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Further to my Blog post yesterday, here is part two of Steve Bulwa's interesting analysis of the primary differences between the Canadian and US real estate markets, and what has lead to our success.

 

Paul Sidhu, head broker at online mortgage company, MortgagesCanada.ca,  believes Canadians have been the beneficiaries of more conservative lending practices and tighter regulation. "Without the extreme predatory lending practices witnessed during the real estate boom and bust in the U.S., Canadian lending institutions have preserved much more reasonable lending standards and it has prevented most buyers from acquiring property that they clearly cannot afford. This has kept most buyers in their homes and allowed demand to remain stronger than the supply of homes for sale. Mortgage interest rates    remain very low with a five year fixed rate around 3.39%, it is clearly still a good time to be a home buyer in major cities in Canada."

Some of the continued strength in the Canadian housing market can be attributed to the wealth effect created by the global commodity boom. Canadian stock markets are dominated by resource and commodity companies have dramatically outperformed their U.S. counterparts mitigating the damage to Canadians’ retirement accounts and keeping sentiment stronger.

As demand for oil and other Canadian resources has propelled Canadian stock markets and housing prices higher, it has also driven the Canadian dollar to unprecedented heights, above parity with the U.S. dollar.

What are the risks to the Canadian housing market?

While this has strengthened Canadians financial profiles during a commodity boom when the country is able to sell everything it produces to resource hungry countries like China and the U.S., no matter how high the Canadian dollar rises, a crash in the commodity markets would likely cause serious trouble for an economy so heavily dependent on the riches its land delivers.

One other significant risk to the Canadian housing market is higher interest rates. Without the ability to deduct mortgage interest from income, like in the U.S., affordability is a concern as prices continue to rise. Moreover, Canadians are unable to fix mortgage rates for 30 years like their American counterparts can. Both of these factors expose Canadians to greater risks should interest rates rise as their mortgages come up for renewal within the usual 5 year term of most Canadian fixed products.  But in a world hell-bent on devaluing currencies, it seems unlikely that significant rate increases are coming anytime soon. "There is not a country in the world that wants a firmer domestic currency," says Kamal Naqvi, head of commodity sales at Credit Suisse, speaking to the Financial Times . Should rates rise, the Canadian government would be wise to allow Canadians to deduct mortgage interest from taxes, as a means of keeping markets strong and people in their homes.

Canadians should be proud of the stability of its economy during this period of global economic turmoil, and they’ll likely continue to benefit from their more conservative ways, should the commodity boom bust, and take some luster off this seemingly unflappable economy.

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