The average price of detached homes in Toronto and Vancouver has topped $1-million, and that should make you wonder.
Detached from what, exactly?
I’d say reality. From Canada to China and Greece, the financial and economic news this summer is worrying. Only if you have gold-plated financial security in your life should you jump into an entanglement like buying a house in a hot market.
This advice applies especially if the Bank of Canada lowers interest rates next Wednesday, as some people expect it will. Ask yourself this: Do soaring house prices make sense in an economy so weak that it can’t gain traction even with rates that are already the lowest many people have ever seen?
The big problem for our economy is the impact of depressed oil prices. They moved higher in the spring, but have plunged lately. One explanation is economic uncertainty caused by events in Greece and China.
Greece can’t pay what it owes, which means there’s a chance of an industrialized country defaulting on its debt. This would not be unexpected, and financial markets are more or less prepared. China’s different, though. The Chinese stock market has plunged in the past month or so and the government has been trying to steady things. If these efforts don’t work, the instability could undermine an economy that was already decelerating. Think oil prices are weak now? Wait and see what happens if the world’s second-largest economy slows dramatically.
All of these issues together explain why Canada’s stock market and dollar have been falling lately. Except in the housing market in certain cities, people are nervous.
A recent Personal Finance column noted how well the Canadian economy is doing according to the misery index, a measure that looks at inflation and unemployment. Both are low, which means our economy has been in a comfortable spot in recent years. But slowing growth or a recession could change that by affecting the job market. Higher unemployment equals more misery.
In Calgary, the oil industry hub, the housing market reflects the full extent of today’s economic problems. Detached home sales last month were down 13.8 per cent and the average priced dipped 2.1 per cent to $554,587. Vancouver and Toronto are insulated from the direct effects of the oil slump, but not from the trickle-down effects it has on the country. And yet, urban Toronto detached home sales surged 14.2 per cent in June on a year-over-year basis, while sales in Greater Vancouver jumped 20 per cent. Other markets were strong as well – for example, the average price in Ottawa rose 4.1 per cent in June.
In a normal housing market, the time to buy is when you can truly afford it Buying into a hot market in a cold economy demands sharper thinking about such matters as your job security and prospects for pay increases (you’ll need them to cope with rising home ownership costs). Also consider how long you intend to spend in your home. Moving to a bigger home after just a few years will be costly if prices stagnate or fall after you buy.
If you buy now, you also have to consider whether you’re getting in at the peak of the market. Housing, particularly in Toronto and Vancouver, has survived many economic ups and downs in recent years. But all along, there’s been some support from wealthy Chinese buyers. This money could dry up if China’s economic troubles worsen.
The case for joining the summer home-buying rally would be enhanced if mortgage rates fall. Variable-rate mortgages would likely get a bit cheaper if the Bank of Canada cuts its benchmark rate next week, while fixed-rate mortgages have room to edge lower as well. Fixed-rate mortgages are influenced by government bond yields, which have fallen sharply lately. In uncertain times for financial markets, money flows into government bonds and drives up bond prices. As prices go higher, yields fall. This sequence of events should be seen as a sign of alarm in financial markets, not minor details that somehow make it cheaper for people to buy a house.
The reality of today’s housing market is that prices in some cities have soared beyond underlying economic fundamentals that are only getting worse. A buying frenzy right now seems detached from reality.
Source ( http://www.theglobeandmail.com)