Housing bubbles don't make me feel fine

The US housing market is about to burst.
Is your house safe?

By Anwar Ali

It should be a pleasant word, but it's one that'll have a physician investor waking up with the cold sweats: bubble. And when this kind pops, no one's laughing.

Bubbles come and go — from Dutch tulips to dot com start-ups — but the latest inflated market to keep analysts up at night hits a bit closer to home for most MDs: the housing bubble.

South of the border, where housing prices have been rising exponentially for years, things are starting to look bad. New numbers released this month by the National Association of Realtors are very worrying indeed. Sales of new homes in the US rose 16% in April, which sounds ok but it's more than 10% lower than the April 2006 estimate. Most frightening is the fact that the median price for a new home plunged 10.9% to $229,100, the biggest drop in price since 1970.

So just thank your stars you're not the Bay Area physician who's just coming to realize that his bungalow isn't quite worth the nearly half a million he paid for it.

Could it happen here?

IN FREEFALL
There's a lingering sentiment that the slide in the US housing industry hasn't hit bottom yet. The economy will need to buckle up as it rides out high vacancy rates, stagnant construction and inflated prices, especially in sun states such as Florida, California and Arizona.

Housing prices are still flying high in Canada. According to the Canada Mortgage and Housing Corporation (CMHC), the average home in Calgary cost $346,673 in 2006. In Toronto, it's more like $352,388. Vancouver's prices look suspiciously American-style — the average price there was $509,876, the highest of all Canadian cities. But the annual change in the new pricing index was highest in Calgary at 43.6%. In Toronto and Vancouver, it was a worrying 3.8 and 6.9%, respectively.

Does that mean we're heading into a slump like the one that's dragged the roof down, as it were, in the US market?

There are plenty of reasons to believe that won't happen. University of Toronto economist Avery Shenfeld thinks the Canadian market isn't in bad shape, noting the housing construction industry isn't experiencing the same meltdown we're seeing in the US. Expect a downward trend in prices: a "de-accelerated rate of increase," but not a decline.

"There's no reason that house prices won't rise to match inflation," says Dr Shenfeld, who's also senior economist at CIBC World Markets.

INCHING UPWARD
The new housing price index (NHPI) in 2007 and 2008 clearly shows the trend. In Calgary, it changed from 18.3% to 9%; in Toronto, 3% to 2.5%; in Vancouver, 6.5% to 5.8%. The exception appears to be Edmonton, where the NHPI is 28% and 15% per cent in those years. The national average in major metro centres is 6.9% and 5.3%.

The signs point to a slowdown in market activity, but it's fairly safe to predict the impact will be mild. Interest and mortgage rates are kept comparatively low in Canada. And the CHMC says a strong loonie and modest GDP growth will keep it that way for the rest of the year. The CMHC forecasts one, three and five-year mortgage rates to be, respectively, in the 5.75-6.75, 6.00-7.00 and 6.25-7.25% ranges this year and 2008.

Mortgage carrying costs will, however, inch higher. That might be a deterrent for first-time buyers, but tighter lending standards will prevent the sub-prime loan fiasco in the US. Loan defaults by borrowers with dubious credit histories undermined the housing market and forced more than 50 lending companies into bankruptcy.

"We're not seeing a crunch in mortgage lending the way the US is," observes Dr Shenfeld. The Canadian Real Estate Association says while sellers generally have the upper hand, real estate markets will still be "healthy and active."

So no need to fear, doctor. The value of that executive townhouse you just bought in Rosedale is safe — at least for now.