Why Canadians Should Monitor What is Going On With the U.S. Real Estate Market

I know that when I bought my house in Toronto two months ago, I was lucky. The house was on the market for nine days, there were no other bidders, and we negotiated a purchase price slightly below the listing price, which was very strange considering the house is in one of the popular Toronto neighborhoods. At one point, I even thought it must have been because there was something wrong with it. But, there isn’t, knock on wood!

Yet, a friend of mine was not so lucky. She saw her dream home also in one of the hot neighborhoods, with a swimming pool, mature trees on the street and in the backyard, and listed for CDN$1.2 million. She put in her bid at about CDN$800,000. To her immense surprise, the house was sold at considerable premium above the listed price–CDN$1.7 million!

I honestly couldn’t believe it when she told me what had happened. I thought real estate transactions like that are more likely to happen south of the border, or rather were more likely to happen.

These days, U.S. house sales are not what they used to be, and many real estate analysts are predicting this is only the beginning. However, experts are not only worried about price drops and longer days on the market. Rather, they are worried about something financial press has long dubbed as the evaporating “wealth effect.”

While real estate market was booming on both sides of the border, homeowners experienced a temporary effect of having a high net worth because their homes’ market prices were skyrocketing. Unfortunately, the emphasis should have been on the word “temporary,” simply because the steep curve of house prices eventually had to peak and then, trend downward.

Unfortunately, resembling a domino-effect, this temporary wealth fuelled exorbitant consumer spending, which has since been responsible for both North American and global growth. But now, that gushing spending “force” is about to dry up, and with it, so is the global economic growth.

Canada’s real estate market is not in the bubble. However, the U.S. real estate market is already showing warning signs. For example, in the past year, sales dropped 0.7%, while inventory of resale homes grew by a scary 39%. That percentage is much worse in the condominium market, currently down a whopping 85%.

It is clear that the U.S. real estate “wealth” is evaporating, and with it the spending power of every American. And, once the U.S. spending machine grinds to a halt, Canada particularly will not be immune to its fallout.