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Despite the troubled times, the local market looks sound

By: Derek Raymaker
The Globe and Mail

There's an old saying that goes: when the water-hole dries up, that's when all the animals start to look at each other funny.

The last two weeks have seen a spectacular crash of global equity markets and a virtual paralysis in capital flow. The headlines are frightening, but digging behind them even slightly is enough to make your blood run cold.

This is especially true if you are close to retirement and have just watched your investments go for a swan dive off the tallest peak of Bay Street, ripping one-third or more of their value on the way down. But the scariest part of a good old-fashioned economic meltdown is waiting for the other shoe to drop. That's when the terror sets in - not having a clue what comes next.

As last week's stock market collapse showed, psychology can drive events to a crisis point as much as real economic happenings such as job losses, trade slowdowns, property foreclosures and bank failures. So how do home buyers and sellers keep their heads on straight in these troubled times?

For all the doomsday scenarios that have been put forward in excruciating detail on the business pages and the television news, Canada (and Toronto) don't really have to worry about property foreclosures and bank failures seen in the United States.

Both of these problems were brought on by the subprime mortgage feeding frenzy, which put property in the hands of people who could not afford to service their mortgages or even come up with a down payment. To no one's surprise, as more homes were bought through these weak mortgages, prices rose dramatically in a speculative spiral.

When it became clear that many subprime mortgages were worthless, the bad debt incurred was repackaged into complicated financial instruments and sold to institutional investors thinking they were investing in mortgage-backed securities. But U.S. home prices are now diving, so not only are the mortgages unlikely to be serviced, they also are worth more money than the actual properties.

And that, in a nutshell, is how a full-on banking panic has paralyzed the North American economy.

Probably the most important data indicator in which local real estate watchers can find solace is the arrears rate. The percentage of residential mortgages that are behind current payments by 90 days or more stands at 0.27 per cent, according to data compiled by the chartered banks and reported by the Canadian Association of Accredited Mortgage Professionals. This accounts for about 20,000 to 25,000 of residential mortgages in Canada.

To put this in perspective, at the peak of the last major recession in 1992 the arrears rate stood at 0.6 per cent. For even more perspective, consider the United States. The current arrears rate is 4 per cent for prime mortgages (meaning people who qualified for a decent interest rate and went through the rigmarole of actually depositing a substantial down payment). Subprime mortgages - those handed out with no down payment on a wing and a prayer - are in arrears at a rate of 18 per cent.

"The consensus view is that housing markets have turned and that we can expect a slower pace of price appreciation across Ontario," said Ted Tsiakopoulos, Canada Mortgage Housing Corp.'s regional economist for Ontario.

But Mr. Tsiakopoulos is quick to add that he is not predicting a devaluation of home prices caused by a flood of listings. Certainly there are markets in Toronto where that is a concern because of job losses, such as in Windsor and Oshawa.

For those who are predicting a market correction in Toronto similar to that of 1992 - one caused by a typical bubble of price spirals caused by unhinged speculation - there are a lot of reasons to breathe easy.

"It's important to remember that 2007 was a record year [in terms of price increases and sales volume]," he said.

"What we're seeing is employment growth slowing and the pent-up demand for housing finally being absorbed. A natural market response in 2008 and 2009 is a balanced market where you see prices growing at or near the rate of inflation."

Mr. Tsiakopoulos is predicting sales volumes for Greater Toronto to settle in the 2003 range, when they stood at 79,000, compared with 93,193 for 2007.

Resale home prices have held steady in Greater Toronto through to August (the last month for which data is available). The average price stood at $376,236 in 2007, and has gone up 2.2 per cent to $384,605 for the January-to-August period in 2008, according to the Toronto Real Estate Board. For new detached houses, the average price for January-to-August stood at $536,404 throughout Greater Toronto, up 4.9 per cent from the same period in 2007 from $511,322, according to CMHC.

Another advantage is historically low interest rates, that are likely to remain low with the help of the Bank of Canada to avoid a recession.

The big mystery is how the terms of lending will tighten up thanks to the chaos causing all these sleepless nights these days.

"The run-up in price appreciation has been steady and sustainable here, not at all like what the United States experienced," Mr. Tsiakopoulos said. "That, and historically low interest rates, should make the adjustment easier."

 

Posted on Friday, October 17, 2008 at 04:04PM by Registered CommenterElaine in | CommentsPost a Comment | References1 Reference

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