Blog by Evon Mayer

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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

 

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