Canada's Housing Boom Over

A year or so ago, selling a house in most of Canada's major markets was not a significant challenge. If you lived in a city with a strong economy, the selling price was heading in one direction only - straight up, usually in double-digit leaps every year.

But the most recent reports suggest the boom times are over.

Prices have already begun falling in Calgary and Edmonton after a couple of years of breakneck growth, and prices for the country as a whole were up just 1.8% year-over-year in May. Between the beginning of January and the end of May, 202,899 homes had been sold nationwide through the multiple listing service (MLS) compared with 233,213 in the same period last year - a drop of 13%.

It as a move towards a more balanced market, but with new listings coming in at a pace more than double the number of houses sold, analysts say it is clear that a slowdown has begun.

The combination of significantly higher listings, reflecting the desire of homeowners to take advantage of the past increase in prices, and weaker demand, due to the past erosion in affordability, are leading to declining sales and softer price performance across the country, but particularly in the west.

It all comes down to a simple matter of supply and demand. On the supply side, past price performance has strongly encouraged additional supply in both the new and existing home markets. Housing starts averaged a strong 234,000 units in the first quarter. While we expect new home construction activity to remain robust, starts should gradually edge down to a lower level of around 200,000 units over the course of the next 18 months.

We had anticipated an increase in new listings as a result of solid price gains in the last couple of years, but the recent surge in new listings has been far greater than anticipated. The jump in supply of homes for sale is assuredly an attempt to take advantage of the past home price appreciation on the part of homeowners and real estate investors.

The Canadian situation is far different than that in the U.S., where the housing market is in full retreat and prices are plummeting in a number of major markets.

It should be stressed that the rise in listings does not reflect homeowners of principal dwellings desperate to sell, and this is the dominant difference between the Canadian and U.S. experience.

In Canada, speculators may be quickly dumping properties on the market to get out while the times are good, but individuals that have a principal dwelling are not under financial duress. This distinction is crucial to evaluating the impact of weaker home price performance on personal wealth and consumption. Canadian consumers are also nowhere nearly as leveraged through their home equity as American consumers are.

There can be no doubt that housing prices are due for a correction in Canada, with the country's economy growing wobbly and prices in several markets peaking after six years of rapid growth.

Nationally the average house price increased less than 2% year-over-year in May. We are getting close to slipping under water. I expect to see negative growth figures at least for the next few months. Housing markets have a lot of inertia. Once they start to move they can go in that direction for several years. The market was flat on its back for most of the 1990s.

Looking ahead, flat sales and prices "may be the best-case scenario, at least for the next year or so. The Canadian economy is anemic and it will probably be like that for the rest of the year.

Canada's housing boom is getting long in the tooth. "It has been with us for six years running. We have already seen prices start to fall in Edmonton and Calgary - cities where the prices rose too rapidly. And they are down in Windsor because of that city's economic slump.

Given that Canada's economy is weakening there is room for prices to decline further. But, there is little chance of a U.S.-style bust in Canada. Our housing market is on a firmer foundation.

Nor does it mean that Canadians should rush to sell their homes. Owning a home generally makes more sense than renting. But as for investment properties, we probably wouldn't recommend it.

Canadian Housing Market Not in a Bubble

Canada's housing market does not appear to be in a bubble and is supported by sound fundamentals.

Canada appears not to be in danger of following the U.S. into a housing market meltdown.

The Canadian housing market does not appear to be characterized by excess supply at this time. The proportion of unoccupied, newly built dwellings in most cities remains below historical averages, suggesting that a major widespread reversal in house prices is unlikely in the near term.

The recent downward trend in building permits suggests supply is adjusting to softening demand and, importantly, the Canadian mortgage market is in reasonably good shape.

The Canadian 'subprime' mortgage market accounts for less than 5% of the residential mortgage market, and might be better characterized as a 'near-prime' market, with quite different lending standards than appear to have been applied in the United States.

However, Canadians cannot afford to be complacent and that they need to remember house prices can go down as well as up.

It wasn't that long ago - in the late 1980s and early 1990s, to be exact - that Canada experienced its own real estate boom and bust. It took a decade after that before we saw activity pick up and real prices increase. More recently, of course, we have seen in this part of the country a strong housing market cycle.

Residential investment has averaged about 6% of GDP over the last decade, with about one third devoted to renovations. Some 68% of Canadians are homeowners and real estate accounts for more than $2.2 trillion, or 37% of total household assets in Canada.

