Last time, I urged you to look past sensationalistic media headlines and doom-and-gloom forecasts for a clear view of where the markets are really headed.
I said to look at the fundamentals, look for demand generators, pressure points in the economy where the need for investment, reinvestment, or the replacement of the old with the new, is reaching the boiling point. One example I cited was the advanced age of the average North American automobile.
In the housing market in particular, I referenced the societal and demographic shifts represented by the hordes of retiring baby boomers and the growing economic clout of their successors in the echo generation. For too long now we’ve endured one Chicken Little after another, warning of an impending burst of Canada’s housing bubble, but we have yet to see it. If we look deeper it becomes clear any sudden and drastic collapse of the housing market is unlikely.
Perhaps being a long-time resident of the nation’s capital makes me something of a skeptical optimist. During the heady days of the telecom boom, Ottawa’s housing market rode the bull along with the stocks of ill-fated tech darlings. The peak year for price increases was reached in 2002, when average resale prices came in more than 14 per cent higher than the year before.
At that time, the market forecast for Ottawa warned of a hard landing to come, as job losses in the local high tech sector continued to climb into the tens of thousands.
Gains were still healthy
But this didn’t happen. Average price gains did ease in the years that followed, but the gains were still healthy, by historical standards, even through the 2008 recession.
It wasn’t until this past year that average annual price gains in Ottawa’s resale market fell below two per cent. But this still outstrips Canada’s pace of inflation, which is below one per cent year-over-year (or, at least it was, as of October.)
The price gains for the year-to-date in Ottawa’s resale market are the lowest since the mid-’90s, a downward trend that began in 2010. The number of units sold is also down slightly from 2012 on the year-to-date.
If we look at the national data, Ottawa is weaker than the average, but I don’t believe dire conclusions can be drawn from this. In fact, the local market continues to show its resilience in the face of continued uncertainty at major employers and cuts by the federal government that even have furniture retailers crying uncle. Industry insiders still characterize the local market as stable.
What’s important to note is that the same cooling trend is evident in markets across the country – cooling, not crashing. In fact, the Canadian Real Estate Association is finishing 2013 with an updated forecast that sees better than expected performance across the country. The number of homes that changed hands is expected still to be slightly higher for 2013 than in 2012, with average prices also slightly higher than first forecast for the year.
What this all means
There are three points to be taken from all this:
First, there obviously has not been any collapse in prices in major Canadian cities.
Second, the changes to mortgage lending rules enacted by the federal government over the last two years has reduced the ability of people to overextend themselves. This is being reflected in the fact home prices are increasing only at a relatively nominal rate.
Third, with inflation and wage increases at low levels, prudent limits on mortgage borrowing, and no realistic room for downward movement on interest rates, housing value increases over the next year likely will continue to be nominal in most markets. However, people must appreciate that increases in value are not a given and changes in prices can sometimes be negative, as was the case in the ’90s.
Remember: value only exists if there is a buyer for your property. No buyer – no price – no value.
To discuss this or any other valuation topic in the context of your residential or commercial property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.