If you are considering taking out a home equity loan or second mortgage, are concerns that a drop in demand for housing could trigger a U.S.-style real estate crash realistic? Not so, according to most mainstream analysts.
This week, the Financial Post reported that Canada Mortgage and Housing data showing a 3% decline in seasonally adjusted housing starts in August are signs of a “weakening” real estate market. Yet – even with this decline in housing starts and a reported 0.1 per cent drop in July resale prices – the CMHC report “shows that despite a litany of headwinds, there is still a fair degree of forward momentum in Canada’s housing market” according to TD Securities senior micro strategist, David Tulk.
In fact, while the drop in new home construction represents “the slowest pace of homebuilding this year,” as BMO economist Benjamin Reitzes notes, the lower level of new home starts is “in line with long-run household formation.” Accordingly, builders appear to be scaling back new construction in response to a drop in pent-up demand, rather than in reaction to a bottom falling out of an artificially inflated market.
The Financial Post notes that “none of the commentaries that followed [the release of the] CMHC’s data suggested Canada is a bubble about to burst,” although that has been “the subject of heated debate in recent weeks.” The FP cites RBC economist David Onyett-Jeffries, who asserts that “(t)he risk of a 1990’s-style housing market correction are minimal,” as much of the drop in demand and pricing “represents a payback from earlier unsustainable strength.”
While “the housing market will continue to soften for the remainder of 2010 and possibly well into 2011,” according to analysts cited by the Financial Post; nonetheless, as Mr Onyett Jeffries points out, “on an annual basis, [housing] prices remained 2.9% higher than a year ago.”
Thus, despite headline grabbing stats, homeowners who may wish to access existing equity through home equity loans or second mortgages need not be overly concerned that their equity is going to melt away seemingly overnight as was the case at the height of the U.S. mortgage crisis in 2008.