A number of factors can influence housing prices in addition to supply and demand such as innovations in financing and policy. Policy-makers and financial market players must be wary of new financial products and ensure that they do not distort the market and really do make markets more efficient.

While Canada has escaped many of the problems of the U.S. mortgage crisis in part because of a more conservative mortgage environment, increasing use of extended amortization periods could have a dramatic impact on the personal wealth and savings of Canadians and new no-money down or low deposit mortgages can also encourage speculative behavior, which can also distort real estate markets.

Home Listings Flood Housing Market in Canada

A fresh flood of homes on the market sent resale listings to their second consecutive record level in May, while sales activity and price gains both cooled.

There were 54,029 new listings of resale housing units in major markets last month, a 2.2% increase over the seasonally adjusted record hit in April.

On an unadjusted basis, listings rose to 67,628 units, up 7% from May 2007.

Unlike listings, year-over-year sales levels fell in 18 of the 20 markets in the study for which data were available. Information was not available for the Quebec markets because geographical areas in the province are being redefined.

Unit sales across Canada dropped by 17% this May from the year before on an unadjusted basis, and by 0.5% compared with April, 2008, on a seasonally adjusted basis.

Prices edged up 1% in May from the year before to $337,071, a new record for the average price, but the smallest such increase in more than seven years.

Rising food, fuel and home prices are denting consumer confidence. Increasingly cautious home buyers may keep listings on the market longer before being sold, which increases the importance of realistic pricing.

The most dramatic surges in new listings occurred in Saskatoon and Regina, a marked reversal from earlier in the year when they were the country's tightest markets in terms of supply.

New resale listings rose by 58% in Regina and 44% in Saskatoon year-over-year in May. During the same month, year-over-year sales fell in those markets by 28% and 37% respectively.

This pattern has already been seen in other markets including Calgary and Edmonton, where tight supply and soaring prices have given way to a cool-down.

Listings in those markets are now retreating from the peak levels reached in March as the market readjusts, with listings up 1% in Calgary and down 9% in Edmonton from the year before.

It is now becoming increasingly clear that the Canadian housing market is gradually cooling off, with the decline in activity in the West particularly pronounced,. However, we believe that the sector will remain in reasonable shape, and will avoid any U.S.-style housing correction.


Other data included in the report (all figures compare May, 2008 with May, 2007):

– Markets with the largest increases in listings: Regina (+58%), Saskatoon (+44%), Greater Vancouver (+20%), Victoria (+20%), Sudbury, Ont. (+16%), Ottawa (+16%).

– Markets with the largest drops in listings: Edmonton (-9%), Windsor-Essex (-6%), Newfoundland and Labrador (-6%).

– Markets with the largest decreases in sales: Saskatoon (-37%), Edmonton (-35%), Calgary (-33%), Greater Vancouvejavascript:void(0)
Publish Postr (-31%), Regina (-28%).

– Markets with increases in sales (2 of 20): Newfoundland and Labrador (+5.5%), Ottawa (+2.5%).

– Markets with the largest increases in unit price: Regina (+45%), Saskatoon (+29%), Saint John (+22%), Newfoundland and Labrador (+21%).

– Markets with decreases in unit price (3 of 20): Windsor-Essex (-6%), Edmonton (-5%), Calgary (-2%) .

US Housing: It'll get worse

With home prices plunging by more than 30% in some markets, bargain-hunters are ready to pounce.

But it may pay for buyers to wait. Many housing experts say that the worst-hit metro areas have even farther to fall, and could see total drops of as much as 50%.

The housing boom was unprecedented in U.S. history, and the correction will be as well.

Many erstwhile bubble cities have sustained particularly brutal hits. The median-price of a home in Sacramento, Calif. was down 35% during the three months ended May 31 compared to the same period last year, according to the real estate web site Trulia.com. In Riverside, Calif. prices fell 29%, while San Diego prices dropped 26%.

Smaller cities in California's Central Valley, such as Stockton (-39%), Modesto (-37%) and Bakersfield (-29%), also recorded steep declines.

Outside California, hard-hit markets include Phoenix (-18.8%), Las Vegas (-22%), West Palm Beach, Fla. (-32%) and Cape Coral, Fla. (-35%).

