The Vault
Why real estate has boomed - and what it means to you

by Graham Barber

Many of you can probably remember when GICs were paying 10%. Those golden days of the 1980s quickly lose their luster when you recall how high mortgage rates were.

In 1990, the average fiveyear mortgage rate was about 14%. Today, it's about 6.5%. Low rates are the main reason why real estate has taken off, and why more than two-thirds of Canadians are homeowners.

Indeed, almost 90% of Canadian homeowners recently surveyed said they were satisfied with their mortgages. Most attribute their satisfaction to affordable rates, followed by mortgage flexibility.

Research tip: Stay on top of housing market developments with Scotiabank Economics' Real Estate Trends.

Why rates have come down

Financial analysts and commentators point to many reasons for the dramatic fall in interest rates. Here are a few of them;

Low inflation

Interest rates rise when inflation - or the expectation of inflation - is rising. Since the early 1990s, the bank of Canada has worked to keep inflation within a moderate target range (between 1% and 3% per year).

Central banks have also become much more transparent about possible changes to interest rates. This has contributed to increased confidence among borrowers that rates won't be subject to dramatic moves.

Did you know? Interest rates fell to a 44 year low of 2% in April 2004. By March 2006, the Bank of Canada had hiked interest rates seven times - to 3.75%.

Better productivity

Over the past 15 years, innovations such as email, the Internet, and ecommerce have helped businesses and workers become more productive.

Many of the benefits of the IT revolution have been passed on to consumers in the form of lower priced goods and services. This has helped to keep consumer price inflation in check.

Did you know? About 80% of Canadian Internet users have purchased goods or services online - saving money on everything from books to travel packages.

Growth of emerging markets

Cheaper consumer goods (computers, toys, shoes, clothing) coming from Asia and other emerging markets have also reduced inflation.

In addition, foreign central markets have been large purchasers of government bonds. When demand for bonds is strong, interest rates typically come down.

Other reasons behind the housing boom

Low interest rates aren't the only reason why real estate has taken off. Over the past six years, there have been other factors at play.

Challenging stock markets

Today's real estate boom began in 1999 - just before the troubles on the stock market hit.

First, there was the collapse of the technology bubble in 2000-2001 - and the subsequent market correction. The terrorist attacks of September 2001 also shook investor confidence in stocks and mutual funds. Then there were high-profile corporate scandals to think about. Faces with these challenges, many Canadians turned to real estate - not only as a placer to live, but also as a safer investment. Indeed, many of us now consider our homes to be our best investment.

Flexible mortgage option

Competition amongst mortgage lenders has led to a number of mortgage products and flexible loan terms designed to meet the needs of many different borrowers.

Rising prices

Home and condom prices have risen steadily over the past six years. This has boosted confidence in the real estate market and related industries such as construction, renovation and home retailing.

Where to now?

So where is the real estate market headed? That indeed is the question on the minds of many homeowners and perspective buyers.

In the end, no one knows with any certainty what the market will do. But the consensus is that the red hot housing market is gradually cooling down. Interest rates are edging higher (although they are still low by historical standards), the number of first-time buyers is drying up, and inventories are rising.

Indeed, this gradual slowing in the housing market is typical at this

stage of the cycle and should not be cause for concern.

Diversification still key

Now, for most of us, our homes are our best investment; they provide us with a place to live, allow us to build equity, and can even help us borrow money at more attractive rates.

However, as with any investment, it's possible to have too much exposure. If you also own a vacation home or hold real estate investment trusts (REITs) in your portfolio, you may be overexposed in the real estate sector.

That's why diversification remains the key to financial health over the long term. Your home helps you build equity; stocks and mutual funds (which have now rebounded strongly after falling earlier in the decade) allow you to take part in the growth of the economy; and bonds and GICs add stability. All of these are important building blocks of a solid portfolio.

Your Scotiabank financial advisor can help you assess the role of real estate in your total portfolio and ensure that you are adequately diversified.

The proceeding information was provided by Graham Barber, Branch Manager of Scotiabank, Alcona Branch. The Scotiabank, Alcona Branch, is located at 1161 Innisfil Beach Road, (705) 431-6116.

The Vault is a weekly series of articles provided by Graham Barber with financial advice and suggestions.