Realestock Blog

The price of a new house in Canada rose slightly, prompting more and more people to worry that Canadian homes may be overvalued.  According to Statistics Canada, the housing price rose 0.2% in September, greater than the originally forecast increase of 0.1%.  Rapidly increasing prices over the past decade, including the 2009 recession had  increased speculation recently that Canadian housing could be caught in a bubble.

Montreal and Calgary lead the price increases, as developments in new areas brought slightly higher construction costs, which were passed onto the consumer.

In spite of bubble fears it's important to note that housing prices rose in only 10 of 21 Canadian cities, and housing starts fell 9.2% - the lowest rate in over a year, and the sixth straight month of declines.

In a move not typical for BC prices, Vancouver and Victoria actually contributed to keep the increase down, as both cities - typically known for their white-hot, and according to some skeptics, overvalued property prices - saw a 0.4% decline in housing prices between August and September. In Victoria, home of Realestock, prices have declined slightly both month over month, and year over year - a new home costs 0.6% less now than it did 1 year ago.

Overall though, the average price of a new house in Canada is still 2.7% higher than it was in September 2009, with the strongest year on year gains the cities of Toronto, Montreal, Oshawa and Vancouver.

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The Royal Bank of Canada has raised serious concerns that for most people housing is simply too expensive in Vancouver.  

On Monday, RBC released its quarterly report on housing and affordability. According to the report, on average, the typical Canadian homeowner spends 48.9 percent of their household income on servicing the mortgage on a median two-storey home – an increase of 2.1 percent overall due to rising mortgage rates.  

However, in Vancouver it’s a very different story – the proportion of income required to service the mortgage on a median two-story home or a detached bungalow (a smaller starter home anywhere else in the country) has risen to an astonishing 70 percent.  The situation is not much better for owners of apartments or condominiums – servicing the mortgage on a condo consumes 43 percent of household income.

The report singled out Vancouver’s white hot housing market, but it wasn’t to pass around congratulations: "RBC housing affordability measures are very close to their all-time high, which points to significant underlying stress and raises a red flag," said RBC Economist Robert Hogue. “Generally we have dismissed the case of housing market bubbles in Canada, but the situation in Vancouver is probably the closest to one in the country.”

This means the market could take a big hit unless the pressures ease - "very poor affordability is likely to restrain demand in the period ahead," said Hogue. According to the report, BC and Ontario saw the worst deterioration in housing affordability as prices neared the record highs seen in 2008.

Photo: Even condos in Vancouver may be out of reach for most homeowners. Credit: Beaster725, Flickr

Sources: Bank Raises Red Flag Over Housing Affordability, The Vancouver Sun; House Costs Near Record High in BC, The Province; Housing Becomes Less Affordable, The Globe and Mail.

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Well known for having the hottest real estate market in Canada, Vancouver defied market trends, with the average prices increasing despite the worldwide recession. Famous for incredible mountains, a strong economy and being an olympic host city.

What do you get for $1,000,000?

If you’re looking for a home to call your own in Vancouver without moving to the suburbs or the rougher east side, and all you have to spend is a million, you’ll be looking at a fairly modest house pretty far away from downtown. The better bet is on a condo - in the million dollar price range, you can get yourself a two bedroom sub-penthouse in the tony Yaletown district.

Trendy Sub-penthouse Condo - Vancouver

Size: 1049 sq feet

Bedrooms: 2

Bathrooms: 2

Price: $999,900 CAD

Tokyo, Japan

The original housing bubble economy, Tokyo real estate is expensive because the city is incredibly crowded - over 8 million people live in the city proper, but adding all the outlying suburbs and towns that are connected by the massive rail network swells that number to a mind blowing 30,000,000 people. With so many people wanting to live in a limited area, real estate is valued above all else.

What do you get for $1,000,000?

A surprisingly large apartment in Kagurazaka - a neighbourhood in the classy, ultra-modern and fashionable Shinjuku Ward of Tokyo. Kagurazaka boasts tree-lined streets, some of the best traditional Japanese restaurants in Tokyo, and lots of of history - the area was home to geisha and artists in the 18th century. Watch out for the extra fees though - parking, building management and maintenance fees are an extra $1,300 a month!

