What faltering stocks and bonds could mean for house prices: Don Pittis

Stocks and bonds may be going through a bad patch, but a more important question for many Canadians is how a new feeling of financial uncertainty is affecting their biggest single investment: their homes.

Statistics Canada doesn't ask Canadians directly whether they invest in stocks or bonds. However, as of May 2016, 67.8 per cent of Canadian households owned their own homes.

As bonds and stocks tumble due to fear of rising interest rates, there are signs Canada's housing market is facing similar strains.

Prices hard to read

Unlike stock and bond indexes that offer an accurate running tally, the monthly Canadian Real Estate Association data we use to estimate the changing value of residential real estate is neither as immediate nor as transparent.

After yesterday's wild swings on the markets, the sluggish nature of real estate numbers seems like a blessing, but inevitably it makes house prices harder to read.

CREA only counts transaction prices of resale homes sold through a broker. The data requires a lot of interpretation. 

Each resale home is unique and the motivations of sellers in a complex market are difficult to decipher.

For instance, a decline in sales may indicate sellers are keeping properties off the market in hope of prices returning to their highs. In a falling market, it could be a logjam waiting to break.

Since houses that are listed but withdrawn don't show up in the statistics, rising prices may be skewed toward houses sold in areas that are most in demand.

Those looking for an accurate measure of house prices might want to turn to the presale market. And in cases reported last month by the CBC's Trevor Dunn and in the Toronto Star last weekend, the evidence is troubling.

Housing futures market

There are two advantages of presales as an indicator of the housing market.

Looking at prices of nearly identical homes in the same area allows you to compare.

And since the houses have not even been built yet — the construction site looks like a muddy field — they act as a futures market, showing what people are willing to pay now for a house that won't be finished for at least a year.

The people the CBC's Trevor Dunn spoke with east of Toronto said houses like theirs are selling for $90,000 less than what they paid a year ago.

The Star story, which ran on the front page Saturday under the headline "Buyers stunned as new homes lose value," quoted a woman who the paper says paid $955,000 for a home now selling for $859,000, a difference of $96,000 in 12 months.

Drifting downward

"Recently, prices in the GTA have drifted downwards," Mattamy Homes Canada president Brad Carr told Dunn. "Obviously we need to respond to be able to sell at prices purchasers are willing to pay."

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Just as in the bond market, higher borrowing costs — with the prospect of further interest rate increases ahead — is bound to help take the heat out of the market.  

Following a recent column of mine suggesting many people weren't prepared for the changes that a bout of inflation would bring, one reader tweeted that his first mortgage had been 15 per cent.

"Well you can't put a 15% annual interest rate on a 20 year 300k mortgage in today's world," another Twitter user responded. "No one would be able to afford a house."

And that's just the point. No one is expecting 15 per cent interest rates any time soon. But every interest rate increase from current lows makes houses less affordable, forcing sellers like Mattamy to cut prices if they want buyers. 

An odd quirk is that as house prices went up there was little impact on the official inflation figures because the total value of a house doesn't feed into the inflation rate. It is monthly carrying costs that count.

Vicious circle

Now, as interest rates rise, higher monthly payments will pile on to inflation, contributing in turn to even higher interest rates.

As she left her job last week, outgoing U.S. Federal Reserve chair Janet Yellen worried that prices for stocks and commercial property were "near the high of their historical ranges."​

Despite a gradual rise in interest rates that remain at historical lows, other economic signals in Canada such as low unemployment, rising wages and lots of immigration are good for the housing market. Falling home prices are also good for people looking to buy for the first time.

As with falling stock prices, some people see the advantages of buying while prices are down.

Buying a house at a savings of $100,000 is a great deal so long as you don't think prices will fall another $100,000 the following year.

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Psychology plays an enormous part in homebuying decisions. Continued stock market instability could be a drag on housing. But Yellen says the U.S. economy, crucial to Canada's sense of well-being, is strong enough to survive.  

"If stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole?" Yellen asked rhetorically in an interview Friday. "And I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system."

In the case of Canadian homes, the important economic story is that while builders like Mattamy have been enjoying a windfall as prices shot up, it is clear they intend to continue supplying the market, making a profit even as prices retreat.  

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