This is a question that gets tossed around a lot. Several large organizations have come out stating that “the recovery” is already underway, or that the recovery is going to start this quarter or next.

I personally don’t buy it. This article and content is very incendiary to people who always advocate “buy buy buy” so I’m sure people will disagree.

If you want to read the article by Remax that says the market is about to take off, you can do so at:

http://www.canada.com/business/fp/Canadian+housing+market+recovery+mode/1786722/story.html

I attended a conference in Toronto a few weeks ago and listened to Benjamin Tal speak (CIBC Economist). He brought up a concept that several people have been talking about: whether this is a “U-shaped” recovery or a “W-shaped” recovery.

In a U-shaped recovery, there is a crash, a period of pain, and a recovery where the market takes off again and doesn’t look back. In a W-shaped recovery, there is a crash, a false recovery, a deeper crash (where the real pain takes place) and then a recovery. The W-shaped recovery is usually far more prolonged than a U-shaped recovery.

The bottom that everyone thinks came and went needs to be re-evaluated. Let’s look at what has occurred from a financing standpoint and you be the judge of what type of recovery we’ve seen:

In the run up to the crash we had the cancellation of the 40 year mortgage and the zero down mortgage. Almost THE DAY the crash began, was the day that those products ceased to exist in Canada. With the longer amortizations gone, and no more zero down available, affordability and access to housing was restricted. While not everyone used these products, it is naive to say that their disappearance wasn’t a contributing factor to the slowdown. This, all at the same time as the huge Wall Street fallout with the Lehman Brothers going down, and the events we are all now familiar with ensued.

In the period where sales really started to fall (October through March) 5 year fixed rates started at around 5.24% on November 1^st and hit a low of 3.60% on June 1st. Almost on queue, the market “picked up” and sales shot to an extreme high in June of 2009.

During the same period of time, prime rate fell from 4.50% to 2.25%. A fall of FIFTY percent!

Also during the same time, the premium on variable rate fell from prime rate plus 1.50% at many lenders to prime rate plus 0.30% at currently. So, by the time the rate drops had filtered down, you had financing rates that were now on average 50% lower than they had been previously. At the same time as this was going on prices were falling, and falling harder than people who follow “benchmark prices” were letting on. Prices in Vancouver had obviously declined, and declined a lot. Some estimates were 20%, but there is evidence of far greater declines in other municipalities or amongst high end properties or “unique” properties.

So, we have a crash in prices, and a crash in rates. Let’s see how this translates into affordability:

A $400,000 mortgage in a 5 year fixed rate before the crash would have had a monthly payment of $2,066.00

A $400,000 mortgage in a 5 year fixed after the crash (assuming the average 20% decline) would have a payment of $1,337.00.

$2,066
$1,337
$729

That’s a decline of 35%, and what did buyers have to do to make these savings?

Nothing.

They just had to wait and NOT BUY before when rates were higher. I honestly believe, and feel that the evidence shows, financing accessibility and rates, drive prices.

Where are we now?

Junes’s sales were one of the highest on record… EVER. Even higher than the 2006/2007 meteoric rise. 5 year fixed rates have climbed from around 3.65% to 4.39% at most lenders. Economists feel rates are going to continue upwards further yet (although there may be a short term pullback). Also, prices and the frenzied pace of the market have increased dramatically. Bidding wars are back, multiple offers with no subjects or conditions are back, and prices far… far… far over asking price are also back. So the market is heating up, right?

Maybe not…

A lot of those purchases going on right now are for buyers that have pre-approvals at the old lower rates. Those pre-approvals are good, in most instances, until September 30^th. So the real question is not “where are we right now?” but “where will we be at the end of the year?”

The thought scares me, but I too own real estate and I’m not selling. Why? Because I’m holding it for the long term. People holding for the short term, or thinking they are going to upgrade right away, or buy and flip, might be in for a rude, rude surprise.

So there is the evidence I’m putting forth, and why I think there is going to be another downturn before we see long term stability.

Comments? Let me hear them!

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