reverse (as it has done so often in the past)… or accelerate.

Should we be worried?

This may be a good time to point out that the Canadian government has taken deliberate steps to specifically cool down the housing market and has tightened mortgage eligibility criteria four times since 2008 (see our article). Why? Because it was worried that that too-easy access to the real estate market would unduly increase household debt, induce a wealth effect that would artificially increase consumer spending, and ultimately create a bubble that, when it burst, would impact both borrowers and the entire economy.

Some economists argue, however, that the situation is still not great. They say that if the decrease in sales is quickly followed by a decline in prices, it could trigger a downward spiral: destruction of the wealth effect, decline in consumer spending, slowdown in economic activity. When you add to that mix that in demographic terms buyers (the younger generation) are fewer than sellers (the baby-boomers) then, according to some experts, you have the perfect conditions for a repeat of the 1991 scenario, when house prices fell 20% and the country was in a recession.

But others argue that we are still a long way from that: Canada’s economic situation is not the same as it was in 1991, government finances are in better shape and the credit market is healthier than it was a few years ago.

So?

Nonetheless, if you are preparing to sell your house, it might be wise to check your expectations about price, and about how long you think it will take to sell. If, on the other hand, you’re thinking about buying a home, be aware that a buyer’s market may be developing, but that you probably shouldn’t expect the value of your dream house to rise rapidly after you buy it.

In short, while it is not an ice age, it does look like the real estate market may now be cooling down a little.