Tag Archives: softening real estate market
By Lori Mcleod – Globe and Mail
Ontario will likely follow major cities in Western Canada into a decline in real estate prices, and while its slide should be shallower it will be more worrisome due to the province’s weaker outlook, an economist says.
The average price of a resale home in Canada fell by 3.6% last month, continuing a decline that started in June when prices lost ground for the first time in more than nine years, according to data released yesterday by the Canadian Real Estate Association (CREA).
So far, the drop in average home values has mainly radiated from Calgary and Edmonton, where July prices fell by 7.8% and 5.3% respectively from the previous year.
It wouldn’t be surprising to see prices in these and other large Western cities slump by as much as 20% in the near term in a correction of markets that got ahead of themselves, said Benjamin Tal, senior economist at CIBC World Markets Inc.
“You don’t have to be an economist to predict that prices will go down in Saskatoon and Regina, but in terms of the fundamentals all the pieces there are still fine – a healthy economy, energy boom and rising food prices,” Mr. Tal said. “Other than people who bought last year thinking prices would keep doubling over breakfast, most people there [Western Canada] should still end up ahead.”
Of more concern is Ontario’s softening real estate market, he added.
Hit hard by the slump in the auto sector, Windsor-Essex became Ontario’s first major market to post year-over-year house price declines. Toronto also appears headed for a drop, with prices rising a scant 1.5% in July, while sales fell by 12.4% and new listings surged by 17.8%.
“The concern here is that the potential decline in Ontario would not reflect overshooting, but instead the further slowing of an economy that is probably already in recession,” Mr. Tal said.
“While I would expect a more modest drop in prices of about 5% in Ontario and the GTA, prices have not risen as much here and the decline would be more painful.”
July’s 3.6% drop in the average price of a resale home in Canada came on the heels of a 0.4% drop in June, according to CREA. The average price stood at $327,020 at the end of July, compared with $339,277 in July, 2007.
Listings also remained near record levels in July, with 50,782 properties listed for sale in major markets. It is the second-highest level on record, and down a slight 0.2% from the peak hit in May.
A sharp drop in consumer sentiment helped push sales down 10.9% from the year before, and the latest figures drive home the impact that excess supply is having on prices, Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc., said in a research note.
“While we still doubt that Canada will stage an instant replay of the trauma in U.S. markets, even a mild version would be bad news,” Mr. Porter said.
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By Virginia Galt – Globe and Mail
The Canadian real estate boom is ending, but there is no “major correction” in the cards – and buyers are unlikely to see anything near the bargain-basement prices that currently characterize the United States housing market, the Bank of Nova Scotia said Thursday.
Canada Mortgage and Housing Corp., in its second-quarter outlook, reported Thursday that new home construction will begin to slow in 2008, “but remain high by historical standards.”
Both Scotiabank and CMHC said the Canadian housing market is fundamentally strong.
However, higher mortgage carrying costs “will be a catalyst for the decrease in residential construction to 214,650 units in 2008, from 228,343 in 2007,” CMHC said in its second quarter housing market outlook.
Bob Dugan, CMHC’s chief economist, added that most of the pent-up demand that built up during the 1990s “had now been fulfilled and residential construction activity will gradually move in line with Canadian demographic fundamentals.
“These factors will continue to exert downward pressure on housing starts, which will decline to 199,900 units in 2009,” Mr. Dugan said.
Scotiabank, looking at the resale market, reported that home resales – having fallen for four consecutive months – are running about 15% below last summer’s historic peak.
“Average annual home price appreciation has eased back into the mid single digits, as overall market conditions come into better balance,” according to the Scotiabank report.
“Adjusted for inflation, the average resale home price in Canada registered its first quarterly decline in seven years in the first quarter of 2008,” the bank said.
However, senior Scotiabank economist Adrienne Warren said in an interview that the softening real estate market is due to a “cyclical slowdown,” and the Canadian real estate market is “fundamentally stronger than the situation we’re seeing in the U.S.”
The cooling could bring eventually price relief to buyers, she said.
