Only in Canada

April 2007

Only in Canada

Stylized Canadian Flag. Original image at http://www.megacoolstuff.com/CanMCross.asp

Vive la différence
As a longtime student of economics, I've been struck by some differences that have recently appeared between those of us who live north of the 49th parallel and those who reside to the south of it. If, as Winston Churchill once said, England and American are two countries separated by the same language, the Canadian and US real estate markets seem to have lately arrived at some hitherto unseen dissimilarities.
For decades, we were in lockstep with what was happening in the US. As their prices went up, ours followed suit. If their market went down, ours did as well. Our mortgage rates weren't quite the same -- interest rates in American banks have something of a different basis than ours -- but the pattern of increases and decreases matched their ups and downs.
And if there were concerns about a bubble that was about to burst, the doomsayers hereabouts had the same sort of argument and made similar predictions of a market collapse.
Well, the market has certainly lost some of its excitment these past six months or more. Listings have become harder to find and buyers are much less prepared to bid against one another. Selling or buying a house now calls for patience and persistence more than it did during much of last year.
Yet the mutterings to the south of us are more pronounced -- and perhaps more justified -- than ours. Canadian agents are being forced into a return to basics (i.e. you gotta work at this business!), but there aren't signs of a mass exodus of salespeople as there was when the Mulroney "error" (as I've always been fond of terming it) took the heat out of the economy in the 1990s.
Without doubt, there's less hope of sitting back while listings sell themselves and one offer isn't going to be as often accompanied by half a dozen others. But it's all no more than a return to a better comfort level for both sides of a transaction. And I for one am glad to see it.

The great American way
Why, though, are the bewailings in the US worse?
It's a personal view rather than anything rooted in extensive research, but it strikes me that two main reasons can be identified.
One is the freer application of private enterprise. Sellers, buyers, and, yes, agents in the US are far less regulated. Not infrequently, our American neigbbours can get away with what we frown upon. If nothing else, Canadian officialdom of one kind or another either takes issue with it or outright prevents it from happening.   In fact, our approach to things isn't quite so unfettered. There's less acceptance of the principle that if something hasn't been tried before it's time it was.
Therein lies America's great strength, of course. But it also implies a weakness and a greater risk of failure. Thus, the free-for-all upsurge in sales that ignored any possible end to them couldn't -- and didn't -- come with any guarantees. In fact, the bewailings were inevitable. It wasn't a bubble that burst perhaps, but you can't expect to keep on selling homes that an increasing number of people cannot afford.
American agents are, no less than our own, being forced into a return to basics. They, too, now need to work at this business. And, with all due respect to some of them, this includes not cutting as many corners.

Meanwhile, here back at home ...
To some degree, we matched the American experience of selling homes as fast we could list them. We had our own share of bidding wars and double digit price increases. And we made it increasingly possible to attract purchasers who didn't have a downpayment and at interest rates that seemed unlikely to ever move upwards.
Yet, whether consciously or not, our buyers were less inclined to pay any price and, somewhat importantly, our banks and other lending people weren't as willing to let them. Sure, you might not need a downpayment, but you'd better have A1 credit and an income level well in excess of the norm. Maybe the banks were falling over themselves to lend you money, but they'd make you jump through more hoops than usual to get it.
Which really didn't happen in the States.
You have only to be aware of the mounting number of foreclosures in the US -- and these are the equivalent of our Power of Sale proceedings -- to realize that our banking people hung onto the old rule that they'd only lend you money when you didn't need it.
But herein lies what I see as a second reason for the louder mutterings we keep hearing from below the 49th parallel.
Last month I noticed a Power of Sale listing and, although they must have been others, I had difficulty in recalling when I'd last seen one. They were plentiful throughout the 1990s when people were losing jobs and being laid off because their companies were, of necessity, becoming lean and mean. Since then, though, there's been a quicker adjustment when GM and its like kept a longfelt threat to close a plant down. Our employment rate suffered no more than the suddenly-thrown-out-of-work victims did. There was -- and remains -- a resilience among our workforce that wasn't impaired by an approach that smacked of "You bet we'll give you a mortgage today. We'll just wait until tomorrow to find out if you're able to repay it."

So what does it all mean?
Again, I'm not claiming insight based on detailed knowledge. I'm merely making what I like to think are a couple of intelligent guesses.
On the one hand, we're going to see fewer listings and it will take longer to find buyers for them. Our market has, without doubt, softened or, as I prefer to describe it, become more balanced. Supply and demand has always been a governing factor in how soon something is going to sell -- and sometimes if it will sell at all. For a while, though, the rule seemed to be set aside. Now, however, its impact has returned. There'll still be occasions when there's only one house on the market to choose from, but a potential buyer will rarely see it sold from under them within the next couple of hours. There'll usually be time to think things over as opposed to having to rush into making an offer before it's too late.   Or, if you will, the hype of listing agents will be just that instead of a true statment of fact.
Of course, it was ever thus -- although, ahem, for a time it wasn't and again it now is!
On the other hand, I don't foresee significant drops in prices. At most, listing agents will nudge them down when they're higher than the comparables justify, but this, too, is only a return to normal. However, buyers will have more chance to make an offer that's rooted in reality instead of being stampeded into meeting the asking price (or coming very close to it).   Just as the house in question may be the only one to choose from, an offer on it is likely to be the same.
All told, things will -- in my view, at least -- be healthier. The most important purchase in a person's life, which is what a house invariably represents, can be made with due and proper consideration instead of out of panic.
It's enough to gladden my Buyer Agent heart!

And as for mortgages ...
One predicted consequence of the greater fallout in the US market -- notably in the way of a decided rise in forclosures -- is an increase in mortgage rates and a tightening of lending criteria. Both can be said to have gotten out of hand. The laxity isn't a repeat of the Savings and Loan situation, but there is some analogy and a correction is probably inevitable.
But, as I've noted, the banks hereabouts have retained their scepticism. Just because you want a mortgage doesn't mean you'll get one. You need to qualify and, by one means or another, remove any doubt about the likelihood of a default.
Our rates will continue to be tinkered with, although this is more at the behest of government than any senior management decision to recover from losses. (Losses incurred by Canadian banks? Who are you kidding?!!)
If you're interested in more liberal terms as far as a minimum (or even no) downpayment, income from self-employment, and extended amortization periods (e.g. 30 instead fo 25 years) are concerned, your application won't be rejected out of hand (as it was three or four years ago). However, you can expect some grilling before the lender agrees to take the risk -- and you may have to pay for it with a higher rate than the bank's advertising promises.
But, in some regards, this, too, was ever thus.
I suppose it's all a case of how we do things in Canada.
Vive la différence indeed, eh?

With my good wishes to you, as always -- accompanied by a hope that the Easter Bunny was kind to you and yours.