David Wolf of Merrill Lynch — the investment firm that lost 70 per cent of its stock value in the last two months and was taken over — is now pontificating on the real estate market. The company couldn’t get the securities business right, but now it wants to counsel you on real estate.
The sub-prime crisis, caused by greedy U.S. banks bundling mortgage instruments into caustic investment paper and then selling the bundles, has caused a real problem south of the border (in fact, across the globe) that actually affects American homeowners. Meanwhile, Canadian newspapers look at the legitimate national correction in an eight-year sellers’ market as somehow being a direct reflection of what’s occurring in the States.
However, the WinnipegREALTORS® Association, the Manitoba Home Builders Association and the Canada Mortgage and Housing Corporation all report Winnipeg’s new and resale market is fairly healthy and still clipping along at record numbers!
What gives? Who do we believe?
As we look at what’s being reported, I think we have to agree that the for-profit media sells more newspapers and radio and television networks sell more commercial spots by concentrating on the negative rather than attempting to report the truth.
If the market’s working in Winnipeg but the banks are foreclosing in Great Britain, guess which story gets reported? Let’s look at the “reality of realty” in Winnipeg and Manitoba.
Some of the leading indicators for the real estate market are:
• Immigration
• Employment
• Interest rates
• Inflation
• Consumer confidence
For the past eight years Winnipeg has experienced a sellers’ market, with more buyers than houses. We have had increased immigration, increased employment and increased consumer confidence.
On the other side of the ledger, we’ve had reduced or stable interest rates and inflation. You might say the perfect storm — perfect, that is, for sellers. Not so hot for buyers.
In the resale market, which is what the WinnipegREALTORS® Association organizes and tracks through its 1,400 agents and its MLS® system, Winnipeg has experienced five straight years of increased listings, increased sales and increased dollar volume. Property values have skyrocketed. As was said earlier, great for sellers, but not so hot for buyers.
Then the world markets were turned topsy-turvy. A financing scheme of zero down payments arose that put consumers into properties they couldn’t afford with mortgages exceeding the values of the properties. Speculation abounded without regulation, while excessive over-building occurred in many U.S. centres and an unsustainable bubble began to inflate.
In the US., there were minimum regulations; creative, if not fraudulent, financing schemes; speculative building outstripping heated demand; and a tax system that taxes sellers of real property on the capital gain on a house and permits the write-off of mortgage interest on income in any given year — greatly reducing income tax owed, which is a great recipe for consumers to over-mortgage and never build equity. When a market correction or adjustment occurred, crisis loomed as the product of the multiplying effects built into the U.S. system — cheap money, no money down, minimum regulation, speculation, over-building, greed, high mortgages creating tax relief and no equity.
In some of Canada’s major markets, the same issues experienced south of the border are evident, and those markets are affected by the market correction to a greater extent than either Regina or Winnipeg.
In Toronto, Vancouver and Calgary, you may see greater speculation, more aggressive construction — over-building? — more emphasis on and a greater history of housing as an investment in addition to shelter, but many issues are different in our largest cities than in the States. Even our largest cities are still subject to Canada’s more regulated approach: mortgages are more regulated, banks are more regulated, you can’t write-off mortgage interest rates on your income tax and we don’t impose capital gains on your equity when you sell, so it’s good to pay down your mortgage and build equity.
The meltdown that occurred in the States was just a cooling-off — an adjustment — a correction.
The further you get away from the largest markets in Canada — for example, Regina or Winnipeg — even fewer of the circumstances causing meltdown existed. There is less speculation with truer supply/demand economies; construction is more regulated, even if the regulations are imposed by the players in the industry themselves rather than governments; and there are the same responsible banking and lending policies mentioned above.
While the international (even our Canadian media) goes looking for horror stories to sell papers and attract viewers, and reports, U.S. realities as somehow a template for what is happening here, we’ll continue to provide verifiable statistics and stories that Manitobans can take to the bank — a rather healthy and well-regulated bank.
And, this isn’t just “spin” created by the real
estate industry.
Next week we’ll look at what others are saying about the current and future of markets in our fair province. It doesn’t look like a meltdown in the “postage-stamp province,” but maybe just a well needed adjustment to give the other half of the resale real estate equation a chance — home buyers.