Soaring house prices ‘unsustainable’
Sep 13, 2007 09:04 AM
TORONTO – Canadian home price increases are not sustainable in the long term, a report from the Bank of Nova Scotia (TSX: BNS) economics department says.
The fundamentals of Canada’s housing market are solid, with little evidence of overbuilding or speculative buying, and a low volume of subprime mortgage lending to risky borrowers, Scotiabank economist Adrienne Warren said today.
“Yet, there is little doubt that current trends are unsustainable,” she said.
“Affordability is becoming increasingly stretched for many would-be buyers after almost a decade of rising home prices. More recently, economic risks have increased in the wake of the intensifying financial market turmoil stemming from the U.S. subprime mortgage problems.”
Additionally, “from a long-term perspective,” there is growing overvaluation in some parts of the country, “a precursor to a period of softening conditions,” the report says.
Scotiabank surveyed 15 cities, and all except St. John’s, N.L., have inflation-adjusted prices above their long-term trend. The national average deviation was eight per cent, ranging from one per cent in Ottawa to 25 per cent in Edmonton.
“Some deviation from underlying trends is to be expected at the late stage of a housing boom,” Warren observed.
“At the peak of the prior two housing cycles in 1976 and 1989, national home prices were 12 per cent and 18 per cent, respectively, above their long-term trend. The smaller degree of overshooting this time around, and the sustainability of price appreciation, may reflect in part an undervaluation of Canadian real estate prices in the late 1990s and into the early part of this decade.”
Warren added that Canada’s overvaluation is small compared with other countries such as the United States, and price growth “remains consistent with short-term supply-demand dynamics.”
However, she cautioned: “The further domestic home prices climb above underlying economic fundamentals, the greater the risk of an eventual correction.”
Rate, price hikes reduce home affordability
Toronto homeowners fork out 52% of income to maintain a dwelling
Sep 13, 2007 04:30 AM
Housing affordability in Toronto showed the sharpest deterioration in more than a decade over the second quarter of this year, a Royal Bank of Canada report says.
Sizeable gains in house prices, higher mortgage rates and utility bills mean home buyers looking to buy a standard two-storey house in the city have to fork out 52-per-cent of their pre-tax income to maintain a dwelling. That’s up from 48.6 per cent in the first quarter of the year, and the highest figure since 1993, the bank said.
In the second quarter, Canada’s housing affordability made “one of the largest and most broadly based quarterly deteriorations since the mid-1990s,” said RBC Economics assistant chief economist Derek Holt, the author of the report.
Affordability has “deteriorated dramatically across all housing segments,” which include condominiums, bungalows and townhouses, the economist said.
Most financial institutions use as a guide 32 per cent of pre-tax income in determining whether someone can afford to buy a home. That would include mortgage expenses, property taxes, heating costs and other maintenance.
A minimum qualifying income of $111,345 is now required to carry a $475,625 mortgage on a detached two-storey home in Toronto, which RBC defines as 1,500 square feet.
Meanwhile, things could get worse next year because of the budget crunch at Toronto City Hall and since a freeze on property value assessment will be lifted in 2008.
“The combination of potentially higher city tax rates and a jump in property assessment levels through higher market values of homes could pose a more significant challenge to affordability,” Holt said.
One positive indicator for the city is that it doesn’t have the inflationary pressure of western provinces.
A separate report released this week by Statistics Canada showed new housing prices were up by a mere 2.3 per cent in Toronto over the last year, compared to Saskatoon at 51.4 per cent.
And Holt says Toronto is nowhere near the height of 1990, when a housing bubble at the time was at its peak.
Then it took 72 per cent of pre-tax income to afford a home.
“Outside the core Toronto area hot pockets that are driving double digit price growth and bidding wars, broader Toronto housing market conditions are healthy and roughly balanced,” Holt said.
With prices continuing to appreciate for houses in Toronto, condos remain the alternative.
It takes 31 per cent of pre-tax income to afford a standard 900 square foot condo valued at $282,000.
A report released yesterday by the Conference Board of Canada and Genworth Financial forecasts average resale condo prices in Toronto to rise by 4.4 per cent this year.
However, price acceleration should deteriorate to 2.8 per cent in 2008 and 3.1 per cent in 2009, according to the study which describes Toronto as a “solid, but not overheated market.”
Nationally, Alberta is now less affordable than Ontario, requiring 45 per cent of pre-tax income to afford a two-storey home as opposed to 43 per cent.
“Alberta’s house prices have been growing at a pace well above incomes and in a short time have created stressed affordability conditions,” Holt said.
British Columbia remains in top spot, requiring 68 per cent of pre-tax income to afford a home.
In Vancouver, that figure is 73 per cent, about where Toronto was before the bubble burst in 1990.