On April 18th, 2013, we attended BILD’s Low-Rise Forum. The speaker was Will Dunning, an economist and housing market analyst with over 30 years of experience. Dunning has a history working with the Canada Mortgage and Housing Corporation, and now his company Will Dunning Inc. provides market analysis services to a variety of clients.

Mortgage Mania

The topic of BILD’s Low-Rise Forum was “Mortgage Mania.” Dunning focused on the strong effect that mortgage rule changes have on the housing market.

Dunning explained that the past four changes to mortgage insurance rules were followed by significant decreases in the percentage of adults active in the resale market in Canada. The policy change in July 2012, eliminating amortization periods over 25 years, had a very large impact. Dunning calls this “a policy-induced housing market downturn.” Meaning that “no economic factors existed that should have caused the housing downturn.”

New homes market

According to Dunning and RealNet, new low-rise sales, along with high-rise, have dropped sharply recently. That’s no surprise. The new housing market received an influx of new inventory over the past couple years, and sales were high. To maintain or increase those numbers would be difficult.

Dunning also presented low-rise housing starts versus sales. According to Dunning and statistics sourced from BILD and CMHC, low-rise is on the cusp of a large drop in starts. The graph supplied by Dunning displayed the sales trend and starts trend since 2007, and every couple years or so, the number of sales and starts would be very similar. What does this mean? It’s simply supply and demand. Homebuilders are always playing catch-up to meet demand, and when they come close to meeting it, sales rise and starts drop. It’s the natural cycle of the housing market. So, the fact that there will be less new product hitting the market over the next couple years should not be a concern.

Questions to ponder

Dunning asked two questions: Are prices too high for new low-rises? And do lot prices need to fall? Everyone would love lower prices for a new home, but only if they are actually searching for one. For the most part, someone who is not looking for a new home would not purchase one just because the price is lower than average.

The prices in the housing market are set by what people are willing to pay for a new home in our current economy. The housing market is almost an organic entity, and Dunning displayed that by showing what happened to the market when the government made changes to the mortgage rules. Every time a mortgage rule was changed, the market took a hit, but it repaired itself as the population adjusted to the change. It really is quite fascinating how the housing market tends to take care of itself as numerous parties attempt to control and predict it.

What do you think about the current state of the low-rise market? Do you trust the market to continue on its regular cycle?