Two-Minute Reality Check
Two-Minute Reality Check The world financial crisis and
extremely volatile equity markets
have cut consumer confidence off
at the knees.
Many households fear their savings
are worth pennies on the dollar, and
that they’ll need to work well past
retirement age to re-coup their losses.
They’re also worried about their jobs,
the price of fuel and the value of their
most important assets: their homes.
Amid your daily dose of doom and
gloom, consider the following as a
quick reality check.
Home sales will be down nearly 30
per cent this year, and are expected to
remain at 2001-2002 levels (the beginning
of the last cycle) through 2009.
Slower home sales began last spring as
rapidly rising fuel prices caused a
tipping point in consumer confidence,
which has since been intensified by
the global financial crisis. Consumer
confidence is now at its lowest level in
26 years.
The housing market is highly dependent
on the financial condition and
confidence of people who live, work
and raise their families in BC. Even
though confidence is low, the financial
condition of households is relatively
solid. This is important, so I’ll explain
further.
The housing recession in the United
States is the result of financial hardship,
caused by loose lending practices
and over-leveraging with complex
financial instruments. Americans are
losing their homes due to foreclosure
and job losses. Relinquishing one’s
home is a last resort and a signal of a
collapse in the economy. Remember the
old saying, “If your neighbour loses her
home it’s a recession; if you lose your
home it’s a depression.”
Financial hardship is typically caused
by job loss and/or an onerous jump in
interest rates. By comparison, the unemployment
rate in BC remains low—
only half what it was ten years ago.
While some job losses are likely next
year, the unemployment rate is expected
to remain low, from a historical
perspective. Mortgage interest rates are
also low from a historical perspective
and are expected to stay near their
current level, at least through 2009.
BC households aren’t expected to face
the same financial hardship as households
south of the border. This means
home sellers aren’t under duress to sell
at any price. In fact, statistics back this
up: the proportion of BC mortgage
holders in arrears (three months or
more behind in their payments) is the
lowest in Canada and the lowest in BC
in more than a decade. It’s a leading
indicator of foreclosures, since a homeowner
must first stop payment before
foreclosure proceedings commence.
Any comparison that concludes a
similarity between the US housing
market and our own housing market
ignores the fundamental difference of
household financial conditions. While
home prices have edged lower over the
past several months, it’s not the result
of household financial calamity. There’s
a million miles between households
putting off major purchases and being
foreclosed upon.
By Cameron Muir,
BCREA Chief Economist