Youngblood expects that these markets will likely endure total price drops of 50% or more.
The smart money

Indeed, prices are falling faster and further than in any other post-war housing bust. During the bust in Austin, Tex., which started in 1986 and is one of the worst on record, prices fell 25%, according to Local Market Monitor, a financial data provider. And that cycle took four years to bottom out.

In other major downturns, prices in Los Angeles fell by 21% during a six-year period in the 1990s, and Honolulu home prices saw a decline of 16% in the five years starting in 1994.

Youngblood's forecast is quite plausible, it especially significant that the smart money, investors in the S&P Case/Shiller Home Price Index, are still buying futures as if they expect prices to continue to plummet.

The index, which tracks the sale price of specific homes as they are sold and resold over the years, is considered to be one of the most accurate home price indicators.

The people who are putting their money where their mouths are betting on more losses.

Specifically, Case/Shiller investors are betting that Las Vegas prices will fall an additional 22% by November 2009. Los Angeles futures predict a loss of 24.2% through November 2009, while investors expect to see Miami down 21.6% by then.

These markets may have a hard time recovering because, according to Perna, people are afraid to buy right now, because they're concerned about over-paying. That helps explain why price depreciation seems to be accelerating.

The most severe declines are happening right now.

This correction was inevitable, in Youngblood's opinion; home price gains had simply out-paced income by far too much to be sustained.

Historically, home prices have averaged about four times wages. Whenever homes got significantly more expensive, people could not afford to buy and home prices fell back.

But local price-to-income ratios are still out of whack even after steep price declines, which means prices have further to fall. In Los Angeles, where the ratio peaked at 22.7, according to Youngblood, it's still in the high teens. Home prices would have to come down another 40% or so to get that ratio back into the single digits.

And it's not just the housing fundamentals that lead Youngblood to expect more drops; he also cites the local economic conditions.

Bubble cities are now seeing fleeing employment conditions. In Miami, the unemployment rate rose 34.3% between April 2007 and April 2008, according to Youngblood. And the job picture in California cities, where many jobs were housing related, has been even more disastrous.

Housing was a key economic engine for towns like Riverside, Stockton and Modesto during the boom, according to Zandi. Builders, real estate salespeople, mortgage brokers and lenders, and even retailers, like Home Depot and Lowe's , depended on growth in the sector.

In all those deteriorating housing markets, it's a double hit.

Ten of the 11 cities with the highest unemployment rates in the nation are now in central California, with El Centro, at 18.4% in April, leading the way. Other double-digit disaster areas were in Merced (12.3%), Yuba City (11.8%), Modesto (10.7%), Visalia (10.3%), Hanford (10.2%) and Fresno (10%).

Many of these cities are also among the leaders in foreclosure rates. As more foreclosed properties hit the market, prices are further depressed.

The price drops reflect a wave of distressed sales of bank-owned properties and discouraged sellers.

Not all analysts are pessimistic. Richard DeKaser, chief economist for National City Corp points out that, thanks to the price declines, the national market is the most affordable it's been in years.

With the national median price of a single family home at $204,229, mortgage rates around 6% and the average household earning nearly $50,000, the average home buyer spent about 23.2% of their income on housing during the first quarter of 2008. That's down from 2006, when homeowners spent an average of 29% of their income on housing.

While he expects home prices to stagnate for the next five years, Youngblood's 50% price decline forecast is a little extreme.

But that target is realistic, after taking inflation into account. In markets where prices have fallen 35% or more, and remain depressed through five years of 4% inflation, home prices in real dollars will absorb an additional 20%-plus hit. That would push price declines to over 50%.

Of course, there are plenty of wild cards that could affect home price trends, such as the election, Congressional legislation, unemployment, gas prices, and interest rates.

Ottawa's Housing Sector to Tighten in 2009

Construction activity in Ottawa is expected to rise this year, but slower-than-expected economic growth will cause housing starts to drop in 2009.

Total housing starts are expected to increase by 6.1% in 2008 to 6,900 units, with particularly strong activity in the condominium apartment sector, which will reach 1,700 units by the end of 2008. The gain will mitigate the expected drop in the construction of the more costly single-detached units, which are anticipated to drop to 2,750 units from 2,973 a year earlier.

However, sales of existing housing in Ottawa are expected to decline year-over-year by 8.4% to 13,500 units, while the average price growth of a resale home will outpace inflation, rising by more than four per cent to reach $285,000.

