RIDING THE ... REAL ESTATE ROLLER COASTER

Garry Marr, Financial Post

Heather Harding and her husband, film editor Graham Withers, have been on the real estate sidelines looking for a home for the past 18 months. The Toronto couple, renters, started their search when the market was at the top and every home they looked at was "just too expensive."

But now that prices are finally falling and affordability is increasing, there is another major stumbling block in their search: Job security.

"There just seems to be so much uncertainty. Prices in the range we have been looking at haven't changed all that much, either," said Mr. Withers.

"We keep waiting for the big housing crash," said Ms. Harding.

They look to the situation in the United States and see prices dropping by as much as a third in many markets, but that hasn't happened here. The Canadian Real Estate Association said prices across the country in the first four months of 2009 were down 6.7% compared with a year ago.

"We are looking for more of a deal. And more stability. I work on contracts and my wife just changed jobs," said Mr. Withers. "Unless we are going to get a deal, why would we introduce more uncertainty into our lives?"

That's the real-estate rub: Sales have stalled as vendors refuse to lower prices while buyers sit on the sidelines waiting for a deal after more than a decade of rising prices.

To be sure, the deals have finally begun to materialize, although not from plummeting prices. Rather, record-low interest rates, whether consumers are borrowing long-term or short, are a key factor in the new real-estate affordability.

Consider a $300,000 mortgage. At the 3.75% rate some mortgage brokers claim they can get for a five-year closed mortgage, the monthly payment is $1,537.67, based on a 25-year amortization. A couple of years ago, when the rate was closer to 5.75%, the same mortgage would cost 22% more, or $1,875.07 a month.

Cheap money has created a classic economic battle. In one corner stands the real estate industry, trying to lure buyers with rates so low it is now cheaper to own than to rent. In the other is the skittish consumer who is too focused on job concerns to care about interest rates.

For the first time this decade, the Royal Bank of Canada's Affordability Index, which measures the percentage of household income needed to carry a home, is declining.

"We've seen affordability improve across the board, but especially in some centres where it had deteriorated over the past few years," said Robert Hogue, senior economist with RBC.

Vancouver is one example. At the market peak, almost 80% of pre-tax household income (based on the median household income in the city) was needed to carry a standard two-storey home. The index is based on a 25% down payment, a 25-year amortization and includes the costs of principal and interest, property taxes and utilities.

Vancouver's affordability rating has improved to the 70% range, but so has job uncertainty, according to RBC. The decision to jump into Canada's most expensive city for housing has not gotten easier.

Nationwide, 43.7% of household income is needed to carry a detached bungalow, a decline from 46.6% in the fourth quarter of 2007. When RBC releases its first quarter results later this month, that figure is expected to fall again. The all-time peak in Canada was 52.6% in 1990.

"Consumers still are not jumping into the market en masse because of concerns over job uncertainty," says Mr. Hogue. "The job market continues to show losses. We are talking about a battle between confidence and affordability. This is likely to see-saw for some months ahead."

The real estate industry is busy pumping out the statistics to back up the affordability argument. CREA and others in the industry point to three straight months of improving sales activity, adjusted for seasonality. April sales were 32% above the decade's low point reached in January.

But the numbers still show very slow sales for 2009. April sales were off 9.2% from a year ago, while sales for the first four months of 2009 were down 20.7% from a year earlier.

In Windsor-Essex, ground zero for the Canadian auto industry, housing sales for the year were down 21% from a year ago, while the $152,856 average price of a home has sunk to the fourth lowest among the 25 urban centres CREA tracks.

"There are tons of homes up for sale," said Rick LaPorte president of Canadian Auto Workers local 444 in Windsor. "My house has probably dropped $20,000, maybe $30,000, in the last three years. It's a buyer's market -- as long as you have a job. ... If you have no way of paying for a mortgage, houses can be as cheap as you want." said Mr. LaPorte.

From the real estate industry's perspective, first-time buyers have been the cement that has held this market together. A survey by Royal LePage last month found 86% of potential first-time buyers indicated that low interest rates were a key motivator for buying. Lower prices was the second-biggest reason to purchase, with 81% of potential buyers citing that factor. But 76% of respondents also listed job security as a major factor affecting whether to buy.

The results back up LePage president Phil Soper's assertion that affordability trumps job security in this high-stakes game. "While these consumers appreciate government incentives such as tax credits, greater RSP deduction limits and rebates on home renovations, it is markedly improved affordability that is proving to be the powerful drawing card," he said.

Canadian Imperial Bank of Commerce senior economist Benjamin Tal has his own set of statistics. He say outstanding mortgage debt is rising 8.5% on a year-over-year basis, but the pace of borrowing continues to slow.

"That's the real test of affordability. If affordability was the only measure, you would see mortgage activity accelerating," said Mr. Tal. "Look at the U. S. market, it's extremely affordable. But is anyone buying? If you have no confidence, you are not buying a house, even if interest rates are zero because you cannot afford the risk."

Toronto appraiser Barry Lebow, of Lebow Hicks Ltd., said the Canadian real estate market has nowhere to go but down -- no matter how much cheap money is thrown at consumers. These days he's taking the conservative route when assessing the price of homes because he doesn't want to face the wrath of a bank that has to foreclose on a house that was valued too high and ends up selling for less than the mortgage placed on it.

"There are going to be tremendous changes in real estate... There are just not enough first-time buyers and the ones buying today, those people are not really buyers, You know what they are? They are renters of cheap money, variable-rate mortgages of 2.99%," says Mr. Lebow.

"If mortgage rates were 8% to 9%, these people wouldn't be buying. It's an artificial market. One hiccup in the rates and it's all gone."