Sniffing out the truth about the end of the Canadian real estate boom: Don Pittis

Quite fairly, the many Canadians and foreign investors who have been making a killing in the country's crazy property market don't want the party to be over.

As the Canadian Real Estate Associationreleases its latest figures on house prices today, showing the average Canadian home was worth just over $500,000 last month, it will beharder than everfor the rest of usto be certain if either thereassurances orthe warningsfrom industry experts can be trusted.

The latest figures show average home prices have declined by about 10 per cent since April, and people in the real estate industry are fond of calling slowdowns like that a"soft landing."

More dire terms are used only if it's determined that government interference ends upkillingthe goose that laid the golden egg.

Brave face

But whether you are a prospective buyer, a prospective seller, or someone not planning to play in the property market at all it may be wise to take any such comments with a grain of salt.

There is nothing wrong with putting a brave face on things, but rational people realize it had to end.

MacBethquotes research that showsfollowing a property bubble, a soft landing just never happens. But there are also reasons why his worst case, a resulting financial crisis, is altogether too gloomy.

Purveyors of the soft landing argument will point to the fact that house prices have continued to rise in many markets despite the recentfederal and provincial rulesintended to cool overheated house prices.

Not counting new condos

In the midst of those reassurances some ofthesame people who have pronounced a soft landingasked the government last week to roll back planned banking regulations that they fear, with rising rates, will coolthe property market.

The real estate industry's own statistics indicatethe market has turned. But accentuating numbers from the entire year showing prices still rising seems misleading for those thinking of getting into the market.

Because that is who the reassurances are meant for. Evidently few young couples will want to buy a condoif they think prices are about to drop like a stone. That would meanfewer mortgages for banks, fewer real estate fees for agents.

Could the market fall further? Absolutely. Today's CREA numbers only countresale properties that are actually sold. New condos are under the radar. The same with low bids that are not accepted.

Even that growinginventory of unsold houses is likely anunderestimate. About a month ago a neighbour put her house on the market but after 10 days without a nibble, the sign came down.

Time to get rich

Whether listed or not, that weight of unsold properties is bound to accumulate until people who really need to sell will accept an offer, even if it is below the pricethey expected.

But that does not mean property prices will plunge. Nice houses and condos in prime locations are still selling. It is just that the froth is coming off the market.

And it's about time.

When CBC business reporter JeannieLee saw and photographed the subway poster below it reminded her of a previous mania for day trading that ended badly.

"'Everybody can get rich buying real estate,'it seemed to say," she says of the poster that advises you to "Get pumped!"

As interest rates rise and the increase in the value of investment propertiesslows orstops or the value evenfalls, buying up condos to rent using borrowed cashmay no longer be worth getting pumped about.

Canada's population continues to grow and people will continue to need someplace to live.

While property speculators may be disappointed, building houses for people who need them will remain a money-making proposition. There were lots of condos being built when they sold for $100,000 less.

More than speculation

The inflation figures tell us that the costs of lumber and steel beams and stucco and the labour to stick them all together have stayed nearly the same. It is the price of the land and thefinished product that has gone crazy.

Ahealthy economy is about more than houses and it is about more than speculation.

In some ways real estate has been a bit like the energy sector in the oil-producing areas of the country. It has swallowed up too big a share of the economy, in 2016 reaching 50 per cent of GDP growth.

If speculating in real estate earns you a sure 30 per cent, the risk of investing in building an export business, for example, just isn't so attractive.

The real estate sectorneeds an adjustment period. Like oil and gas, the industry will likely have to learn how to operate more efficiently.

If property prices fall, those forced to sell will suffer. Recent buyers who have overextended themselves will feel the squeeze of higher rates.

But almost everyone knew this day had to come sometime.

With luckit comes at a time when Canada's industrial economy is showing signs of vigour as itjoinsEurope and the United Statesin a return to slow if sustained growth.

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