« Average Edmonton Home Now Costs Over $318,000 | Main | A Condo With Room for Your Horse! »

August 31, 2006

TD Warns of Potential Housing Bubble in Western Canada

Everyone knows property prices have gone through the roof in Calgary in Vancouver, and they are at new record-setting levels in Edmonton every month. TD Economics now says there is potential for a bubble in western Canada. The important thing to note is that they state that in Edmonton "affordability remains surprisingly good."

TD warns of potential for housing problems in West
By Ottawa Business Journal Staff
Thu, Aug 31, 2006 1:00 PM EST

Housing activity in Central and Atlantic Canada has cooled down without prompting a price correction, but select cities in Western Canada are "flashing warning signs" that suggest the recent pace of price gains has been unsustainable.

That's the conclusion of TD Economics latest "Housing Bubble Watch" report.

"Canada's real estate markets appear to be in good shape and market conditions are becoming more balanced. Key exceptions are Vancouver, Calgary and Edmonton," says TD's deputy chief economist, Craig Alexander.

"The recent dramatic price gains in Calgary and Vancouver are unsustainable over the long-term, and both cities are vulnerable to significant moderation. Edmonton is also experiencing explosive price growth, but affordability remains surprisingly good."

While sales of existing homes are poised to set another record, Mr. Alexander cautions that regional developments are distorting the national story. Resale home prices rose 12.9 percent in the second quarter of 2006 from a year earlier, but excluding Alberta and British Columbia, the average rise in resale prices across the other provinces was a more moderate 7.3 percent. Alberta is responsible for almost half of the gain in the national average of new home prices.

"The dominant trends in housing markets outside of the West have been weaker unit sales, greater new listings and more moderate price growth - all of which point to more balanced market conditions and declining real estate risks."

In Ottawa, Mr. Alexander notes the pace of resale home prices has slowed, dropping from a 6.2 percent year-over-year increase in April to 1.4 percent in July. This can be partly explained, he says, by an increase in new home construction, which has put a damper on price growth.

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c6fe753ef00d834ad743453ef

Listed below are links to weblogs that reference TD Warns of Potential Housing Bubble in Western Canada:

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

It's funny how Sarah being a real estate agent always has a positive twist to every red flag.

Edmonton's a positive place to be. More jobs and lower taxes than Montreal and Toronto. However having said that having sold real estate through several u.s. recessions and 20 years in Edmonton you can see, sense and feel the difference. She did not say that the Edmonton will continue to grow at an unprecedented pace she merely pointed out what the article indicated. If she were being completely biased she wouldn't have posted that article. Thanks for commenting on our blog and come back any time. We hope you find it informative at the very least.

I suppose when the prices start falling you will be saying it's a buyers market

lol...Actually a buyer's market occurs when there are more sellers than there are buyers. Sometimes prices will drop in a buyer's market so I suppose you could be right.

4 MYTHS ABOUT THE FUTURE OF HOME PRICES

For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense.

Forget about a crash, they assured homeowners. Expect a "soft landing" where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a "normal," "sustainable" rate of 6 percent or so into the sunset.

Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air.

The newest sign that the myth-makers were spectacularly wrong is the data on existing home sales for July. Nationwide, median prices rose .9 percent.

But even that meager number masks the real story. Prices actually fell where housing is most vulnerable, in the bubble markets in the West and Northeast. In the Northeast, they dropped 2.1 percent from July of 2005, at the same time prices nationwide rose around 3 percent, meaning that houses lost over 5 percent of their value adjusted for inflation.

Homeowners just saw their wealth shrink, by a lot. The numbers will only get worse. It's time to examine the clichés that the "experts" - chiefly analysts and economists from realtors and mortgage associations - used to convince Americans that what they're seeing now could never happen. Here are the four great housing myths - and why they never made much sense in the first place.


Myth #1: As long as job growth is strong, prices can't go down

You can almost forgive the bulls for stumbling over this one. In past housing recessions, prices fell sharply in markets with severe job losses, like Texas in the mid-80s and Boston in the early 90s.

But the argument that prices can't fall in a good job market doesn't make economic sense: To be sure, a strong employment picture helps demand. But if far more houses are pouring onto the market than can be absorbed by households lured by the new jobs, and if the sellers are pressured to sell, prices will fall.

That's precisely what's happening now in good job markets such as San Diego and Northern Virginia. In this boom, prices soared to such extraordinary levels that builders kept churning out new homes, and owners of existing houses threw a record number of units on the market to cash out. The supply grew so fast that demand, even in strong job markets, simply couldn't keep up.

As usual, for the believers, it's always easier to fall back on a clich頴han read the warning signs.


Myth #2: The builders learned their lesson in the last downturn. They won't swamp the market with new houses when the market turns

You might call this the OPEC theory of homebuilders. The idea was that the builders wouldn't take a chance by building lots of unsold, "spec" units that could clog the market in a downturn. They had supposedly absorbed hard-won discipline from their excessive building in past downturns.

Well, it hasn't turned out that way. Builders are still pouring out near-record numbers of new homes as sales decline, assuring a further fall in prices. "Buyers" are walking away from deposits on houses that were supposedly pre-sold, forcing developers to throw them back on the market at a discount.

The problem is that even now, margins on new homes are still pretty good, though well below the levels of a year ago. As a result, builders will just keep building until those big margins evaporate. High prices are sewing the seeds of their own demise. They always do.


Myth #3: Low interest rates will keep values rising, or at the very least, put a floor under prices

What really matters for all assets, whether it's houses, stocks or bonds, is real interest rates - in other words, nominal rates after subtracting inflation. And real rates fell sharply starting in 2001. That caused a legitimate, one-time increase in housing prices.

The rub is that prices rose far more than could ever be justified by declining mortgage rates. That's where the bubble kicked in. Today's relatively low rates are not, and never were, a reason why prices would keep rising. Once real rates drop and stabilize, the impetus goes away - again, the gain is a one-time, not a recurring, phenomenon.

Today, real 10-year rates are still extremely low. They have nowhere to go but up. When the one-time gain of 2001-2004 reverses, housing prices could take a further hit.

By the way, a decline in rates due to a fall in inflation isn't the boom to real estate it's advertised to be. Sure, rates go down, but workers also receive lower raises. So the fall in rates turns out to be a wash. As for what matters - real rates - what goes down later goes up, and housing prices go in the other direction, namely south.


Myth #4: Restriction on development in the suburbs ensures low supply, and guarantees rising prices

This argument ignores that the tough zoning laws and anti-development fervor have been a feature of America's tony towns since the early 1970s. The "not in my town" phenomenon is nothing new.

Sure, it's still difficult to get new building permits in suburbs of New Jersey, New York, Washington, Seattle and San Francisco. But America's housing market is extremely fluid. People move farther from job centers, and commute longer hours, to get bargains where housing is plentiful. Then the jobs move to the areas with the cheap houses. People in their 50s and 60s cash out early in San Diego and buy a bigger house for half the money in Texas or South Carolina.

And the cities are just as enthusiastic about developing blighted areas with new, tax-paying high-rises as the suburbs are slamming the door. In the New York area, Brooklyn, Jersey City and Hoboken - and even Manhattan - are sprouting more new housing than in decades, despite a job market that's hardly robust.

A year ago, the reigning cliché was that real estate had entered a new world of "no supply." Now, a record 3.85 million homes are up for sale, and buyers are getting scarce.

No, the world hasn't changed. And the myths haven't changed either. Next time, don't believe them.

Take a look at the new portable out houses that Jayman is slapping up in Sherwood Park and asking $350,000+ for. It'a an absolute joke!

The comments to this entry are closed.