The Real Estate Market In Canada And In The US

03/20/07 09:38:12 AM

by Koos van der Merwe

The real estate market may be in trouble in the United States, with house prices dropping and mortgage companies that gave risky loans facing serious problems, but in Canada, it is still up, up, and away.

Security: RTRE-T
Position: Hold

The press is full of it. Ex-Fed head Alan Greenspan cannot stop talking about it, and the markets have fallen because of it. Lenders bought into the myth that US housing prices couldn't drop, and buyers bought and bought, lured by subprime lenders who targeted home buyers with a poor credit rating and high debt.

"Wall Street failed to understand that poorly underwritten mortgages would make the market more volatile," said Ms. Wachter, a lecturer of real estate finance at the Wharton School of the University of Pennsylvania.

But what about the Canadian real estate market? Prices in Canada have risen in the same spiral that US prices rose, but where buyers in the US were coaxed into buying by the wild, wild West of the mortgage world, in Canada, mortgage companies remained cautious and stuck to their conservative rules. House prices have risen astronomically, in many instances doubling in two to three years, but mortgage borrowers have not overextended themselves and fallen into financial difficulties. Many buyers who bought to flip may have difficulty in selling, but probably not for long. If interest rates fall as the market falls this could be their savior. This is shown in Figure 1, a weekly chart of the Canadian REIT Index.

FIGURE 1: CANADIAN REAL ESTATE INDEX, WEEKLY. The wave count shows that the index is a fourth-wave correction.

Graphic provided by: AdvancedGET.

Figure 1 is a weekly Elliott wave chart of the S&P/TSX Canadian REIT index. The wave count shows that the index is in a fourth-wave correction, targeting either 158.86 or 146.19 with a probability factor (PTI) of 82%. The chart is suggesting that the wave count could still be in a third-wave rise, and that the target of 216 could be a third-wave top and not a fifth-wave top. This will only be finalized when the fourth-wave bottom is set.

Based on this information, the Canadian real estate market will likely decline alongside the US market as shown by the index, but not to the same extent. The index appears to be in a short-term correction with a very bullish long-term future. Based on the analysis, I suggest buying the index as and when the fourth wave is complete. Better yet, buy the Canadian real estate investment trust (UN -T) as an alternative as it is falling alongside the REIT index shown.

FIGURE 2: CANADIAN REAL ESTATE INVESTMENT TRUST, WEEKLY. The market may decline alongside the US market, but not to the same extent.

Graphic provided by: AdvancedGET.

The real estate investment trust is not bound by the recent "Tax on Trusts" announced by the Canadian Minister of Finance; it is falling simply in line with general market sentiment. Figure 2 shows that it is also tracing a fourth-wave retracement, with a 79% probability and a fifth-wave target of Canadian $42.39. The REIT is paying a 3.91% yield at the moment, which will rise as prices drop.

Definitely a good investment as the price reaches and confirms the low of the fourth wave. The falling RSI will confirm a buy signal as it reaches oversold levels.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.