Housing Crash in 2008?

One of the few articles about the housing market in Canada that actually has a few negatives in it

The article is below:

A few points:

1) The CMHC says that December was an "extremely cold month in Toronto". Untrue! It was about normal (I looked at Environment Canada and Accuweather's website). Sure, there was a lot of snow and it was colder than normal until Dec 17th but nothing unusual. This was also true of Montreal and Toronto, but out west where all things real estate are hot, temps were relatively normal. Watch the forecast for 2008 to be quietly revised downward in the next few months. January and February were actually very warm out East so let's see if they use the weather as an excuse. The winter of 07/08 was mild and snowy out East. There were colder winters (02/03 & 03/04) in the middle of this boom! Weather is a lame excuse.

2) The industry morons in the US used to say the same thing in 2005 and early 2006. The "it's a healthy slowdown/return to single digit price increases" talk. Now we are about 10% down and probably another 10-20% to go.

3) Interest rates are creeping up despite the central bank efforts. The recent bad news from BMO on its SIV crap are likely to put it into the balance sheet cash hording mode (similar to CIBC and National). 3 of 6 national banks are likely to be lending a little more conservatively despite the Bank of Canada's interest rate cuts. This will tend to keep interest rates higher than they "should" be. Also, expect credit to be harder to get in the future with higher downpayments. This will ultimately hurt the 0% down crowd.

I don't want to put too much stock in 1 month of data. It will take a few months of data to confirm that the housing market is beginning to slow. It will probably take another month of scary stock markets and a bursting of the commodity bubble to really make it obvious.

Nothing continues forever and I just find it hard to believe that despite a credit crunch unparalleled since the 1930s, that Canada's housing market is just going to keep going up 5-10% while the US and UK (and ultimately others) will fall 20-30% and likely go in to recession. Canada will just magically decouple and things will be la-de-da... A more likely scenario is a drop in nominal and real prices for Canadian real estate, in the East and West. The East as we go into recession and the West once things cool off and the commodity bubble bursts.

Housing market's 'sky is not falling'

Garry Marr, Financial Post Published: Thursday, February 21, 2008

New-home construction slumped badly last month but Canada Mortgage and Housing Corp. says there is little fear the Canadian housing market could soon resemble the one in the United States.

On a seasonally adjusted annualized basis there were 187,500 housing starts in December, a 19.6% drop from a month earlier. Despite the decline, there were an estimated 229,600 new homes constructed last year, the second highest level of construction in the past two decades.

"No, the sky is not falling, it really was a weather-related decline," said Bob Dugan, chief economist with CMHC, noting December was an extremely cold month in Toronto, in particular, and that slowed condominium construction.

He said there are plenty of pre-sales for condominiums, which would indicate a lot of activity to come. CMHC is sticking with a forecast of 214,000 for new-home construction in 2008, the seventh straight year starts would top 200,000. One would have to go back 30 years to find a comparable run for the construction industry.

But all is not perfect. Interest rates have been creeping up and the posted rate for a five-year closed mortgage -- the most popular --is 7.59%. Rates haven't been this high since Au-gust, 2001. "They are high for recent months but not if you look at them long term," said Mr. Dugan, who said one of his concerns for the housing market was the possibility of credit drying up.

The credit crunch has not materialized as far as homeowners are concerned, but they are being asked to pay higher interest rates, which, combined with higher home prices, is affecting affordability.

"Despite earlier concerns about the potential impact of the financial market storm on Canadian housing demand, it does not appear the recent tightening in credit conditions has created an undue burden on developers and consumers, and home building clearly remains a pillar of strength in the Canadian economy," said Ritu Sapra, an economist with Toronto-Dominion Bank. "But home affordability is eroding across the nation, especially in the western provinces where it has become common to see huge annual price gains."

Major real estate firms now predict price growth in the existing home market to slow down.

gmarr@nationalpost.com