The Coming Crash in the Canadian Housing Market
Last week the July numbers were released and Canadian home sales dropped 30% over July of 2009! And prices are slipping along with the sales numbers as fewer buyers are willing to step into this uncertain market. In fact – national home prices dropped nearly 4% from June 2010 to July 2010. Clearly the crash is finally coming as many said it would.
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At least that is what the media would have you believe as long as it makes you click their link, tune into their channel or pick up their paper.
But keep in mind something a smart person once said (if only just one person would be quoted as saying this I would know who to source for this brilliance):
Statistics are usually used like a drunk person uses a lamp post – more for support than for illumination.
In other words – if my editor tells me to run a story about the terrible news in the housing market it’s not that difficult to find a dramatic stat that will support that story.
But there are three reasons you, a smart real estate investor, will not even give such an article your attention.
#1. The Average Price and Average Sales Activity across the country mean absolutely NOTHING.
Real estate is local. It’s impacted by national economic conditions but ultimately values, sales demand and the supply are all local issues. Think about it – the sectors of the economy that drive an area always vary. Some areas may heavily rely on trade with Asia while others rely on the auto sector or oil and gas. That alone plays a huge role in determining what is happening in the local housing market. Add to that differences in the quantity of development, local government investment and quality of life related differences and you will find that what is happening on a national average very rarely directly matches what is happening in your backyard.
It’s also very important to note that in Canada, what happens to the national averages is very strongly driven by what is happening in it’s two largest housing markets: Toronto and Vancouver. It doesn’t mean much at all for the other major cities in the country.
#2. What Does the Number Really Mean? What is it compared to?
When I read this headline I actually laughed out loud because I said this was going to happen. Usually it’s because they compare June to July … and July and August are almost always slower than June because it’s summer and in Canada where we spend most of the year stuck in a snow suit or hiding under an umbrella we treasure our summer months. We don’t spend them buying houses or moving. This time they actually compared July 2009 to July 2010 – which normally would at least be a more reasonable comparison but this year in Ontario and BC a new tax came into effect on July 1st that has had a dramatic but short term impact on the housing market. As such the two largest markets in Canada had a surge in sales before the tax came into effect and will then see a few months of slow down while people get used to and gain some understanding of the new taxation.
Always look behind the number. Usually it’s what is being compared that causes dramatic shifts in the number, but sometimes there is a different reason, in this case, government policy changes that cause the number to rise or fall in a big way. It doesn’t mean the sky is falling.
#3 All that matters are the market fundamentals. Stop reading the paper if you find yourself forgetting this.
Look for areas with a growing population, growing job market (ideally with good quality and well paying jobs), and government investment in the infrastructure of the city. A supportive and strong government can go a long way to making a city prosperous. One only needs to look at Mississauga versus Toronto in Canada to know how large of a difference a government body can change the economic success of an area (or at least how a feisty business minded woman named Hazel McCallion can change it – seriously if you have any interest in politics you should learn about her. She is almost 90 years old and has been mayor of Mississauga, one of Canada’s largest cities, since the 70’s. I think in the last election 90% of the people voted for her.) Mississauga has been very successful at attracting a wide variety of businesses to their city – many of them enticed to leave downtown Toronto because of favourable tax conditions . Many developers also choose to develop in Missisauga because of how much easier it is to work with the City of Mississauga than the City of Toronto. All of this has served to increase the economic base of the area very effectively.
The point is – no matter what a single stat tells you – look around and see for yourself. If you’re investing in an area where people want to live, employers are offering good jobs, people can get around easily, and there’s investment in the area by the public and private sectors, you don’t care what any stat published in a headline says – you’ve found yourself a market with good potential for investment. And if you find yourself getting scared about headlines declaring the crash of the market – stop reading the papers. They are mostly full of bad news you don’t need to know anyway.
Of course – you then have to find deals where the numbers work – but that is a whole different story with a whole different lesson.
So before you start repeating a bad headline and being like chicken little telling the world that the SKY IS FALLING! THE SKY IS FALLING! Remember that you’re in the business of real estate investing … and as such you’re looking for the opportunities. And behind headlines like this there are opportunities. The average person will be hesitant to buy a property right now, but because you know the national numbers don’t matter, you understand why the number is what it is, and you’ve found an area with solid market fundamentals you aren’t worried about what everyone else is worried about.
All you’re worried about how you’re going to get all these deals done before the rest of the world wakes up and realizes real estate is a good investment again!