What’s in store for the Canadian housing market?

The strong real estate market has helped overall consumer confidence.

With Canada’s housing market continuing to expand at a solid pace, we asked Pascal Gauthier of TD Economics for his views on the real estate recovery and what the future may hold.

Why does the Canadian housing market continue to do so well relative to the troubled U.S. market?

There are two primary reasons. On the cyclical side, it has to do with how deep the recession was here versus the United States. Our domestic economy wasn’t as badly wounded as the U.S. economy was. On the structural side, our financial system is stronger. Canadian mortgage lending practices were safer, so we didn’t see the vicious circle the U.S. had — where home prices started to decline, people couldn’t refinance and foreclosures took place, which led to even more downward pressure on prices.

Is the Canadian market overpriced?

From the perspective of affordability, most estimates would indicate that homes are moderately overpriced compared with the kind of income growth we’ve had over the last five to seven years. But they’re not so out of line that they would warrant a significant correction. In some parts of the country, such as the West, affordability is more of an issue.

What happens to home sales when interest rates start to rise?

Rising rates will mean higher mortgage payments, which will dampen sales activity. But rates will rise in an environment that reflects a stronger economy — when incomes are starting to grow and unemployment is coming down. These factors should continue to support housing, even as interest rates begin to rise later this year.

How should homeowners prepare for increasing rates?

This is a good time to emphasize savings, to give yourself a cash cushion for when rates move up.

Should Canadians rely on the value of their house as a significant part of their overall financial plan?

Capital appreciation should not be the first priority when it comes to housing. Location, your environment, your commute to work, schools and other factors should drive your decision. If you get decent price appreciation, all the better.

However, your house is part of your asset mix. And housing has held up well as part of a diversified asset portfolio. From peak to trough, Canadian homes dropped by about 10% before recovering, while global stock markets fell 40% to 50%. Indeed, the strong real estate market has helped overall consumer confidence.

Over the long term it is reasonable to assume that homes will appreciate in real terms. However, double-digit gains over the long term are not sustainable.

How to invest in real estate If you’re interested in adding real estate investments to your portfolio, the following types of investments could boost your exposure to this sector. REITs. Real Estate Investment Trusts (REITs) own and manage properties, including apartments, hotels, commercial buildings and shopping centres. REITs strive to deliver tax-advantaged rental income to unitholders. While the tax regime may change for other types of income trusts in 2011, most REITs should remain exempt. Property stocks. Shares in publicly traded companies involved in residential construction, property management or other aspects of real estate are another way to take part in the real estate market. ETFs. There are exchange-traded funds (ETFs) designed to track the performance of real estate market indexes. Mutual funds. Real estate funds invest in a range of companies involved in real estate and may also hold REITs. WebBroker’s* Markets & Research site can help you with your search for real estate investment options. If you have any questions, please contact an Investment Representative at 1-800-465-5463 or a FundSmart* Mutual Fund Specialist at 1-800-461-3863.

 

* Trade-mark of The Toronto-Dominion Bank, used under license.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed or insured, their values change frequently, and past performance may not be repeated.

In this issue		April 2010
	Global economy gaining traction, but risks remain		What’s in store for the Canadian housing market?
	What does the future hold for gold?		TD Waterhouse presents MoneyTalk and book review
	How to research market sectors in WebBroker		Our enhanced retirement site is designed for you
	Invest for principle and profit — the socially responsible way