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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (43230)	4/9/2006 10:06:24 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 69852

Local real estate in for soft landing GETTING TECHNICAL \| The Great 1997-2006 price advance is over, says columnist Bill Carrigan Apr. 9, 2006. 01:00 AM BILL CARRIGAN From time to time I use this space to study GTA resale housing prices because I believe any residential real estate is an investment asset much like equities and bonds. Modern portfolio theory suggests that an investment portfolio should contain a mix of asset classes that have some degree of inverse correlation. In other words, we need a mix of some financial, some industrial, some consumer, some utilities and some materials. The materials sector would include the shares of companies related to hard assets such as base metals, gold, forest and steel. Your investment in a home, whether a principal residence or rental property, should be considered a "hard" asset and therefore is somewhat commodity sensitive. Like a commodity, home ownership provides some protection against inflation and a falling local currency, and it is a beneficiary of local economic growth. Last week there were several studies released concerning the condition of the Canadian housing market. A Merrill Lynch study claims that although the U.S. housing market may be rolling over, virtually all Canadian cities remain undervalued (with the exception of Victoria) and could see annual price increases of 4.2 per cent on average through 2010. The study runs contrary to the current wisdom that Canada's housing market is heating up. Another study from Royal LePage Real Estate Services claims the Canadian housing market did heat up in the first quarter. A TD Economics study dated April 4, 2006 — "The Great Divide: Speculation picks up in the West, soft-landing unfolding in central Canada" — proclaims, "Canada's housing markets remain robust in early 2006, despite slightly higher mortgage rates. "With new listings hard pressed to keep up with the elevated level of existing home sales, real estate conditions are relatively tight in aggregate," it continues. "As a result, the national average price of existing homes continues to climb at a vigorous pace, rising in the first quarter at an estimated 10 per cent year over year — not much different from the national average experienced over the past few years and well above any assessment of a sustainable rate. "However, like so many other recent economic indicators, these national figures significantly mask a great divide emerging from a regional perspective." In a nutshell, TD Economics is saying that prices for homes east of Manitoba are now experiencing softer growth than the national average. Those markets could experience a "soft-landing" in price growth because they did not previously experience a speculative bubble that required a correction. In Western Canada, where housing conditions remain tight, markets are overheated. "Activity has become so intense that home-price growth has accelerated to over 20 per cent in year-over-year terms in some markets. Much of this outsized growth can be attributed to surging commodity prices. "However, when economic conditions are booming, it can also create the perfect breeding ground for speculative price bubbles to form. That's because in such an environment, housing market participants are at greater risk of developing a case of `irrational exuberance,' especially if they expect that such exorbitant price gains will continue indefinitely." TD predicts a soft landing for the Toronto and Ottawa markets. They note that mortgage rates remain near historical lows and, despite some recent modest increases, the "soft landing" in Toronto and Ottawa housing markets has already begun to occur. They reason that no major correction was needed in these regions because there was no previous housing bubble. Our chart this week plots the monthly Toronto District Single Family House Resale Price above the monthly On Balance Unit Sales (OBUS). When a technical analyst studies a chart, he or she must determine several important conditions. We need to know the trend, we need to know if the trend is supported by volume and we need to know when there is a change in trend. Currently the price is trending higher because the price has remained above its long-term (two-year) moving average since mid 1997. At this time, there is no change in the upward trend. The current price of $353,134 remains about 7 per cent above the two-year moving average of $329,978. Most worrisome is the negative divergence between the resale prices and the OBUS. The OBUS number is based on the relationship of price changes relative to unit sales changes. When the price advances, we also need to see the OBUS number advance, and from early 2005 until now, OBUS numbers are lower as noted at (2) and again at (3). Technically the great 1997-2006 price advance is over and a reasonable scenario is for prices to drift into the mean or long-term moving average, giving us that healthy soft landing. Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Sunday. He can be reached at gettingtechnical.com on the Internet. Additional articles by Bill Carrigan Get Copyright Permissions Click here for copyright permissions