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September 02, 2006

Western Canada Housing Bubble an Exaggeration

The other day we published an article from the Ottawa Business Journal which implied that there is a housing bubble in Edmonton and especially Calgary and Vancouver, based on a report from TD Canada. Well we found a new article with some more information on that report that refutes the idea that Edmonton's bubble is about to burst. Funny how the media loves to blow things out of proportion. Of course, we didn't agree with the bubble theory and now I feel a certain sense of vindication. The best little bit of info from the article, to put everything into perspective is this:

"Payments on an average Edmonton home, with a 75-per-cent mortgage over a 25-year term, still consume only 18 per cent of a median family income -- compared to 24 per cent in Calgary and 50 per cent in Vancouver." This is a great article, worth a read with opinions expressed from a number of industry experts. Here is the complete article:

Bank report sees Edmonton as affordable despite demand
Ron Chalmers, The Edmonton Journal
Published: Friday, September 01, 2006

EDMONTON - Edmonton home prices will keep rising, but gradually, and are unlikely to fall says a major TD Economics report.

"There are concrete signs that the U. S. housing market is falling back to earth," Craig Alexander, TD's deputy chief economist wrote in the report, released Thursday. "This has led to concerns that Canada might have a similar experience."

But Canadian prices "have generally lacked the degree of speculation" seen in the U. S., he wrote.

Calgary and Vancouver do present "the possibility of a pullback in prices at some point in the future," Alexander cautioned. Edmonton is also experiencing explosive price growth, he wrote, "but affordability remains high."

Alexander said he expects Alberta's high immigration and low unemployment to sustain the demand for housing. More new homes and resale listings will dampen future price shocks but will not cause prices to fall, he predicted.

Alexander traced the recent spike in Edmonton resale home prices -- up 31 per cent this July from last July -- to inventory shortages.

"The best thing that could happen is the market moving into better balance, and this is starting to happen," he said, citing "a frenzy of housing starts."

Alexander expects prices now to rise slowly toward "a soft landing" of the boom -- with no bust.

Although Edmonton prices have risen faster than rents and incomes, they still score well on the "affordability index," he noted.

Payments on an average Edmonton home, with a 75-per-cent mortgage over a 25-year term, still consume only 18 per cent of a median family income -- compared to 24 per cent in Calgary and 50 per cent in Vancouver.

Alexander suggested that anyone considering a home purchase should balance the low risk of prices falling against the opposite risk that prices will continue to rise -- while a potential buyer remains out of the market.

"It's a question of affordability, and Edmonton is still extremely affordable for people of average incomes," he said -- although rising prices have shut out lower-income earners.

Vinay Bhardwaj, a market analyst with Canada Mortgage and Housing Corporation, agreed that "prices will continue to go up, but not at the pace we have seen over the past few months."

The Alberta economy will sustain strong demand, he said, while rising supply will restrain price increases.

Madeline Sarafinchan, president of the Edmonton Real Estate Board, said increases already are moderating. While average Edmonton prices rose 31 per cent in the past 12 months, they rose only 1.5 per cent in the past one month, she said.

"It is a little slower, and I think that will continue."

Bhardwaj and Sarafinchan both noted that higher costs are shifting the market mix, with more first-time buyers looking at condominiums rather than single-detached houses.

Affordability has been further enhanced by financial institutions now offering 30 and 35-year mortgages.

Such long-term commitments are prudent, given Alberta's long-term economic outlook, said ATB spokesman Brian Countryman.

"We see nothing on the horizon to suggest that our economy is in jeopardy," he said.

Edmonton house prices are unlikely to fall because planned energy developments will attract workers, and "people coming to Alberta will need homes," Countryman said.


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The housing collapse heard round the world

Sunday, September 03, 2006

Real estate agent Andrea Gaus knew the market was out of whack when the price of a typical four-bedroom house near good schools in the leafy Maryland suburbs of Washington shot past the $1-million (U.S.) mark.

“It got to the point where appreciation was so high that it priced people out of the market,” Ms. Gaus said.

But the peak has passed, and the consequences of the deflating bubble are buffeting the housing market, in Washington and across the United States.

What sold in a weekend here last year is taking months to unload. And increasingly nervous home sellers are slashing prices to get rid of properties before their value sinks even further. One buyer recently threatened to walk away from a signed contract on a $1.6-million house unless the seller took $100,000 off the price to reflect the drop in value since the deal was struck. The seller quickly buckled, fearing the house might be worth even less if put back on the market today.

