Merrill Lynch says Saskatoon real estate overvalued “as much as 50%”
In a report titled, “Peaked: Canada’s housing market in depth,” economist David Wolf of investment-banker Merrill Lynch says that “Canada’s housing market is entering a sustained downturn amid excess supply and as higher prices deter new buyers.”
According to a story in today’s Globe and Mail, Mr. Wolf is most concerned about Saskatchewan, where the doubling of house prices in Regina and Saskatoon over the past two years “has led us to estimate that these markets are now close to 50 per cent overvalued.”
David Wolf is not the first economist to make the claim that Saskatoon is overvalued. Scotiabank economist Adrienne Warren said it first in September of 2007. RBC’s Amy Goldbloom said it again in October. Both of these stories were covered on this blog and in the Star Phoenix. Seems nobody was really listening then.
The Saskatoon Region Association of Realtors responded with this.
Read the Star Phoenix story here.
Peaked: Canada’s housing market in depth
I have argued that prices in the Saskatoon real estate market have been out of whack with fundamentals so I won’t go out of my way to take issue with Merrill Lynch. I would suggest that it’s appropriate to keep in mind that this report is written by an investment-banking firm who makes the bulk of its money selling investments, and they don’t sell real estate.
This post is dedicated to Doug who would like you to know that unemployment is up, crime is obscenely high, incomes have not risen in Saskatchewan as much as they have in Alberta, Saskatoon’s population may be down by 2000 people, Westfair Foods is moving to Regina, SaskHouses now has 420 properties advertised, MLS listings are well above 1500 and growing weekly, MLS sales suck compared to last year, the average price of a Saskatoon home is falling, the price of oil is dropping, GDP was lower then expected last year, and “breaking your hip” is a real threat when living in Saskatoon. 
Now that we’ve got that out of the way, let’s talk Saskatoon real estate.
I’m always happy to answer your Saskatoon real estate questions. All of my contact info is here. Please feel free to call or email.
Follow our daily updates on Twitter @SaskatoonHomes.
Norm Fisher
Royal LePage Saskatoon Real Estate
42 comments so far. We'd love to hear your thoughts.
April 29th, 2009 at 10:42 AM
Norm wrote:
“This post is dedicated to Doug who would like you to know that unemployment is up, crime is obscenely high, incomes have not risen in Saskatchewan as much as they have in Alberta, Saskatoon’s population may be down by 2000 people, Westfair Foods is moving to Regina, SaskHouses now has 420 properties advertised, MLS listings are well above 1500 and growing weekly, MLS sales suck compared to last year, the average price of a Saskatoon home is falling, the price of oil is dropping, GDP was lower then expected last year, and “breaking your hip” is a real threat when living in Saskatoon.”
Okay, I’m a bear – and that made me laugh my a$$ off. Thanks Norm.
April 29th, 2009 at 10:43 AM
Re: the Doug rider.
But how CAN we talk RE? You’ve eliminated all the talking points!
I’m pleased to see that the Merrill economist agrees with me that last year’s gains are a bubble that can’t be sustained.
April 29th, 2009 at 10:43 AM
That is probably the funniest thing I have read since following this blog.
April 29th, 2009 at 10:44 AM
lol, thats pretty hilarious Norm.
This is getting exhausting. In the last 4 years I have read so many “analyst reports” that are wrong that I don’t put much credit in this one either.
He could be long or short, who knows. Nobody knows where prices will stabalize but I think he is overly bearish, by a good 10-15% at least.
He is saying that prices are going to correct 50%.
I find it REALLY hard to think that $200k homes are going to drop to $100k.
April 29th, 2009 at 10:45 AM
Oh my goodness… Norm… have I told you lately how much you make me laugh???
April 29th, 2009 at 10:45 AM
I think it’s important to note that the economist isn’t predicting a price correction of that magnitude, only stating how far over-valued real estate is based on certain criteria like household income. Balance could come in many ways. Household income is rising rapidly in Saskatchewan right now, in the range of five percent this year, and possibly something similar next year. At an extreme, prices could stay where they are and gradually make more sense as incomes rise. Markets do stay overvalued for years without correcting, if demand remains high. Vancouver has been overvalued for a long, long time. If prices do drop substantially here, we’ll likely end up somewhere in the middle. Who knows, maybe 10 or 15 percent over the next year or two, a dip stopped by rising income and sustained demand. Given the pace of income gains in Sask., and actual 50 percent correction would leave houses undervalued in a matter of months.
