The Sky Isn’t Falling…

The sky isn’t falling
At the end of 2008 things were changing so fast that every time I sat down to write things had already changed again. So I chose to wait until the dust started to settle and revealed a clearer picture.

Well, what a year we had. Financial Armageddon! Doom and Gloom! Bankruptcies! Foreclosures! Bailouts! Recession! Depression! It just didn’t seem to stop. It seemed that wherever we turned was bad news and more bad news on the horizon. Stories about financial meltdown surround us and uncertainty is still abundant. So, is the sky really falling? And what are we to do? Let us examine a few facts, myths and fictions.

We have been pummelled with news about tumbling real estate markets but the truth reveals a more optimistic situation. We’ve had an unprecedented and relentless ten year run of rising prices, but history proves time and again that what goes up must come down. We gave up some of this ten year gain without sinking to 1989 levels. It sounds like the market has seen a huge crash, but when we compare sales figures from a year ago, we are in fact still well above historic sales levels. The 2008 numbers prove that MLS sales in the GTA are the 6th best year in history.

Canada vs. US

The economic crisis started with the US subprime mortgage meltdown, and some people predict that Canada’s housing market will soon see a similar fate. Don’t believe them. We don’t have a US style bust caused by overbuilding, speculative buying and imprudent lending, but rather a cyclical slowdown. Another difference lies in the rate of mortgage arrears (which stands at less than 0.03%) and the amount of equity Canadians have in their homes. Canada will not experience the sort of market collapse and tidal wave of foreclosures that are occurring south of the border.

As of December, US housing prices were down 30-50% (depending on the State) from their peak in July, 2006, and given there is so much unsold inventory, the market could face a further decline of 25% or more. The correction in national average housing prices in Canada will probably be in the range of 10-15%. In Canada the inventory for new and unsold resale homes is still well below prior cycles. There is a low risk of widespread foreclosure and builders are starting to slow the pace of new construction. This means that Canada will not have to cope with the massive inventory glut that underlies record setting US price declines.

Your home is still the safest investment there is. It will continue to far outperform any other investments in the volatile financial markets. We sure have not seen declines of our homes by 40-60% as we have in our financial portfolios. There is absolutely no need to panic or to give in to all the fears created by negative media publicity.

Toronto prices haven’t dropped significantly: just 3-10%, depending on the area. Even though the inventory of available homes is up, there are no desperate sellers willing to give their homes away at bargain basement prices. The prices in Canada will adjust down according to how disproportionately they went up. Toronto’s increases have been reasonable, and based on demand, which means the drop in prices will be reasonable (unlike the Wild West, where the unruly appreciation of prices have been affected by a single and volatile commodity – oil). CMHC says that in Toronto jobs continue to be created in the service sector, the labour market remains tight and wages will continue to grow slightly above the rate of inflation. Immigration to the GTA remains strong, mortgage rates remain low. The Federal Housing Agency says that real estate prices in the GTA were up 2.6% by the end of 2008 and predicts that by the end of 2009 they will be up another 1.8%. (Please keep in mind there are all kinds of reports by different agencies quoting all kinds of numbers and stats, from increase of 1.8% to decrease of 3-5%, I have no idea how they can predict and/or make these forecast. But regardless, none of them are nowhere near as bad as the media will have you believe).
Like the weather, all real estate is local. Traditionally popular demand neighbourhoods such as the Beach, the Kingsway, High Park, Leslieville and Riverdale continue to hold their value. In some of these areas, demand still exceeds supply.

Interest Rates
Low interest rates are a big reason why the real estate boom lasted as long it did. The good news is they are still the lowest they have been in decades. CMHC forecasts the rates to remain at their current levels for the first half of 2009. The Bank of Canada is committed to keeping interest rates low and ensuring that Canada’s economy remains strong.

So what does it all mean to you?
Real estate is not just a commodity that you buy and sell based on market conditions. There may be a strong temptation to take a wait-and-see approach on the sidelines, but what really matters is what is happening with your family right now.

All said, with the end of the boom comes lots of choices. So if you are in the market for a home, now is a great time to start looking. If you are selling, price your home realistically and market aggressively and you will still do very well in terms of cashing in your equity and gaining on the upside. If you are looking to grow, seriously consider making a real estate investment.

I am really excited by the opportunities this market presents. No more shortages of available homes, no more crazy bidding wars with often unreasonably inflated prices, incredibly low interest rates… It is always difficult to take action when all around are saying, in essence, that it is the end of the world as we know it. I would suggest it is likely the best opportunity for buying a home in the last decade. Here’s why:

1. It is easier and cheaper to move up in the down markets. Maxed out in terms of space (if your house is so small you need to go outside to change your mind)? Need to improve on the type, style or location? There’s no better time to do it than now. When markets drop, the high end has the most significant price decrease. Likewise, when markets move up, quality products always appreciate first and most. If you are buying and selling in the same market, this benefits you. For example, let’s say you own a home that was worth $500,000 but has now dropped to $450,000. You want to move up to a one million dollar home, but that home is no longer worth one million, it is worth $800,000. The spread to move up to a bigger, more expensive home is actually lower in the down markets as the higher end homes drop further in value than lower priced homes. Add that to the fact that interest rates are the lowest they’ve been and what you’ve got is a great opportunity to make an upward move. These are the best times and markets to move up and grow.

2. Quality pays big dividends. I am and always have been a big advocate of quality. Not only do you get to enjoy it, it also grows significantly once markets begin to appreciate again. And all that growth is tax-free. In Canada the appreciation on the growth of your principal residence is the only tax-free investment available to you. It only makes pure and logical sense to maximize it.

3. If you are investing, greatest wealth is made in the down markets. As many of you have substantial equity in your home, I would recommend using that equity to make a real estate investment. Perhaps you might consider a renovation or light improvements on your home. Or buying an income property for a long-term hold. It may not seem glamorous or sexy, but trust me, in the long term your returns, profits and lifestyles will be. Many of my clients and myself are living proof of it.

Eventually the bad news will be behind us. At some point, in a not so distant future, life and business will go back to normal. In the meantime, many will actually benefit.

Keep in mind the wise words of Real Estate Appraiser, Barry Lebow: “Those who bought in the downturn come out the biggest winners as markets rebound. Remember, prices do not go down or up, they simply correct themselves. You look at real estate over a period of years and average the price. No matter how low or how high, on average, in Toronto prices went up 6.5%s smoothed out over the past 25 years. 6.5% for an investment that you can eat in, live in, make love in, enjoy your privacy or family and is tax free. I still believe that real estate ownership is the best investment one can make.”

The mental side of things, money and finances aside
Finances are but one of the pillars of your life (albeit a very important one!). Remember that your friends and family, your health and your spiritual side are vitally important to you as well. NOW more than ever.

I have guided my clients through all kinds of markets with great results for the past 28 years. I hope to be of support and assistance to you in any way I can.

Wishing you and your family all the best in 2009.
Vladimir Bregman

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  • Michael Cayley

    Great post Vlad!

    I hope that you will repost over at!


  • Aerin Guy

    Very informative and nicely written. Your optimism is a breath of fresh air.

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