“Look how fast prices were going up. The same thing is happening on the way down,” observed Ms. Gaus, who's been selling homes in Potomac for 16 years.

“It's a very tough market.”

The once red-hot housing market has fizzled. And the topic du jour among economists, investors and policy makers is whether the end of the housing boom signals the beginning of the end of a long run for the world's mightiest economy, and by association, the rest of the planet.

The U.S. housing crash may prove to be the economic equivalent of the canary in the coal mine — a warning of impending danger in an economy that has surged too far, too fast. Many experts are now openly speculating about a possible U.S. recession next year, brought on by consumers reacting to the shrinking value of their nest egg. If they're right, the fallout could prove to be far nastier than the collapse of the technology bubble at the start of the decade.

“It could throw the economy into recession if consumers go into a shell,” worried economist Peter Morici, a business professor at the University of Maryland. “I don't see anything out there to compensate.”

The housing market has been a perfect conduit for economic activity, funnelling and leveraging billions of dollars worth of household wealth into consumer spending in recent years. The U.S. savings rate is negative now, but even a relatively modest shift toward savings now could have a dramatic effect on consumption, sending the economy into reverse. Joining a growing number of anxious forecasters, Prof. Morici puts the risk of recession in 2007 at 50-50.

“The wealth effect has been very important in fuelling the recovery,” he said. “It doesn't appear like that is going to be available any more. Housing prices have finally outrun incomes.”

Runaway real estate prices, which had been growing in double digits throughout much of the country, are now pricing potential homeowners right out of the market. The ability of Americans to afford a home is the worst it's been in two decades, according to the National Association of Realtors.

The past year has been rough on consumers. First, mortgage rates began to rise. Then, there was the jolt from sharply higher energy prices. And now the apparent end of the long real estate boom is at hand. It's all combined to make Americans feeling distinctly poorer, and less confident. Mirroring other recent surveys, the U.S. Conference Board reported last week that its consumer confidence index suffered its biggest one-month drop in August since the devastation of hurricane Katrina a year ago.

Think it all doesn't matter to you? Think again. For nearly a decade now, the United States has been the economic driver for much of the world — Canada included. The United States has been sucking up excess savings and consuming everything in sight, from cars to homes and everything that goes in them.

“It's hard to imagine that a U.S.-centric global economy wouldn't be at risk in the aftermath of a bursting of the U.S. housing bubble,” warned Morgan Stanley chief economist Stephen Roach, one of Wall Street's most outspoken worrywarts.

“The non-U.S. world remains heavily reliant on selling exports to wealth-dependent American consumers. As the United States comes to grips with the aftershocks of another post-bubble shakeout, so too must the rest of the world.”

As he put it: “If the American consumer sneezes, countries in both the developed and the developing world could easily catch a cold.”

How Potomac real estate became a leading indicator for the global economy is the story of a silent transformation of the U.S. economy.

In the early 1990s, when Ms. Gaus got into the real estate business, investment in residential real estate represented less than 3.5 per cent of the economy. Today, it makes up 6 per cent. Add in all the products and services tied to real estate — furniture, big-screen TVs, home improvements and financing — and the total contribution is much larger.

Housing has also emerged as an increasingly vital economic driver — for consumption, jobs and overall economic activity.

Economist David Rosenberg of Merrill Lynch & Co. Inc. estimated that construction activity, combined with surging home values, accounted for nearly half of U.S. economic growth over the past three years, or 1.5 percentage points of the 3.5-per-cent average annual GDP increase.

Encouraged by low interest rates, innovative mortgages and a tax system that favours maximum leverage, Americans have been using their homes as ATMs. Thanks to generous lines of credit and multiple refinancings, they've renovated, furnished their nests and moved up to ever-larger homes.

In the past decade, the percentage of U.S. household wealth tied up in homes has climbed to 48.5 per cent from 38.7 per cent.

Americans have also super-sized their abodes. From 1975 to 2005, the average size of new single-family homes grew by 48 per cent — from 1,645 square feet to 2,434 sq. ft. — even as families shrunk in size, according to new data from the U.S. Census Bureau.

These larger homes come with more bedrooms and more bathrooms, spawning a bevy of retail chains to help homeowners furnish all that space, such as Crate & Barrel, the Pottery Barn and Bed, Bath and Beyond. In 1975, only 4 per cent of homes had more than 1½ baths. Today, nearly half of new homes do.

