While Mark Carney, the Governor of the Bank of England, continues to enjoy his honeymoon period it seems that the situation left behind in Canada may not have been as rosy as many would have you believe. A number of high-profile real estate investment funds have been talking very cautiously about the Canadian real estate market and indeed at least one major funding house has slashed its exposure to the market. This is something which we discussed only a few weeks ago, the ever-growing cost of Canadian property and a lack of trust between the public and the estate agency sector.
A number of factors have come into play and at this moment in time experts are unsure whether we will see a dramatic collapse or a period of consolidation in the short to medium term. So, what factors do we need to take into consideration when looking at the Canadian real estate market?
Are we approaching the perfect storm?
If you take into account the fact that mortgage rates in Canada have been increasing, there has been a significant change in the regulation of mortgage underwriting standards, house prices are stretched by any traditional yardstick and the economy is struggling, this does not look good. The Canadian real estate market has been one of the better performers over the last few years and has attracted enormous investment from overseas pension funds. Some of these operations are now looking to reduce their exposure to Canada which is having a knock-on effect on Canadian real estate funds.
Quote from PropertyForum.com : “Canada should avoid a house price collapse…..or is the situation set to get much worse than originally expected?”
In the good times it is always helpful to have exposure to assets which are growing in value and this has certainly been the case with domestic pension funds in Canada and the Canadian real estate market. These two elements of the investment industry have enjoyed something of an Indian summer for many years now although it seems that the sun may be setting?
How does Canada compare to other property markets?
It is very difficult to compare overseas real estate markets because there are often very different characteristics on the ground and in many cases a different culture towards real estate investment. However, some experts have stepped out into the open to suggest that Canadian real estate prices are perhaps 20% overvalued when compared to their German counterparts. Whether the German real estate market, with the ongoing troubles in the European Union, is the correct yardstick to use is debatable.
The reality is, even though some experts seem unwilling to discuss this, that Canadian real estate prices have on the whole been higher than many other developed markets for many years now. It is a mixture of excellent economic management, a heavy concentration of real estate investment in a relatively small number of towns and cities and in different performances from other real estate markets which have helped to create this “premium”.
Time and time again we have seen experts suggesting the end of the Canadian real estate market is nigh and we should sell our assets as soon as possible. We have seen ongoing criticism of Mark Carney despite the fact that he was the darling of the financial and real estate sector when head of the Canadian Central Bank. It will be interesting to see how the Canadian real estate market performs in the short to medium term because we have been here on so many occasions, predictions of doom and gloom, which never actually materialise. However, could this time be different?