“The real estate market is becoming better balanced, so there will be more homes listed, which takes a little bit of pressure off prices,” Ms. Warren said.
“But it will take some time, and a number of years of fairly soft prices, in order to bring affordability back to the levels” that are typically seen at the beginning of an upward cycle, she said.
CMHC forecast that existing home sales, as measured by Multiple Listing Service, will fall by 8.5% in 2008 to 475,900 units, and the trend will continue in 2009, with a decrease to 465,000 units.
“Despite a slowdown in MLS(R) sales, demand remains strong by historical standards,” CMHC wrote. Average resale prices will increase by 5.1% to $323,000 in 2008, and by 3.3%, to $333,500 in 2009, CMHC projected.
In line with the CMHC report, Scotiabank noted that “cracks are appearing on the new home front as well.
“While housing starts in early 2008 are essentially tracking last year’s elevated levels, demand for new residential building permits has fallen sharply. Price increases for new homes are moderating, while inventories of unsold new homes are trending higher.”
Ms. Warren said she expects overall sales volumes in 2008 to be about 15% below last year’s record levels, and home prices to increase on average by about five%.
“Price gains should slow further in 2009 with the return of a balanced real estate market for the first time in a decade. Meanwhile, housing starts are projected to gradually moderate, returning toward underlying annual household formation levels of around 180,000 by the end of the decade, from the current 225,000 unit range,” Ms. Warren said.
The report also notes that the cooling in overall activity is most pronounced in many of Canada’s hottest urban real estate markets in recent years, including Calgary and Edmonton.
“Both centres have officially moved into buyers’ territory as soaring prices weaken demand and fuel new listings. More generally, however, economic conditions continue to favour the resource-rich markets in the West over manufacturing-dominated centres in Central Canada. Regina and Saskatoon are currently in the strongest sellers’ position nationally, supported by good affordability, rising population inflows and tight supply,” according to the report.
However, risk of a major correction is low, Ms. Warren said.
“Home prices in Canada are not substantially overvalued. Our long-term housing price model puts average home prices in 2007 at about 8% above their long-term trend, compared with a premium of 12% and 18%, respectively, at the 1976 and 1989 housing cycle peaks. Recent International Monetary Fund (IMF) estimates placed Canada at the bottom rungs of international home price overvaluation.”
Scotiabank also said in its report that Canada’s real estate market is not overbuilt.
“While inventories of unsold homes are trending higher, the number of unabsorbed units, including condominiums, remains well below prior cyclical peaks in most major centres. Tighter lending guidelines and high construction costs have likely contributed to a more cautious approach among builders.
Overall mortgage quality is still sound, Scotiabank said.
“Canada does not have ultra-low teaser rate mortgages that have contributed heavily to U.S. defaults as they reset. Adjustable-rate mortgages, sub-prime lending, borrowing against home equity, and insured investor mortgages all account for a much smaller share of the Canadian mortgage market than in the United States,” the report said.
At the end of the day, we predict a soft landing for the Canadian real estate market, with somewhat lower sales and construction, and a period of relatively flat inflation-adjusted home prices,” added Ms. Warren. “While underlying domestic housing fundamentals remain healthy, a major risk to the outlook would be a deeper and more protracted downturn in the U.S. economy, with more serious repercussions for domestic output, employment and income growth.”
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To stay afloat, new homeowners are forgoing vacations, putting off having kids and surviving on tuna sandwiches. They tell themselves it’ll all be worth it – if the Toronto real estate market doesn’t tank
By Rachel Giese – Toronto Life Magazine
With an initial budget of $500,000, Louise and Daniel* were in a better position than many first-time buyers. The first day of their search, their real estate agent took the two teachers—she’s 32, he’s 30—to 16 properties in Riverdale, Bloor West Village, and around Yonge and Davisville. What they saw was typical of the current market: renovated homes were out of their price range, and even clunkers were spurring bidding wars.
One fixer-upper at Mount Pleasant and Eglinton got 18 bids and sold for $120,000 over asking. After that, the houses began to blur. “We became really discouraged,” Louise says. “We thought, OK, we’re going to have to live in a shit hole. There’s something wrong when two people with good, stable incomes, with a tremendous amount of help from their families, and with very little debt can’t afford a reasonably nice house in the city. What are people without those things doing?”
