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U.S. market different
Sep 08, 2006

Ominous news about the American housing market is coming out of the United States. In fact, the news is so dire that American market observers and economists are saying the steep decline in both new and existing home sales is the forerunner of a U.S. recession.

On the other hand, observers are quite optimistic about the Canadian housing market, foreseeing not a significant drop in the market but a settling down to greater stability — the exception is Western Canada where home sales are still climbing upward. There is also continued strong consumer confidence, which is in sharp contrast to what is happening in the U.S.

While there is evidence of more stability in the marketplace, the Canadian Real Estate Association reported that home resales activity for the first seven months of 2006 were still at a record pace with sales 3.7 per cent ahead of last year during the same period. Transactions reached the highest levels on record for the month of July in Alberta, Saskatchewan and Manitoba, said CREA.

The good news for Canadians is that home buyers are now being offered greater choice. 

“The national residential market is now more balanced than it has been at any point in the past five years due to a marked increase in new listings in Alberta and the

return to more normal levels of sales activity in British Columbia and Alberta,” according to CREA.

Investment in residential construction has climbed 8.5 per cent in Canada for the second quarter this year when compared to the same quarter in 2005, according to Statistics Canada. Expenditures on new home

construction totalled $10.4 billion in the

second quarter, up 9.8 per cent from the same quarter in 2005.

Compare these figures to what is happening south of the border: a 13.3 per cent drop in housing starts and a 16 per cent drop in existing home sales in July when compared to the same month in 2005.

“Consumers held the least favourable home-buying plans since the low point in the 1990 recession,” said Richard Curtin, the

director of the University of Michigan’s

Survey of Consumers, in a report on American buying intentions, “which indicates

continued declines in sales of new and existing homes during the year ahead.”

An Inman News article said the Index of Consumer Sentiment was 82 in the August 2006 survey, down from 84.7 in July and significantly below the 89.1 recorded in

August 2005.

American consumers reported a growing weakness in their personal financial situation.

“The corrosive impact of inflation on their finances is still the top problem cited by

consumers,” said Curtin.

Just 29 per cent of all households thought that their finances would improve during the year ahead, which is also the lowest level since 1990.

All this is translating into a crash in the U.S. housing market and the potential for a recession in the coming year. Some observers are now saying that the fall-out will even be nastier than the technology bubble bursting at the beginning of the 21st century.

The previously booming U.S. housing market had been a Godsend to the

economy. While other sectors were in a downturn, double-digit housing sales and  the sale of all the products needed to fill houses such as furniture, TVs and other appliances, had buoyed up the economy. Today, retail companies are reporting declining household goods sales due to consumers

cutting back on their purchases.

The Globe and Mail reported that nearly half of U.S. economic growth over the past three years was attributed to housing. At the same time, all the housing growth had

created an indebted society — U.S. household wealth tied into homes had jumped from 38.7 per cent to 48.5 per cent. This makes Americans vulnerable to any major downturn in the market because so much of their wealth is tied into housing.

Article author Barrie McKenna wrote that economist David Rosenberg of Merrill Lynch & Co. is predicting that housing prices will fall another five per cent, erasing $1-trillion worth of U.S. household wealth. 

Even with mortgage rates and house prices declining in the U.S., consumers have not judged the declines to be sufficient to adopt more favourable home buying-plans, said Curtin.

The question is whether the Canadian housing market will catch a cold as America sneezes. Traditionally, Canada has been heavily reliant on the health of the American economy. Yet, Canada still has plenty of what the U.S. needs even if the bubble bursts — oil and gas and other resources that are also heavily in demand in the rest of the world. 

And, the Canadian housing market has not been exposed to as extremely dramatic price increases as has the U.S. — the exceptions are Calgary, Edmonton and Vancouver, although they are returning to more

sustainable levels —  making any downswing easier to absorb. Many housing observers claim that the price increases that have

occurred in Canada were really market

corrections after years of stagnant price growth, which is particularly true of the

Winnipeg real estate market. 

On the other hand, the U.S. price increases were overheated, arising from a frenzy of speculative investments because of cheap credit and multiple refinancing

options. Houses were sold, resold and sold again in a fever pitch to turn over a quick buck. In the meantime, Canadians usually see their homes as a long-term investment and are thus less likely to enter the speculative market.

Unlike their American counterparts, Canadians are not spending as much of their income to maintain their investments in the housing market and have more dollars left over to spend for other purchases.

“Softer U.S. economic growth will either keep interest rates on hold or lead to lower interest rates, which is good news for the Canadian housing market,” said Gregory Klump, chief economist for CREA.

“Demand for resale homes is still historically strong,” he added. “Prices are expected to continue to rise at a more normal pace over the rest of the year since the housing market is becoming more balanced as new listings increase,” he added.

Simply put, unlike the U.S. situation, there isn’t any evidence of a looming bust in the Canadian housing market.