The already tight rental vacancy rate is expected to continue its downward trend this year, narrowing further to 2% from 2.3%, fuelling an increase in average rent to $980 from $960.

While the pattern for the rental market is anticipated to extend into 2009, local construction activity is expected to be hit by a province-wide slowdown in housing demand.

A rise in mortgage carrying costs and slower economic conditions will dampen housing demand, particularly among first-time buyers.

However, demand for modestly priced housing will hold up better as declining employment opportunities in higher-paying employment sectors encourage demand for both apartment ownership and rental accommodation.

As a result, housing starts are expected to drop 7.2% to 6,400 units next year, with single-detached housing bearing the brunt of the loss, plunging 9.1% to 2,500 units. Housing sales will drop by roughly 1.9% to an estimated 13,250 units.

Meanwhile, the average price tag for an Ottawa resale home is expected to rise 3.5 % to $295,000, and the rental vacancy rate is forecast to drop to 1.7%, with average rent rising to $1,000.

More Canadians Struggle To Pay For Housing

The number of Canadians paying 30% or more of their household income on shelter has increased. Many of these are homeowners. 1.5 million renters pay 30% or more of their
income on housing. This percentage has risen since 2001.

The increase in the percentage of Canadians paying more than they can afford for housing is a clear indicator that housing conditions for low-income Canadians will not improve until there is a cohesive national plan of action. Today's census figures paint a picture of the failure to provide affordable housing to thousands of Canadians across the country.

Things have grown worse, not better since 2001 despite years of economic growth in Canada.

Several segments of the population are struggling to pay for housing. In 2006, 40.3% of all renter households were paying more than 30% of their income on rent. More than half of all renters living alone pay more than 30% of their income on housing. This figure has increased since 2001, from 50.1 to 51.6 %. Immigrant households faced higher increases in shelter costs than the Canadian-born population, but lower increases in income.

Lower-income Canadians are struggling more than ever to pay for their housing. Ottawa needs to take a leadership role in developing a national affordable action plan, in
consultation with the provinces, territories, municipalities and major housing
stakeholder groups. The Conservative government has been in power for nearly 2.5 years, and the number of Canadians paying more than they can afford on housing has increased. A positive first step would be for the federal government to provide some predictability for affordable housing providers, such as non-profit housing co-operatives, and immediately renew the major national housing programs that are set to expire on March 31, 2009, less than one-year from now.

Housing rents rise 1.5% in Ottawa

Rents are rising in Ottawa and also in Gatineau. But well below the national rate.

The average monthly rent for a two-bedroom apartment rose 1.5% in Ottawa to $957 per month and up 2.2% in Gatineau to $674.

The vacancy rate in Ottawa was stable at 2.2% while the vacancy rate in Gatineau rose to 4.1% from 2.8% a year earlier.

Nationwide, rents rose an average of 3.6% compared to a year earlier, driven by increases as much as 21% in hot cities like Saskatoon, Edmonton and Regina.

Excluding these fast-growth centers, rents rose an average of 2.3%.

The average rental apartment vacancy rate in Canada's 35 major centers decreased slightly to 2.6% in April 2008, from 2.8 per cent in April 2007.

The Canadian economy remains very supportive of strong demand for both ownership and rental housing thanks to solid job creation and healthy income gains.

High levels of immigration and the increasing gap between the cost of home ownership and renting continue to drive rental demand in 2008. These factors have put downward pressure on vacancy rates over the past year.

Ottawa to Give $$$ to Social Housing & Rural Roads

Ottawa city council committee is recommending that $17.1 million in provincial funding be allocated towards improving social housing and rural roads, instead of putting the money in the bank, in response to pressure by advocates.

The city's economic affairs committee committed $7.1 million towards improving the stock of low-cost housing in Ottawa, and $10 million towards improving rural roads.

The funds are part of a one-time $59-million transfer payment from the Ontario government, which city bureaucrats had recommended be put into the municipality's bank account in order to stabilize property tax rates.

Social housing advocates had objected to the initial recommendation to put the money in the bank, saying that thousands of people are on the waiting list for low-cost housing space and the available stock is in poor condition.

Meanwhile, West Carleton-March Coun. Eli El-Chantiry introduced a motion that $10 million of the $59 million be earmarked for rural roads, saying that the city needs to spend about $85 million on road repair, maintenance and new construction.