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REAL ESTATE
U.S. housing woes get stuck at border
LORI MCLEOD
REAL ESTATE REPORTER
August 17, 2007

Investors worried about the fallout from defaults on high-risk mortgages in the United States have sent stock markets, including the Toronto Stock Exchange, on a bumpy ride. But barring the unlikely event of the market correction snowballing into a full-blown macroeconomic crisis, the Canadian real estate market should be relatively unscathed by the turbulence, said Benjamin Tal, senior economist at CIBC World Markets.

"I think that the fundamentals of the economy are relatively strong and this crisis is really about fear rather than reality. Also, traditionally we have seen a situation where the housing market does relatively much better than the stock market in periods of correction because it's like comfort food," Mr. Tal said.

In the U.S., loans given to high-risk borrowers at low interest rates, known as subprime mortgages, created "artificial demand" that sent house prices soaring, Mr. Tal said. This was exacerbated by speculators buying investment properties and trying to flip them at a profit. When interest rates went up, defaults soared, spilling over to hurt both lenders and investors who buy and sell mortgage-related debt.

Canada has not experienced the same woes because "we did not push the envelope in terms of exotic mortgages," Mr. Tal said.

A rise in house prices here has been sparked by real demand rather than speculation and compensates for the stagnancy of the market between 1992 and 1997, he added.

The Canadian unemployment rate is at its lowest point in more than 30 years, and that's boosted personal income levels and fuelled demand for residential real estate. Last month, the price of a resale home in Canada hit $332,442, a 13.1-per-cent increase from the previous July, according to statistics released this week by the Canadian Real Estate Association. Sales are expected to reach 514,450 units for the year, the highest level on record and a 6.5-per-cent increase from last year.

The housing market is expected to grow at a more moderate pace next year. However, this will be the result of decreasing affordability rather than the impact of U.S. subprime woes, said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.

"There's no direct tie between the U.S. housing market and the Canadian market. The risk I'm more concerned about is if the volatility continues, there's a greater chance financial institutions in the U.S. could decide to cut back on the amount of credit they're willing to lend to consumers. That would impact Canadian trade, pull down Canadian economic growth, and could eventually trickle down to weaken our housing market."

In terms of borrowing costs, the U.S. mortgage crisis could actually have a silver lining for Canadian home buyers, Mr. Alexander said.

That's because the resultant credit market woes have made the Bank of Canada less likely to raise its overnight interest rate when it meets next month, he said. The overnight rate is used by banks to set the prime lending rate for their best customers, and that in turn is what variable mortgage rates are priced on.

Fixed-rate mortgage rates could also edge down if nervous investors continue to move their money from stocks into lower-risk investments such as government bonds. That's because fixed-rate mortgages move in tandem with bond yields, and bond yields drop when increased demand sends their prices higher.