Two National Post Stories

David Berman has a new coloumn in the Post called “Ahead of the Bell”. In it he discusses market matters that haven’t yet happened. Sunday he wrote about the smugness of the current bull market in stocks; today he wrote about weakness in Canadian real estate prices (sorry, I can’t find the link right now for some reason).

He compares the US drop in prices with Canada and comments that the same thing will happen here. While Berman is pessimistic, he also quotes BMO Capital Market’s senior economist, Bert Melek, who points out that the US has a fundamentally different market. The US had an upswing in interest rates from 1% in 2003 to 5.25% today, a volatile ride that Canadians haven’t experienced. Additionally, lending practices in the US were much looser. Berman counters by citing a BCA Research report indicating that Canadian real estate is currently 28% over-valued based on comparisons with gross domestic product and competing assets.

In another real estate related story Mario Toneguzzi reports that Zaio Corporation, a Calgary based company operating in the US, is expanding to Canada. Zaio builds databases of photos and property info and then sells it, on the basis of geographic zones, to appraisers. The idea is that appraisers will have a faster turn around so that the mortgage process can be sped up.

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11 Comments

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11 responses to “Two National Post Stories

  1. Snick

    “…the US has a fundamentally different market. The US had an upswing in interest rates from 1% in 2003 to 5.25% today, a volatile ride that Canadians haven’t experienced. Additionally, lending practices in the US were much looser.”

    If anyone thinks that our piddly market will escape the wrath of a correction down south, he/she/it needs their head examined.

  2. Moneyfromasia

    “Berman counters by citing a BCA Research report indicating that Canadian real estate is currently 28% over-valued based on comparisons with gross domestic product and competing assets.”

    And I only said that I expect a 20% decline back to 2005’s numbers. How conservative can I be.

    “Awe it will never happen bear!” We are not the U.S.
    “We have an army larger than theirs.”
    “Our mountains are bigger”
    “Our trees grow faster, better and longer”

    “Buy now because Canada has opened up the immigration food gates to Asia to run it’s econimic engine and you will be priced out forever.”

    Some economy, we run on immigrants.

  3. Noname

    Thanks Rob for the article. By providing references to back up both sides of the RE debate, this site becomes more objective.

    “Berman counters by citing a BCA Research report indicating that Canadian real estate is currently 28% over-valued based on comparisons with gross domestic product and competing assets.”

    If the 28% refers to Canada as a whole, do you think Vancouver is above or below that 28% ?

    Makes you wonder…

    Noname

  4. robchipman

    Thanks, Paul, for the link.

    noname: I’m not with you on the objectivity thing. In this case its Berman who’s being objective, not me. Since this is the second time you’ve brought it up I’ll share some thoughts.

    It seems to me that to claim objectivity we first have to agree that we’re trying to find some sort of truth. In this case I assume the truth you want me to be objective about is whether or not the local RE market is over-valued/bubbly. I’m not looking for that truth, and it isn’t my theme for this blog, even if it attracts many of the participants in that debate (and yes, they are welcome to debate it here to their heart’s content).

    I am interested in the answer to the bubble/over-valuation question, but I’m not obsessed with it, and I’m not interested in the search for the answer or the debate that’s entailed. There are two reasons. First, I can’t wait for that particular answer to take action. I’m in the market now, and need to act now. I need a different answer, and frankly, a different question. Second, I’m unconvinced that winning the debate will influence the actual event.

    So, if I don’t care to play a role in the bubble argument, am I objective about the question and answer I do care about? Clearly not. I’ve stated repeatedly that I assume long term appreciation. I don’t know that it will happen, but I need a starting point, so I make the assumption. The assumption seems supportable by history, but I don’t consider that objective; after all, the future could well be different from the past, and we’re not always clear about what happened in the past anyway. What if, for example, a boom, bust, echo scenario comes to pass in which we have more housing, long term, than we need? Aren’t there examples of long term metropolitan real estate value declines? I don’t balance my long term assumption of growth by pointing to other possible outcomes, so I don’t think I can call myself objective. However, I am very open about that, and I recommend considering them when making any investment decision (take care of the downside becaues the upside will take care of itself).

    If I’m not interested in the search for a bubble answer, why post an article like Berman’s? The answer is the same as why I post any article. The audience for this blog is diverse. If I think an article will be interesting, I comment on it and try to link to it. Often the feedback is more interesting than the article itself.

    If you assume I’m trying to counter a bear argument then I’m sure you can find evidence of a subjective approach. However, I think I negate a my apparent counter bear argument myself when I admit that I base my views on an assumption of long term appreciation that can’t be proven in advance.

    Is it bad for the blog if I admit that I’m not objective? I don’ think so. In fact, I think its fine. I’m up front about who I am and what I believe and care about. If I make, or seem to make, a controversial point there are more than enough people to counter it.

    BCA is based in Montreal, and the Post is a national paper, so I’d guess that they’re talking about Canadian real estate, nationally, rather than Vancouver real estate in particular.

  5. Jim

    Factoring in the tax deductability of mortgage interest in the US, and the effects of leverage and compounding, our .25 point increase in mortgage rates this week ,were comparable to a .5 point
    increase in the US. As for lending practises its all relative. As some one deeply invested in RE for the past 25 years, I can tell you our lending standards in Canada have been the “loosest” ever in the last 4 or 5 years. Examples: How about I will lend you money on something that has not been built yet? How about 40 year amort. How about less than 25% downpayment, How about cash back financing to buy that beemer? This is all new in the last 10 years in Cnada. So take the base line and tighten from there and the impact will be comparable to a mini sub prime retraction.

  6. robchipman

    Jim:

    I will concur that lending practices here have become very loose, at least if you’ve got some mileage under the hood. The first time I saw a 110% mortgage here I thought someone was breaking a law. That was less than ten years ago, but now its common. Lenders will also give cash back, and lend on the basis of a higher purchase price that nets out lower because of “reno rebates”. That’s a heck of a lot different from when I first bought.

    However, I think the teaser rates/ARMs/neg amortization stuff that you hear about from the States is even looser. Speaking for myself, I have no personal knowledge of those things, and can only go by what I hear.

  7. wishiweremidas

    Rob C.,

    The answer to your question, “Aren’t there examples of long term metropolitan real estate value declines?”, is yes.

    Consider what has happened to Tokyo RE over the past 15+ years. Here’s a picture for you: http://tinyurl.com/j2twh.

    The difference in the North American picture will be dictated by the level of inflation… which will likely be much higher here, for a variety of reasons. In fact, RE prices may “appear” to appreciate going forward. However, in inflation adjusted terms, the “picture” will be misleading.

    Thanks for your contribution to the debate.

    Cheers.

  8. wishiweremidas

    sorry, that link seems to be broken.

    try this one:

  9. wishiweremidas

    Here’s a picture of Tokyo, specifically.

    http://www.housingjapan.net/forsale/

    Sorry for the fragmented post.

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