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Sat, 12 Jan 2013 18:15:00 GMT | By Deirdre McMurdy, MSN Money

Canada’s changing real estate market

Softer real estate prices will have a big impact on more than just markets and margins.

Deirdre McMurdy

It’s good to know that someone out there always has an icy bucket of water handy.

The Bank of Canada’s announcement that it has downgraded its outlook for domestic economic growth certainly extinguished any hopes that 2013 might be the year of The Great Rebound. Instead, the Bank declared that “near-term momentum appears to be slightly softer than previously anticipated.”

On the one hand, that means that interest rates are less likely to rise over the next few months. On the other, that’s not likely to make much difference to Canada’s real estate market. Just like the economy itself, home sales — especially for condos — also appear “to be slightly softer than previously anticipated.”

There are currently two prevailing schools of thought on the property market: we’re all going to hell in a handbasket or we’re just going around the block in a handbasket.

It matters a great deal who’s actually right. Research done by CIBC suggests a five per cent per year drop in housing prices would shave about a half-point off Canada’s GDP growth because of the ripple effect on consumer spending. According to the bank’s chief economist, Avery Shenfeld, that makes it urgent for the economy to recover before the impact of a weaker real estate market fully kicks in.

The more aggressive doomsayers insist Canada is already in the first stages of a full-fledged real estate collapse. Others — specifically bank economists and real estate sector executives — acknowledge that weakness has set in, but they’re equally insistent there’s only a fairly gradual market deflation ahead.

That’s largely a function of a deliberate federal policy: mortgage financing rules have been tightened steadily over four years with a view to cooling down consumer debt levels.

To date, it seems to have worked.

The Canadian Real Estate Association is calling for home sales to drop about two per cent in 2013, noting that the market has stabilized after its initial pullback when mortgage rules changed last summer. That said, it expects prices to actually increase slightly by 0.3 per cent for an average national house price of $365,100.

Embedded in the intense speculation about the direction of house prices and sales volumes, however, is a trend that’s much more significant than just another real estate cycle.

While market conditions are softening in the largest segment of the business, prices and sales of the highest-end homes have de-coupled from the norm and are continuing to surge.

A recent report from Sotheby’s International Realty Canada shows that demand for houses over $1 million continues to demonstrate strength.

In the second half of 2012, for example, listings of homes over $1 million increase by 19 per cent over the same period a year earlier. And in each of the last two years, the percentage of high-end homes that sold over asking price has remained steady, at between three and five per cent.

Granted, Vancouver has shown some signs of easing back from its record highs, but Calgary, Toronto and Montreal have been resilient.

It’s also worth noting that sales of luxury vehicles continued to boom in 2012 — and the outlook is unchanged for this year.

Last year, Rolls Royce sold more cars (starting at $250,000) than in any previous year in its 108-year history. So did BMW, Audi and Mercedes-Benz. Bentley sales were up 22 per cent.

It’s not just a function of flashy new wealth in emerging economies: In Canada, luxury car sales grew 13.2 per cent in the first eight months of last year. And they’re on track to repeat — or top — that performance in 2013.

That suggests the erosion of the middle class — something that’s been underway in the United States for years — is gathering momentum in Canada. And it has implications for everything from social policy and tax structure to retail spending. (The middle class in Canada is very broadly defined as a three-person household with annual income between $39,000 and $118,000)

It doesn’t require much expertise to understand that a country with an increasingly polarized population, sharply divided between rich and poor, isn’t healthy — certainly not the way things are currently structured politically, socially and economically.

In the U.S., the middle class — once the bedrock of society — has seen income tumble 7.7 per cent between 2007 and 2010. At the same time, median net worth dropped 38.8 per cent principally because of falling real estate values.

Between 2008 and 2010, Canadian families saw median income stall at the $65,500 mark. The corrosive issue, however, is the underlying level of debt and — in most cases — a U.S.-style leverage to residential real estate fortunes.

In other words, the direction that house prices take over the course of 2013 will have far greater implications than many buyers or sellers realize.

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