If you're concerned about the downturn in the Canadian real estate market, Michael Polzler, regional director and executive vice-president of Re/Max Ontario-Atlantic Canada, has some advice for you: "Stop reading newspapers and stop watching TV. The market hasn't really slowed that much. We've gone from going 150 mph to 120. It feels slow, but it's still a very healthy market."

Polzler was speaking on a panel of real estate leaders at a Toronto Real Estate Board event recently. "It's our job to calm the market -- not to panic with the rest of the population," said another of the panelists, Stephen Wong, chairman of Living Realty of Toronto. "We all have to believe in the market ourselves. We don't have a problem."

Wong said that high immigration levels in Canada, and particularly in the Toronto area, provide a built-in "guaranteed market" for real estate sales. Low interest rates, good employment numbers and an extremely low rate of mortgage arrears means the economy is not as bad as some people are making it out to be, Wong said.

It's not just real estate people who believe the market isn't all that bad. "We argue against taking an overly alarmist view to domestic housing prospects," said Scotiabank economist Adrienne Warren in a report last week. "This is not a 'U.S.-style' bust caused by overbuilding, speculative buying and imprudent lending, but, rather a cyclical slowdown accompanied by a valuation adjustment in several large centres, where booming demand conditions and temporary supply constraints led to an overshooting in prices."

Warren says the drop in sales and prices is "now being hastened by the sharp downgrading in global economic prospects and severe turbulence in financial markets in the wake of the U.S. subprime meltdown."

But Canada has a "much smaller subprime exposure" than the U.S. did before the crisis, she says. In Canada there is "less interest rate reset risk, lower use of home equity withdrawal and investor mortgages and more conservative lender criteria. Canadian households are far less leveraged than those in the United States, and less exposed to any erosion in underlying asset values."

Canada Mortgage and Housing Corp. (CMHC) Chief Economist Bob Dugan says the country has the lowest rate of mortgages in arrears since 1990, at around one-third of one per cent. Another key difference from the U.S. experience is the amount of equity that Canadians have in their homes. While many Americans were able to buy with no money down and were unable to build equity, in Canada the number of homeowners with less than 10 per cent equity in their homes is conservatively estimated by CMHC at 16.8 per cent. "People who are most at risk of arrears are those with less than 10 per cent equity in their homes, or people who bought in the last year or so," Dugan told a CMHC housing conference recently. "So most homeowners are not as exposed to adverse economic effects, such as losing their jobs."

Despite the news headlines, CMHC says the Canadian labour market is still tight, with a 6.1 per cent unemployment rate. Predictions for 2009 range from a low of 6.4 per cent to a high of 7.2 per cent unemployment, which is still a historically low number.

CMHC is predicting the resale housing market will hit 452,200 units in 2008 and drop to 433,300 in 2009. While that's considerably lower than the record-setting 523,700 sales in 2007, it's on a par with sales in the years 2002 to 2004, which were all record-setting years at the time.

House prices are also dropping, and generally speaking, the areas with the fastest run-up in prices are also seeing the biggest drops. CMHC predicts that house prices in British Columbia and Alberta will fall in 2009, but for the country overall it predicts a .3 per cent increase in prices this year and a slight .1 per cent increase in 2009.

Warren at Scotiabank took a look at house prices around the world, concluding that "price appreciation in both the United States and Canada has actually been relatively modest by international standards, totaling a cumulative 50 per cent and 61 per cent respectively. While real prices have declined in Japan and Germany, the 10-year cumulative price run-up was considerably larger in Ireland, the U.K., Spain, France and Australia, all of which have experienced increases upward of or exceeding 100 per cent." She says that price growth has now decelerated sharply in all countries.

While Canada's housing market is the least overvalued according to the IMF's housing valuation model, Warren is less optimistic that prices will hold going forward. "We expect … that the correction in national average prices from their late 2007-peak will probably be in the range of 10 to 15 per cent, well below the ongoing U.S. retrenchment," she says. However, "much of this realignment will occur in Canada's three western-most provinces, and will leave intact most of the significant price appreciation of recent years."

She says that in the longer term, house price deflation is likely to be more pronounced outside of North America, particularly in Ireland, Spain, the U.K. and Australia.

Published: November 25, 2008

Use of this article without permission is a violation of federal copyright laws.

Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He is also consulting editor of Homes & Cottages, Canada's largest building and renovation magazine. Email jimhc@pathcom.com.