What faltering stocks and bonds could mean for house prices: Don Pittis

Stocks and bonds may be goingthrough a bad patch, but amore important question for manyCanadians is how a new feeling of financial uncertainty is affecting their biggest single investment: their homes.

Statistics Canadadoesn't ask Canadians directly whether they invest in stocks or bonds. However, as of May 2016, 67.8 per cent of Canadian households owned their own homes.

As bonds and stocks tumble due to fear of rising interest rates, there are signs Canada's housing market is facing similar strains.

Prices hard to read

Unlike stock and bond indexes that offer an accurate running tally, the monthlyCanadian Real Estate Association data we use to estimate the changing value of residential real estateis neither as immediate nor as transparent.

After yesterday's wild swings on the markets, the sluggish nature of real estate numbers seems like a blessing, but inevitably it makes house prices harder to read.

CREA only counts transaction prices of resale homes sold through a broker. The data requires a lot of interpretation.

Each resale home is unique and the motivations of sellers in a complex market are difficult to decipher.

For instance, adecline in sales may indicate sellers are keeping properties off the market in hope ofprices returning to their highs. In a falling market, it could be a logjam waiting tobreak.

Since houses that are listed but withdrawn don't show up in the statistics, rising prices may be skewed towardhouses sold in areas that are most in demand.

Those looking for an accurate measure of house prices might want toturn to the presale market. And in casesreported last month by the CBC's Trevor Dunn and in the Toronto Star lastweekend, the evidence is troubling.

Housing futures market

There are twoadvantages of presales as an indicator of the housing market.

Looking at prices of nearly identical homes in the same area allows you to compare.

And since the houses have not even been built yet the construction site looks like a muddyfield they act as a futures market, showing what people are willing to pay now for a house that won't be finished for at least a year.

The people the CBC'sTrevor Dunn spoke with east of Toronto said houses like theirsare selling for $90,000 less than what theypaid a year ago.

The Star story, which ran on the front page Saturday under the headline"Buyers stunned as new homes lose value,"quoted a woman who the paper says paid $955,000 for a home now selling for $859,000, a difference of $96,000 in 12 months.

Drifting downward

"Recently, prices in the GTA have drifted downwards," Mattamy Homes Canada president Brad Carr told Dunn."Obviously we need to respond to be able to sell at prices purchasers are willing to pay."

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Just as in the bond market,higher borrowing costs with the prospect of further interest rate increasesahead is bound to help take the heat out of the market.

Following a recent column of mine suggesting many people weren't prepared for the changes that a bout ofinflation would bring, onereader tweetedthat his first mortgage had been 15 per cent.

"Well you can't put a 15% annual interest rate on a 20 year 300k mortgage in today's world,"another Twitter user responded. "No one would be able to afford a house."

And that's just the point. No one is expecting 15 per cent interest rates any time soon. But every interest rateincrease from current lows makes houses less affordable, forcingsellers likeMattamyto cut prices if they want buyers.

An odd quirk is that as house prices went up there was little impact on the officialinflation figures because the totalvalue of a house doesn't feedinto the inflation rate. It is monthly carrying costs that count.

Vicious circle

Now, as interest rates rise, higher monthly paymentswill pile ontoinflation, contributing in turn to even higher interest rates.

As she left her job last week, outgoing U.S. Federal Reserve chair Janet Yellenworried that prices for stocks and commercialproperty were "near the high of their historical ranges."

Despite a gradual rise in interest rates that remain at historical lows, other economic signals in Canada such as low unemployment, rising wages and lots of immigration are good for the housing market. Falling home prices are also good for people looking to buy for the first time.

As with fallingstock prices, some people see the advantages of buyingwhile prices are down.

Buying a house at a savings of $100,000 is a great deal so long as you don't think prices will fall another $100,000 the following year.

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Psychology plays an enormous part in homebuyingdecisions. Continuedstock market instability could be a drag on housing. But Yellensays the U.S. economy, crucial to Canada's sense of well-being, is strong enough to survive.

"If stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole?" Yellen asked rhetoricallyin an interview Friday. "And I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system."

In the case of Canadian homes, the important economic story is that while builders like Mattamy have been enjoying a windfall as prices shot up, it is clear they intendto continue supplying the market,making a profiteven as prices retreat.

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