Monday, March 5, 2012

CREA projects average house prices to dip

The Canadian Real Estate Association is predicting that the national average for house prices will drop in 2012, but not by much.  I wouldn't put too much stock in such forecasts though, before the U.S. housing market cratered so called experts were out to lunch on their predictions south of the border.

The elephant in the room, so to speak, is household debt.  The national average is pegged at over 150% of income with low interest rates being cited as the major cause.  And with so many buyers leveraging themselves to the hilt to buy into a bubble market, many Canadians are sitting on mountains of debt with very little wiggle room should the need to access capital arise. 

Right now we're where the Americans were before their housing balloon went BANG. 

According to the governor of the Bank of Canada Mark Carney, roughly 10% of Canadians are vulnerable financially.  And with home ownership at over 70% in this country there isn't a lot of demand left over when listings start to swell.

My opinion, worth as much as that of the CREA, is that once prices start to dip, that many who were thinking of selling will decide to hang on until things improve.  But momentum in any market is hard to stop.  When real estate prices were climbing the mob mentality took over, with many paying more than they could reasonably afford due to fear of being priced out of the market.

It will be like people who bought Nortel north of $150 per share after it started coming down.  Many will hang on thinking that a rebound is just a year or two away....yes, like in the U.S. 

All it will take for a U.S. style drop in prices is another recession or even a minor bump in interest rates.  And both of those scenarios are more likely than not to occur over the next 12-24 months.

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