|Lessons from a Canadian winter|
Nov 09, 2011 TREVOR BLAKELY irishtimes.com
CANADA’S experience of a severe downturn in the property market in the late 1990’s should provide some lessons for a recovery in the Irish property market.
Much of Canada’s property story will be familiar to Irish readers. Between 1984 and 1989, average house prices in Canada increased from $94,000 to $261,000, and commercial real estate performed even better.
Unemployment levels were at an all time low of under 5 per cent and net inward migration increased by over 250,000 in 1989 compared with 125,000 five years earlier.
When Canada entered into recession in the second quarter of 1990, property values plunged by an average of 40 per cent and the impact on the commercial real estate market was even more pronounced. Downtown office vacancy rates reached record highs of around 20 per cent. Rental rates were effectively zero and there were a large number of commercial defaults due to the inability of those who had become heavily indebted to sustain mortgage repayments.
In the 1990s recession, the Canadian property market changed significantly. Structural reforms were introduced to protect against another property boom and the focus of government policy was on the creation of sustainability in the property market. Effective market regulation, transparency in sale prices and strict lending policies were reinforced by the State and the market itself, so when the Canadian commercial and residential markets emerged, they sustained even stronger growth.
New bank lending disciplines were introduced for developers. Lending for construction projects became far more stringent and pre-lease occupancy levels of between 50 and 75 per cent were required before commercial developments could receive funding.
Eighty-five per cent of pre-sales had to be completed to fund apartment complex developments and residential loans were set at a maximum of 75 per cent Loan-to-Value (LTV) ratio. 100 per cent mortgages were an impossibility.
Those active in the Canadian property market came together to pool their data on property transactions, and created an online database of all transactions, whether for commercial property or residential units.
Everyone, whether estate agent, purchaser or vendor, had real-time access to all property sales prices, which increased consumer understanding of property prices and sped up the sales process.
Because of these new structures in the market place, when the financial crisis and subsequent global downturn arrived in 2008, the Canadian property market escaped the worst of the crash. Having learned the lessons from their own recession, the banking and property market structures ensured that the market fundamentals remained solid and the Canadian economy remained resilient.
House prices in Canada have been steadily increasing at a rate of 7.7 per cent annually over the past 12 years, something which few, if any, other countries have managed to achieve. Commercial real estate investment this year is expected to be $25bn. Not only is this an increase on last year’s activity levels, but it will be the second highest volume of activity since 2007.
So what lessons can the Irish property market learn from this? At the Society of Chartered Surveyors Ireland’s recent conference, the primary recommendations made were for the enforcement of better building regulations, stricter lending policies to developers and purchasers and more transparency in the property market.
The downturn in the Irish property market has been even more pronounced than Canada’s recession in the late 1990s. The environment in which the Irish property market finds itself mirrors that of Canada at that time, but to a more severe level, increasing the need for similar reforms.
Chartered surveyors operating in the Irish residential property sector suggest that the decline in house prices is closer to 60 per cent, rather than the official level of 40 per cent, depending on the location, and the type of house.
Furthermore, the fundamentals that underpin a properly functioning housing market are not in evidence. Lending from the financial institutions is almost at a standstill, consumer confidence is low and the wider economy, exports aside, is sluggish. Ireland is facing not only its own problems, but it is also being affected by wider European and global issues.
However, having seen the benefits of Canada’s recessionary reforms, now is the time for Ireland to put in place the required structures in its property market to let activity resume and to avoid a recurrence of past mistakes.
Whether in Canada or Ireland, a stabilisation of the property sector is critical to economic development. The first, essential step is a realignment of property values and an acceptance of lower property values.
More prudent lending rules will help avoid a repeat property bubble and these should be implemented nationwide. The current standstill in lending is not a good policy and when more credit does become available in the economy, it is crucial that prudent measures are maintained over the long term.
Better regulation in the property industry is required and I understand that the Property Services (Regulation) Bill 2009 (if enacted) should go some way to enhancing consumer confidence in making what is likely to be one of the largest purchases in their lifetime.
Transparency is also a fundamental requirement in order to provide much needed confidence and to spur activity in the property market.
In Canada, the publicly accessible land registry system details all property sales transactions nationwide. This provides complete transparency in relation to real estate transactions and investment performance. It ensures that market commentary is accurate and fully informed on market changes.
Furthermore, the enhanced availability of data on property ownership and population density facilitates better planning decisions and could help avoid a repeat of the “ghost-estates” phenomenon in Ireland.
The future for Ireland is bright but it will take time for the country to recover.
It has a young, educated workforce and the international view is that it is meeting its austerity measures and is working hard to reduce debt and return to growth. The recovery may not be that far off.
Trevor Blakely, is MD of BMO Capital Markets Real Estate Inc, and was a speaker at the Society of Chartered Surveyors Ireland Annual Conference – Pillars of Professionalism.
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