The firm foundation of local housing market lets it weather boom-bust cycles

The declaration this week by economist Douglas Porter of BMO Nesbitt Burns that Canada's six-year housing market boom is officially over may be a little premature. Is it really a bust when sales drop in the dead of winter while prices continue to rise?

Compare Canada's situation with the horror show south of the border and beyond. American homeowners from Blaine to Maine have witnessed the value of their property go down almost as quickly as it went up. The median price of a single-family resale home fell 8.7 per cent in February from a year earlier, the most in four decades of record keeping, according to the Chicago-based National Association of Realtors. Some cities, including Miami and Las Vegas, have reported declines approaching 20 per cent, which is widely expected to be the U.S. national average price drop in 2009.

With more than 234,000 properties at some stage of foreclosure -- that's one in every 538 U.S. households -- and $460 billion US of adjustable-rate loans scheduled to be reset this year, the downward spiral is a long way from over. The American malaise has spread around the globe as housing markets from Ireland to India have collapsed. In Britain, home prices fell 2.5 per in March, the biggest monthly drop since 1992, while prices in New Delhi are down 20 per cent from last year. Average house prices in Ireland fell seven per cent. The U.S.-bred housing crisis is dampening prices in Spain, France and Germany and has cooled markets in Eastern Europe, Hong Kong and South China.

In a report last week, the International Monetary Fund said only two of 17 major housing markets are not overvalued -- Austria and Canada.

The question is whether Canada -- or closer to home, Metro Vancouver -- can remain immune to the virus that has driven down housing markets everywhere else.

The good news is that Canadians, unlike Americans, haven't been using their family homes like bottomless ATMs. Canadians tend to use home equity loans to renovate or invest, rather than to finance purchases of consumer goods. Moreover, Canada's mortgage debt as a percentage of gross domestic product hasn't spiked as it has in many other countries and total debt, including mortgage debt, remains a manageable 18.2 per cent of household net worth. Canadian financial institutions are conservative lenders and subprime mortgages that spawned the U.S. housing debacle are rare here.

The bad news, according to the IMF, is that real house price movements tend to lag cyclical peaks and troughs -- generally by one or two quarters, but in Canada's case as many as six quarters. In other words, the collapse here may be a year to 18 months away. According to the Canadian Real Estate Association, sales dropped 13 per cent in the first quarter of 2008 from a year earlier and the ratio of new listings to sales stands at a nine-year high.

Still, Statistics Canada reports that new house prices continued to rise in February, with contractors' selling prices up 6.2 per cent nationally over a year earlier. The association says average prices were 5.5 per cent higher in the first quarter over last year. In fact, every major market from St. John's to Victoria recorded gains. Metro Vancouver prices were up 6.6 per cent.

If economic theory holds, solid GDP growth should sustain the housing market. The Conference Board of Canada forecasts real growth of 3.1 per cent in Metro Vancouver this year, with increases in mining output and steady construction activity. It also sees employment growth every year through 2012.

Metro Vancouver's limited supply of land and high demand for housing, fueled largely by immigrants' desire to live here, sounds like a recipe for a stable if not robust residential real estate market.

With an abundance of resources, the West is not as vulnerable to a recession in the U.S. as the manufacturing-dependent provinces in Eastern Canada. In the face of a global economic decline, sales may slow and prices may plateau, but the Lower Mainland doesn't appear likely to become a less expensive place to buy a home anytime soon.

(Source: Editorial/Vancouver Sun)