Modern Family Home - Tokyo

Size: 125.55 sq m (1,351 sq feet)

Bedrooms: 3

Bathrooms: 1

Price: ¥89,500,000 (or about $1,002,129 CAD)

Seattle, Washington, USA

Seattle - the home of high tech companies such as Amazon and Microsoft, and the birthplace of the global obsession with good coffee. Despite its high tech industry, Seattle is delightfully down to earth, filled with funky, hole in the wall eateries and friendly people.

What do you get for $1,000,000?

A brand new apartment right the middle of downtown with a waterfront view - and only a few blocks from the internationally famous Pike Place market. The Fifteen Twenty-One Second Avenue condominiums have floor to ceiling windows, high end appliances and all the amenities that you’d expect to have in a million dollar apartment in one of the best and most exciting parts of Seattle.

Brand New Downtown Digs - Seattle

Size: varies (from 1,787 sq feet)

Bedrooms: varies

Bathrooms: varies

Price: $1,000,000 USD + (or about $ 1,032,680 CAD +)

Paris, France

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The general consensus seems to be that the Canadian Real Estate Market is still one of the least disastrous markets worldwide. However, this doesn’t mean that this is a secure market. Sale prices are declining like everywhere else, and the current semblance of stability is only related to the fact that Canadian lenders and banks were, in previous times, much more conservative than lenders in other countries.

However, the market in Canada is by no means in the same state as it was a few years ago, which is obvious than when you look at a city like Vancouver, British Columbia. Vancouver had some of the most insanely hyper-inflated prices in the last few years, and so now that are fewer buyers, there are a distinct lack of properties being sold, and those that do sell, sell low.

On Friday in the Globe and Mail, Kerry Gold wrote an article misleadingly titled ‘First Time Buyers Drive a Rebounding Market” as it also talks about buyers who are upgrading, as well as those who are first time purchasers. One interesting point about this article, is the reminder that there are certain types of buyers who will always exist in any market, and will be the ones who will stop the it from going into complete cardiac arrest. This is, of course, as long as they are not completely scared off by the onslaught of negativity that currently invades the real estate market. Just joking:

1) First Time Buyers: If you are a first time buyer, this is a great time to get on the first rung of the ladder – but only if you are brave enough to take the plunge, and can get a mortgage. Prices are low, mortgage rates are low, and now with tax advantages ahoy, this is the best opportunity that you’ll get for a while!

2) Growing Families: When one’s family starts getting bigger, the need for more space necessitates the move to a bigger place. Last time I checked, people hadn’t stopped having children, and again, if you bought a while back, you’ll have equity in your property, and upgrading in a low market will not make much of a difference

3) Empty Nesters and other ‘downgraders’: At the other end of the scale, there are people downgrading. As long as one is moving within the same or a similar market, downgrading is not a big problem, as the gap between your lower priced large home, and your lower priced small home should be pretty similar.

4) People who are Relocating: When the job market is not secure, people will move where the jobs are, so this market is almost certain to generate a good deal of relocation. As this is born out of necessity, these people buy and sell in any market!

While this is not entirely newsworthy, it is worth remembering that these kinds of buyers exist in every market, so whatever the economy situation, there will still be these kinds of buyers to keep things going. Think of them like the superman of buyers...come to save us all from certain disaster. Which in the current bad news market is a little piece of good news. Shock horror, eh?

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In this week's Globe and Mail, the title “B.C. Housing Market in Deep Freeze” caught my eye. To me, deep freeze is not such a terrible thing. For example, say I bake a really delicious pie, and I can’t eat it all. I might not want to eat it that evening, but I still intend to eat it sometime, so I stick it in the deep freeze and defrost it a few weeks later. Granted, it’s not quite as delicious as it was when it was fresh, but it still tastes pretty good.

According to the Globe and Mail, new developments in Vancouver, and across BC seem to be stalling, or stopping completely. Vancouver developer Ward McAllister talks about the fact that no-one appears to be beginning new projects in 2009.

