Dave Dry

Stock markets down what does this mean?

 Since the beginning of the week we have seen stock markets falling, how will this affect the housing market in Edmonton?

Stock markets are the indicator of confidence in the economy. Investors have, in the last week sold in response primarily to the degrading of the US credit rating, this in turn was in response to a feeling that the US is not doing enough to control its spending.

 When investors sell off stock (at a lower price) of any given company the value of that company is devalued, this in turn lowers the personal wealth of those who have invested in these companies stock. Mutual funds and pension plans also have stock investments.

 What has happened in the last few days is that many stocks have been sold off out of the fear that these stocks will fall further, so the logic is sell off before they loose more value and investors loose more money. The snowball then starts and as more investors sell the prices are driven lower.

 This inevitably will have an effect on the housing market in Edmonton, but what effect? As personal wealth and confidence decline the Real Estate market could slow, another indicator is the increase in multi family starts, this indicates a demand for rental properties, taking potential buyers out of the market. Given lenders tightening up and changes in mortgage rules in the last few years has shrunken the pool of potential buyers. 

 Mortgage rates although influenced by the Bank of Canada rates, financial institutions set their mortgage rates based on the returns on the bond market. As investors look for a safe place to put their money. Canadian government bonds are seen as a safe place to invest, this drives prices up and returns down. Because Banks borrow government bonds to finance fixed rate mortgages there is a close relationship between the five year fixed rate mortgage and five year bond rate. As bond returns fall so do five year mortgage rates. Lenders however do not react to this immediately, they are cautious and wait to see if this trend is sustained.

 In order to protect a fragile economy there will be pressure on the bank of Canada to keep the overnight rates at the current low. As Europe and the US struggle with deficits and pressure increasing on the European union to step in again to stabilize those countries that are on the brink of default. A rate increase by the Bank of Canada combined with the fears of a second global recession may jeopardize our fragile growth.

 If we look back into history we see that in times of economic fragility, the safest place to invest is in tangible property whether that be precious metals or Real Estate.

 With the secure Canadian banking system and stable Real Estate market many investors look to Real Estate in Canada to park their money. Looking at the  TSX composite index for the last week we see that it has posted a loss of 6.5% on a $200,000 investment this would be loss of $13,000. By contrast the Real Estate market in Edmonton, while growth is slow, posted a return of 1% over the last year and 23% over the last five years that is a 4.5% return per year. Better than other investments. Over the same time period (5 years to date) the tsx composite index posted a return of 1.4% and the DOW Jones posted a loss of 2.8%.

 In the passed we have seen increasing sales of multi million dollar homes, during times of stock market volatility, An indication of confidence in both Real Estate and the Canadian economy by the wealthy.

 When looked at in this perspective, the Edmonton Real Estate market is open to all possibilities. If investors and home owners take hold of the opportunities to redirect investment funds. Increasing the value of their current homes, selling their current home and purchasing a higher priced home or purchasing an additional property to hold 'park' money and realize moderate returns, in exchange for safety, then we are looking at a healthy market.

The market however could fall if in the light of the negative economic news if investors and homeowners don't take advantage of this opportunities, sit on their money and don't spend.

While it remains to be seen as to how this plays out, Real Estate has been a safe investment, looking at the current volatility, low returns on paper investments, low mortgage rates and slow but historically safe return. Upgrading, moving up or investing may be the best place to put your money.