That has changed the way Americans spend. Nearly 15 per cent of every dollar consumers spend now goes toward housing-related items. That compares with 11.5 per cent in the early 1990s.

So perhaps it's understandable that some forecasters may be underestimating the potential downside of this housing boom.

“The decline in housing will not be a mere sideshow,” warned Merrill Lynch's Mr. Rosenberg. “The housing correction has all the markings of a three-ring circus that has the potential to pull consumer spending to the brink.”

He's predicting that housing prices will fall by 5 per cent by next year, erasing $1-trillion worth of household wealth.

U.S. Federal Reserve Board chairman Ben Bernanke, for his part, has predicted an orderly deflation of the housing bubble, and a soft landing for the rest of the economy. But in the minutes of their Aug. 8 rate-setting meeting, Fed governors acknowledged that housing is “a downside risk” to the economic outlook. Prospects for the sector remain shrouded in “considerable uncertainty,” according to the minutes, released this week.

Part of the problem for economists is that while housing is now clearly in a slump, other parts of the economy are behaving as if nothing is wrong. Manufacturing, for example, continues to fair well, outside of the auto sector. Similarly, corporate profit and business investment are healthy and growing. Even retail sales and consumer spending aren't yet showing the impact of the slump.

But signs of stress are apparent. Major retailers, including Wal-Mart Stores Inc. and Costco Wholesale Corp., have warned of substantially weaker profit in the months ahead as consumers cut back.

The problem is even more apparent in the home finance business.

Foreclosures were up 18 per cent over last year in July, and are now running at rate of one for every 1,245 households. Banks also report that late payments are way up. And in some markets, homeowners who have seen the value of their property fall below what they still owe the bank are trying to coax lenders to write off part of the mortgage.

The current slowdown is “atypical” because it's being driven by a “less than once-in-a-lifetime housing market bubble,” suggested Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

“Traditional warning signals of impending slowdown are unlikely to work in their usual way,” he explained. “Investors need to focus on the housing numbers, which are fast becoming horrific, and on the implications of the drop in housing activity.”

Thanks again for your comments. The US housing market has seen a number of falls in the past 20 years when Edmonton's market did just fine. Posting articles about the US market really aren't relevant to the Edmonton market, check out our previous post: "Canadian Real Estate Won't See the Same Cooling as the U.S." at: http://edmonton-homes.typepad.com/my_weblog/2006/08/canadian_real_e.html

Oh...and don't forget...affordability remains very good in Edmonton :)

Ok...we get your point, you do not think favourably of the Edmonton real estate market right now. Thanks for your comments.

The average home in Edmonton costs $303,000, not $350. The fact of the matter is (from the above article):

"Payments on an average Edmonton home, with a 75-per-cent mortgage over a 25-year term, still consume only 18 per cent of a median family income -- compared to 24 per cent in Calgary and 50 per cent in Vancouver. It's a question of affordability, and Edmonton is still extremely affordable for people of average incomes."

Affordability No. 1

You including condo's to get that low number. Do a search on http://www.mls.ca/map.aspx and check out Sherwood Park where I used to live. 320+ G's get's you a new 1200 sq ft 2 story out house with no garage.

Actually I'm not, if you include condos it goes down to $256k. Here are the stats:

Residential average price $256,489*
SFD² average selling price $303,304*
Condo average selling price $188,831*

Don't know where your getting your numbers from in Edmonton and satelite communities like St. Albert and Sherwood Park. Check url http://www.mls.ca/map.aspx and see what it really costs you to get into a new home, i mean out house. Like I said it's 320 grand for the bottom of the barrel.

From the Edmonton real estate board monthly report, which includes all sales for the greater Edmonton area. Sale price is what matters, not list price.

I work all over the U.S. and Edmonton is temporarily out of whack because of oil. It will correct, you can count on it. There are so many places in the U.S. that are less then half the price, but Texas is an absolute steal. I can buy a new beautiful 1600+ sq ft totaly brick bungalow with bay windows, arches, columns hardwood, ceramic tile, double front attached garage for 125 grand vs a 1200 sq ft 2 story smart home that looks like a back yard tree fort in Edmonton for 300+ grand. Not me.

If you knew how cheap Edmonton was in relation to other Canadian economies, you wouldn't make yourself look so foolish. Enjoy your nice home in Texas, I am going to take a nice walk in the safe park behind my condo and let it make me more money than an average person's yearly salary.

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