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Glen Hodgson
Senior Vice-President and Chief Economist |
Economists never really stop analyzing the economic and financial aspects of the things you see around you, even on a vacation to Phoenix and Las Vegas during the holiday period. What we saw in the Phoenix property market makes us even more inclined to agree with the recent musings by Finance Minister Flaherty on further reducing the leverage on Canadian mortgages. Canadians should think hard about shorter mortgage terms and larger minimum down-payments (like up to 10 per cent) for CMHC mortgage insurance. While we don’t want reduced leverage in the Canadian mortgage market to snuff out the recovery, we need to be mindful of the long-term sustainability of that market.
So what happened in Phoenix? At first glance, it's hard to tell that there was a sub-prime housing bubble and financial collapse, and resulting recession. The sprawling city buzzes along all through the day and night, particularly with its Sky Harbor airport nestled in the heart of town. The eastern suburbs of Scottsdale, Tempe and Mesa seem affluent enough, with big houses, new office buildings and malls, and many high-end vehicles on the ever-expanding roadways.
Probe a little deeper, however, and the signs of the housing sector collapse and the resulting recession become all too clear. This economy is still in shock. Myriad high-end homes sit vacant and for sale at half the price they commanded only a few years ago. Home prices in Phoenix fell by a further 18 per cent in the twelve month period to October 2009 (the latest available data); only Las Vegas recorded a larger drop among major cities.
The Phoenix real property market is in the midst of a great transformation. Many impressive properties are up for sale at shockingly low prices. Try a 4000 square foot house, with desert landscaping and a pool in the backyard, for $250,000. Comparable properties are available for rent, and there are instant new landlords, and renters, who are being forced to learn the rental business quickly -- along with what it's like to no longer be an owner-occupier. Underlying the property debacle is a sharp drop in personal wealth, with the accompanying impact on personal consumption, or what economists call a negative wealth affect.
Numerous commercial buildings sit empty along the busy boulevards of otherwise-affluent Scottsdale. These are the leftovers from collapsed auto dealerships, restaurants and boutiques, as you can learn from their faded signs. The impact on the retail market is acute. Local business people told me that retail sales are down significantly from the boom years – by as much as 80 per cent lower for some specialty retailers -- and sales have barely stabilized in recent months.
Not that the high end of the real estate market has disappeared entirely; some spectacular hill-side properties are still up for sale, at equally spectacular prices. Nonetheless, the overall Phoenix housing market has gone through hell and has yet to rise from the ashes like its namesake.
The bottom line is not pretty. The local property industry understands that the boom is well over, and few have expectations of a quick bounce-back. It will take a lot of new inward migrants to absorb the available housing over-stock, which would allow average prices eventually to start rising again. But that will likely take years, not months.
What does this mean for Canadians? On the bright side, snowbirds can expect attractive sales prices and rental and hotel rates in Arizona for some time to come, made all the better by a strong loonie. Buying conditions in the Sunbelt have seldom been more favourable for Canadians - and are unlikely to deteriorate any time soon.
But just as clearly, we should learn the lesson that the excesses of a housing bubble are to be avoided, since the downside is ever so painful. The cold fact is that Canada dodged a bullet that hit many others hard – like the Phoenix property market.