Oranges and Apples

Oranges and Apples

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Gloom and Doom?

Within the media's accounts of the Christmas and New Year holiday festivities, there've been a number of handwringing reports about a downturn in the U.S. real estate market. It isn't too surprising, then, that some worries have, in turn, been expressed regarding the possible impact -- a spillover effect, if you will -- on the pattern of Canadian house sales and purchases. The consensus, however, is that the one is most unlikely to affect the other.

In several regards, the two markets have, for some time, been none too comparable or, to explain the simile of this newsletter's title, we're looking at a difference between apples and oranges. With due respect, the American market can be seen as a barrel of apples and has, to many minds, increasingly contained some bad ones. North of the 49th parallel, however, real estate activity has been headed in what can be held to be a less disconcerting direction. In fact -- if I can extend the simile further -- we've varied the flavour, colour, and (may I say?) sweetness of our oranges far less than the U.S. has tampered with its variety of apples.

Given all this, it seems useful to offer a few comments on the underlying dissimilarities.

The sub-prime problem

Without doubt, the approach to financing house purchases in the U.S. in the recent past has been a great deal more liberal than Canada's more cautious willingness on the part of its lenders to approve mortgage applications. In one respect, it has perhaps made sense to decide that, if someone has a history of paying rent over a period of time, there's no good reason why they cannot handle a mortgage payment, especially when, in more than one case, the amount is less than what a landlord has been receiving. The fault, though, has been to take this view to an extreme and pay scant attention to an applicant's record of paying rent on time -- or sometimes never! -- or to give much thought to the certainty of his/her present employment.
These factors may not be particularly significant when considering whether to approve a tenant, even though a prudent landlord will give due account to them. But people can vacate their rented accommodation at any time and, more often than not, a new tenant can be found quickly enough. This isn't the case when a mortgage is concerned, if only because the lender has no real means of locating a subsequent mortgagor in haste if at all. The essential difference between rental and mortgage agreements is permanence. Lease agreements can end up not being worth the paper they're written on, but there's nothing seriously -- let alone legally -- in the way of getting someone else to take the premises over. In contrast, the mortgage business is, in effect, much more restricted. Even if it's obvious that arrears are going to ensue and/or persist, the courts tend to favour the borrower instead of the lender or, at the least, to make a quick switch of payee all but impossible. This isn't why lawyers get rich, of course, but it does help to keep them employed.

In any case, the percentage of sub-prime mortgages in the US is generally reckoned to be five times our own.

Job losses

Conditions vary in the States, just as they do in Canada, but our economy is much less industrially based -- or perhaps I should say not so sensitive to shifts and upheavals in the international dissemination of manufacturing. Admittedly, St. Catharines has endured ongoing threats of labour cutbacks and Welland has suffered from major shutdowns in the steel industry. In these and similar cases, though, the companies involved usually have their parents to the south of us rather than on our doorsteps. In fact, that's where the business often began (with our our own portions of it simply an eventual expansion of the original start-up) and mounting offshore competition can lead to head office questions about the wisdom of retaining Canadian branch plants. Perhaps Alberta is an exception and on a much safer footing, given the explosion of oil and gas discovery and development but, despite an equally large non-local ownership, there's an exclusive geographical location that limits the likelihood of cutbacks and shutdowns.

In any case, however, American industry has declined to a far greater extent than ours has done -- and there's unlikely to be a sudden end to the shrinkage. The truth, harsh though it may be considered, is that today's economy is a global one and jobs are no longer sacrosanct, let alone what and where they were. Rather, career paths these days are likely to follow a succession of sudden curves instead of one long straightforward road ahead.

For that matter, some authorities point out that many of tomorrow's jobs have yet to be invented -- and we're at peril if we aren't ready for them.

Even so, Canada's employment figures have generally held -- and have the merit of a relatively healthy diversification -- instead of being faced with a growing loss of smokestack-based incomes.

"Give me your poor, your tired ..." (as inscribed at the foot of the Statue of Liberty)

Thereby, of course, lay much of the founding of America during the great wave of (very encouraged) emigration to its shores. But that was many. many years ago -- and 9/11 brought a decided change to how people from elsewhere are now perceived in the U.S.A. Indeed, it isn't altogether unfair to say that visitors, never mind would-be permanent residents, are being viewed with paranoia. To more than a few minds, it would in fact be best if no one tried to come at all.

Canada, on the other hand, has made no attempt to withdraw its Welcome mat. Maybe, of necessity, we've set up some parameters and, as innumerable would-be immigrants proclaim, our bureaucracy has made the process of landing here an unduly protracted one. But we see an ongoing influx of new arrivals from countless parts of the world, not to mention the increase in our population that is a result.

To a discernible degree, the housing industry is stimulated by the desire to own a place of our own, and immigrants are no strangers to this wish. This factor alone upholds the steady demand for real estate, and few authorities see the equivalent of it in the States.

Quick flips

These will always exist, but the opportunities for them in Canada have seldom been as available as in the States. Not altogether by coincidence, this is a reflection of the more stringent approval of mortgages and, in consquence, a lower percentage of foreclosures (or Power of Sale listings as we prefer to call them). But the less cautious approach by American lenders has allowed borrowers to finance purchases with much lower prospects of a fast profit, quite apart from the likelihood of defaults if incomes drop or interest rates go up.

The situation is made worse if the numbers and percentages increase, as they started to do in the latter part of 2007. Accordingly, there's going to be a relatively severe pressure downwards on prices of all U.S. properties and many members of the American real estate industry envisage the market not turning round for the better until the end of 2009.

In that Canada hasn't seen a parallel, -- and few authorities think the facts make the happening likely -- we're at most going to see a public belief that our houses are overpriced. However, most sellers -- not to mention their listing agents -- will tend to disagree and, regardless of an avowed deference to the best interests of my buyers, I'm not at all hopeful that the American experience and current convictions are going to make it across the border. Bad news may travel fast, especially when so much of our media has a U.S. flavour to it, but I can't help thinking it will largely fall on deaf Canadian ears.

Same old, same old

All told, the Canadian market doesn't expect to suffer much, if at all, from the doldrums the U.S.is experiencing. We have a strong economy with low unemployment, affordable interests rates, an ongoing demand for housing (including the level of interest among new immigrants), and little chance of a flood of bank repossessions. Moreover, financing sources are predominantly our own as opposed to being subject to the whims of American senior management.

The worry, if there are grounds for it, is more psychologically based rather than having any roots in reality.

Perhaps it's a case for recalling the ad phrase: "Only in Canada, Eh?"

With my best wishes for a successful 2008 to all my readers.

Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: E-mail addressed changed as above on Nov 3 2007

website: http://www.duncanpollock.com

PS. One of my web pages provides a list of the other newsletters I've sent out. If you choose to go to it, you can click on any title to bring up its full text.
PPS. I've recently been invited and encouraged to create a second website, one that deals with my approach to the industrial, commercial, and investment real estate market. You can reach it, if you're so inclined, at http://www.iciniagara.com/.