The Coming Crash in the Canadian Housing Market

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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.

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!

Image Credit: © Martin Bérubé | Dreamstime.com

About Author

Buy and hold real estate investing in Canada since 2001, Julie Broad is now a full time real estate investor and investing educator.

20 Comments

    • Hi Patrick! Thanks for stopping by. Yes – I guess we can’t blame the media for always writing such dramatic stories can we? It gets our attention. They are merely doing what works. It’s only if we stop paying attention to the wild and crazy headlines that they will stop using them. But I used it for the exact reason that I knew people would stop and read the article!!

  1. Great article Julie! The media has such a stranglehold on consumer perception which always astonishes me when I see the poor decisions made my extremely intelligent people. I equate it to a group of lemmings blindly following exactly what they are told to! If our population did half as much of their own research on the real estate market as they do on what breakfast cereal is the best for them I think we’d see a much stronger and more confident Real Estate climate.

    Cheers,
    Jamie Gale

    • Thanks for your comment Jamie! I really appreciate it.
      Haha! It’s true – I see a lot of folks in the cereal aisle really studying the boxes yet most people read the headline of a paper and think they know the whole story. We know so many people who spend hours and hours researching and discussing what TV they should buy but don’t or won’t spend a few hours thinking through their investment strategies. It’s a bit baffling …

    • Within every dark cloud there is a silver lining. I believe there are some rocky roads ahead but I also believe that well researched and wisely made investments in real estate are the best way to grow your money in the coming years – especially in Canadian markets.

  2. Julie – you are spot on with this article. The guys sitting on cash in the bank right now are the ones who should be worried about the future. Their money is worth less every day. As inflation creeps in even more then the cash will lose it’s value while well purchased homes will gain.

    • Hi Lauren,
      Great blog!! I love it. I can’t wait to see what you do with the apartment – but I have to tell you I have seen a lot uglier places!! But that is a bit ugly. I look forward to seeing what you do with it. We’re about to take a 2200 square foot house out of the 70’s. It’s a big project too … but it’s going to be fun.

      Anyway – sorry to shock you with my headline but I had to do it to make the point!! Good luck with your project.
      Julie

  3. Great article, Julie!

    I do agree, real estate is all local. And, that’s coming from a gal who is out on the streets day in and day out! 🙂

    Honestly, there’s always talk about the ups and downs of the market. To me, it’s just talk. And, I guess it gives people something to talk about. So many times, I’ve been in conversations with other folks (whether it be other investors or friends/family) regarding the real estate market.

    And, you know what? I’ve noticed there’s always an emotion attached to these conversations – fear and/or greed.

    I guess it’s just human nature but I find the two emotions of fear and greed to be very powerful among folks when it comes to the subject of money. I see how these two emotions control people, they let money control them instead of the other way around. And, this is dangerous.

    I have to admit, I don’t really watch tv. And, I barely keep up with the real estate market news nowadays unless its business related (i.e. job market, business coming in/out, etc).

    I guess this article will spark some debate as there are those who do keep tabs on the ups and downs of the real estate market. And, yet it will be another topic of conversation!

    Thanks for sharing!

    • Fear and greed are the most powerful forces in our lives and it’s tough not to let them run you!!

      But with real estate I always think to the old veterans I know … the ones who’ve been buying, holding, selling and renting properties for 30, 40 or 50 years. When I chat with them there are almost always two powerful themes:

      — “I wish I had bought that property when I had the chance”
      — “I should have never sold that property”

      In other words – despite the wild swings it feels like the market goes through the folks who’ve been in the business for decades RARELY regret the places they purchased but often have a lot of regrets about the places they didn’t buy or that they sold.

      That is pretty powerful and a much more compelling story than any headline I have ever read in the newspaper. Which is why I am with you – I don’t watch the news or read much of it either.

  4. Pingback: The Badlands, Big Dinosaurs and Bank of Canada –real estate investing made easier

  5. I’ve been researching this and am now setting up shorts across the board on Canadian real estate.

    As a bonus this should be relatively deflationary for the $CAD which will give a boost when exchange rates are considered.

    This blog article, among many items that I have read regarding the Canadian perspective of the CA real estate market, has an eerily familiar ring. The same as the States in 07′-08′.

    Right down to the “but this is different” rationales.

    Remember. Trees don’t grow to the sky. Ever.

  6. Julie,
    I firmly believe, here in the States, the media is at least partially to cause for the housing panic. In 2007-8, they kept using horrible stats from the CA and FL markets (markets that had become way over-inflated and so, had a long way to go on the downward crash), and applying it to the local market. I can’t vouch for other parts of the country, but I can tell you what I witnessed in Atlanta. While the Atlanta Journal Constitution and local TV programs cried that the real estate sky was falling during this time period, the real estate market in metro Atlanta was very active and doing well. I believe it finally became an issue of local residents reading or hearing about the horrible real estate market just so many times before they started believing it and acting accordingly.
    It wasn’t until Fall, 2009 that things got extremely bad here. After 2 years of hearing it was a bad idea to buy real estate, home buyers took it to heart and stopped buying in 2009. By that Fall, the market was pretty bad here. Now, I see glimmers of hope here and there, but we’re still a long way from recovery. High end homes are not selling. Dozens of builders have gone out of business and Georgia, being a non-judicial foreclosure state (translation: foreclosures happen much faster without having to process through the slow American judicial system), has one of the top 10 foreclosure rates in the nation.
    So to also respond to your article about Canadians investing in American real estate, those Canadians reading this might give Georgia a consideration. The North Georgia area is great, while still being an hour’s drive down to Atlanta. Parts of metro Atlanta are also a great investment with many golf or swim/tennis communities to choose from. We also have a busy airport here with tons of international flights.

    • Thanks for your comment Tammy! The media does play a role in both boom times and down times. They take one message and mass distribute it causing people to not only believe it to be totally true but also to take that as social proof as to what they should do. In other words – in boom times when everyone is talking about buying houses and making money that is what the majority of folks think they should be doing.

      The trick is to learn to understand the media headlines and dig behind it so that you’re acting on facts and not just one presentation of a single isolated number – which can causes a dramatically different outlook for you and for your investments!

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