The article goes on to talk about a variety of different opinions as to how this year will play out. Some say that by the end of 2009 the housing market will have returned to some kind of normality, while others are being more conservative, and saying that we have a few more years yet. Many are suggesting that there will be no upturn until a year from now around the time of the Vancouver Winter Olympics in 2010. That’s a long time if you are depending on building-related work. It is estimated that one in ten people in BC works in the construction industry, or in a job related to it. Therefore we are not just talking about obvious job losses, for people like welders, bricklayers or foremen, but factory workers who produce materials, or marketing people who work for developers, or the developers themselves. If there are not any new builds in 2009, there are a number of people who will directly suffer, and then the trickle down will indirectly affect us all.

Some solutions as to what developers and others in construction can do to are mentioned in this Globe and Mail article. They include:

· Building rental apartments

· Selling the land meant for condo developments and such to BC housing, to see if they might want to use the land for public housing projects

These are great ideas. Whether BC housing will take them up on the land offer (if everyone is trying it, then probably not) is debatable, but the idea of building rental apartments is an awesome idea. According to an article I read in Forbes a while back, housing and building supplies are coming down in price, so developers could use these now less expensive materials to build decent apartment housing (a rarity in many BC cities, I’m talking about you, Victoria) which will provide an income, and can be sold when the market upturn happens, whenever that is.

The Globe and Mail talks about some developers who have made enough money in the past to ride this out. Many of them are planning more complex, intensive sites, which require more permits and planning than regular condo developments. Planning for the future is another good way, as long as one can afford it, and still be around when it comes to building it!

In terms of terrifying headlines, in my opinion ‘deep freeze’ is better than ‘recession’ ‘downturn’ ‘crash’ and my personal favourite ‘depression’. It implies that that pie is going to be in the freezer for a long time, but eventually, we’ll be able to defrost it, and get on with things…and I for one am getting the ice cream ready.

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Many people incorrectly believe that all of the bad news about homeowners defaulting on their mortgages mostly relates to the United States. Although there are obviously a lot of people who are losing their homes in the US, other countries are not immune to similar problems. The United Kingdom for one, is looking a number of house repossessions (as we Brits call it) and possibly even a longer recession period than the US. Problems in the UK have been partially exacerbated by scary mortgages like the Northern Rock’s ‘together’ mortgage where you can borrow 125% of your home’s value.

Here in Canada we have been lucky that our banks and mortgage lenders have been more conservative. However, this does not mean that here in Canada we are immune to these problems. Although foreclosure rates are much lower, the country as a whole is experiencing higher unemployment, which means that many, through no fault of their own, are losing their homes.

In the Globe and Mail this week, it was announced that Canada Mortgage and Housing Corporation, in partnership with a number of major Canadian banks, will be bringing forward measures to help homeowners BEFORE they get into trouble or behind on payments. Banks will be calling, mailing, and emailing customers to let them know about various ways that they can help them manage their mortgages better. These include:

· Converting a variable rate mortgage to a fixed rate one, so to avoid sudden interest rate increases

· Offering a temporary short-term deferment of payments

· Offering payment flexibility

· Extended the term or amortization period of the loan. While the 40 year loan was gotten rid of months ago, there is still an option to have 30 or 35 years, and if you have a 25 year mortgage, that’s quite the monthly savings (although much more expensive in the long run…)

· Negotiating special payment options on a client to client basis

· Adding any missed payments to the balance of the mortgage

I think this is a fabulous idea. All of the riskier 5% or less down loans (and I use the term risky loosely, because plenty of young, first time buyers could only afford to put 5% down , and pay their mortgage perfectly well – myself included) are insured and backed by CMHC, and so the fact that they are taking action to prevent the terrible situations that we have seen in the US is great. However, will most homeowners be able to admit that they are in trouble? Your mortgage should only be approximately 30%/35% of your gross income, so if you are having an issue keeping your mortgage, insurance, heating and hydro bills in check, then you might want to talk to your mortgage advisor. If you work in a high risk industry like auto or construction, and finding it hard to make payments due to a decrease in work, this might be a good time to refinance or extend amortization just in case.

What do you think? Is this too little too late? Or is this something that may help Canadians from losing their homes?

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