Their budget inched up, first to $550,000, then 100 grand more. When they saw a detached house in Hillcrest, with its spacious bedrooms, modern kitchen and large yard, it felt like home. It was listed at $589,000, and there were two other interested buyers. Their agent encouraged them to make an aggressive offer of $647,000, a price that was just manageable because the house had a basement apartment they could rent out to help cover the higher mortgage payments.
On the night of the offers, Daniel and Louise sat in their car in front of the house, with their competition parked nearby. When the owners rejected the two top bids, the couple had to decide whether to go up or let it go. “Daniel asked me if I thought the house was worth $650,000,” Louise says. “I said that I didn’t think it was worth $250,000, but that’s not what houses are going for in Toronto right now.” They bid $650,000 and the house was theirs.
When they picked up their keys last November, they had few regrets, not even about the cost of the house. “Now we’re in the game,” Daniel says.
But they hadn’t moved in yet. They haven’t had their furnace die during a February freeze, or a tenant’s rent cheque bounce, or a slow leak from the dishwasher rot the floor joists. When you’re overextended by an irrational real estate market and barely making mortgage payments, the smallest house repair can push you over the edge.
Toronto’s seemingly unstoppable real estate market has transformed us into real estate hawks, circling open houses, desperate to find a darling fixer-upper in the last affordable neighbourhood before interest rates go up or prices rise, or both. Every few months, economists dispel rumours that the real estate market‘s nearly decade-long hot streak has finally peaked.
Sandra Rinomato, a real estate agent and host of the HGTV Canada reality show Property Virgins, is resolutely optimistic. “The predictions of a softening real estate market were wrong,” she says. “If you look at Bloor West Village, in the fall of 2006 you could get a house there for $400,000. By January 2007, it cost you closer to $470,000; 2007 started off with a bang and didn’t slow down.”
In 2007, the average home price in the Toronto area was $415,041, up 10% from 2006. Over the past decade, the average price of a Toronto home has risen a whopping 82%. Low interest rates, appreciation, a growing desire among the commute-fatigued to live closer to downtown, and flexible mortgage options have combined to create a market where houses in prime neighbourhoods are routinely selling 50 or 60% above asking. In July 2007, a four-bedroom, 2,000-square-foot house in the Beach sold for $1.295 million – almost double the sticker price.
No wonder, then, that Toronto is also becoming the city of the house rich and cash poor. Though housing prices are rising faster than incomes – meaning first-time buyers with little equity are taking on big debt loads and longer term mortgages – there remains a jumpy compulsion to get into the real estate market no matter what it takes.
Carrying debt used to come with a stigma, but that’s all changed. “Now we’re living in a society where we joke about working till we’re 90 to pay off all our debt,” says Laurie Campbell, the executive director of the non-profit counselling organization Credit Canada. “I think we’re going to see more and more people unable to retire because of the high debt they’re carrying, principally mortgages.”
The country’s overall household debt amounts to 115.7% of personal disposable income—up from 72% in 1990. Some of the blame for that can be pinned on fears about the runaway real estate market in cities like Toronto and Vancouver, and on mortgage companies who approve greater loans than their clients can afford to carry.
“I started with this agency in 1990,” says Campbell. “We had a huge number of people coming to the organization who were in mortgage arrears. Interest rates were all over the place, and the real estate market had taken a dip. In the late 1980s, the market had rocketed right up like it has now, and people had that same fear: If I don’t get in right away, I’ll never get in. We saw the fallout of that in the early 1990s with the recession.”
The pressure of the Toronto real estate market has been heightened by the practice of under-pricing. “I’ve seen houses where there are 21 offers,” says Toronto real estate agent Kim Kehoe, who specializes in the neighbourhoods of High Park, Parkdale and Roncesvalles. “It pushes buyers to put in bids they can’t afford because they’re making decisions with their emotions. And a string of losing bids can make people extend what they can spend.”
* Not their real names
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