April 29th, 2009 at 10:45 AM
I believe this reports are similar to oil prices guessing. One day barrel should cost $200, next day $70…I am a Vancouver Realtor and our listings continue to outpace sales in last months, while prices were dropping, however, I remain calm, despite it seems Canada’s economy is generally losing steam. We are far from US market decline, despite these negative numbers. I believe this is just correction of last years record prices and the fall will stop soon…Don’t panic and enjoy summer .)
Jay
April 29th, 2009 at 10:46 AM
Maybe Crikey would be interested in putting together a chart to show the number of hips broken by seniors in Saskatoon. Possibly graph it as age against fractures monthly so seniors can know exatly when to get out of Saskatoon BEFORE their hip breaks.
Good one Norm.
April 29th, 2009 at 10:48 AM
I was hoping that someone would see some humour in that, perhaps even Doug. The joke was more about stealing his thunder than the comments he makes. To be clear, I’m poking fun at myself here, and not at Doug.
Most of these items are excellent points that should be part of the discussion and Doug makes a lot more sense than many of the “experts” who have commented on Saskatoon. If I can ever get him to publicly state that Saskatoon has something going for it I’ll be a happy guy.
Warren,
I often ask questions that might lead you to believe I’m a bull. I am not.
Joe,
Yes, it is confusing and it’s a bit amusing how some people are jumping on this one after taking the position that “economists” don’t know what they’re talking about. But again, 50% overvalued doesn’t mean twice as expensive as they should be, but rather, one-third.
Mark,
Good points. Corrections generally take a long time and incomes will certainly be part of the overall picture.
Pamela,
You just saying that ’cause I’m your Dad?
Richmond BC Realtor,
If only “panic” wasn’t a factor. I wonder how many people who had no intention of selling their home might attempt to cash out and re-enter later.
Ken,
Crikey has been pretty helpful but a hip fracture graph sounds like a lot of work.
April 29th, 2009 at 10:48 AM
I think it’s a funny dig. Nice to be noticed. And I didn’t know saskhouses was up to 420, I think it was 400 a couple weeks ago, apparently inventory is still growing a moderate amount, stopped looking when I realized they stopped publishing blog comments. As Crikey can back me up on, it used to be a lively blog, now 0 comments is the norm… agree to disagree, so just not on that blog anymore.
And re: this story, told you all so.
Star Phoenix did cover, but this is the first critical story on the housing markets fundamentals with decent TV news coverage. Then again, not as big a deal as the Conference boards… oh yeah, Norm kind of covered that too.
And we all laugh at the hips, but really a big deal with old people, why does everyone think they move to BC…?
April 29th, 2009 at 10:48 AM
Doug,
The Star Phoenix actually covered this one three times in two days, at least online.
Here’s another one that ran today with some comments from SRAR.
http://tinyurl.com/5kx364
April 29th, 2009 at 10:49 AM
BC chubby girl just got her signed contract. Yesterday she put on a new dress, walked out on stage and started singing. La-la-la-la-la-la-la-laaaaaaaaaahhhhhhhh! :>)
April 29th, 2009 at 10:49 AM
I certainly don’t need Merrill Lynch to inform me that Saskatoon houses are grossly overvalued. I’ve known that all along. I just wish they had the means to do something about it!
(Not that it’s a big secret that Saskatoon homes are grossly overvalued.)
April 29th, 2009 at 10:49 AM
Hey norm
How long is it taking to sell a house in today’s market?
April 29th, 2009 at 10:50 AM
Observation: Mirabella townhouses used to be starting at 322K, now 295K in today’s paper.
Norm, I have seen many public notices for meetings about closing “catwalks” (walkways between cresents). What is the reason for this? Of course the people on both sides would be happy because I have heard of vandalism to fence boards but in a society that is encouraging walking they are closing all the shortcuts!
April 29th, 2009 at 10:50 AM
Actually, I would have access to he “hip fracture” data, but yes, it does sound like WAY too much work.
April 29th, 2009 at 10:50 AM
David Wolf, the economist who wrote this report, has a good interview on BNN : this is a link to the whole show. Wolf’s interview is the last segment, at about 40 minutes in.
He’s excellent.
http://watch.bnn.ca/#clip72331
And Larry, I don’t think this is the fat lady singing: I think it’s a full-scale production of _Aida_ complete with live elephants.
April 29th, 2009 at 10:51 AM
Larry,
How do they like the sound of her voice? Personally, I find it encouraging that the price of a detached home in West Vancouver is now under 1.6 million. If it slides another 1.2 million, I just might move there.
Robin,
“I certainly don’t need Merrill Lynch to inform me that Saskatoon houses are grossly overvalued.’
You didn’t need to hear it but many others probably did.
Ricky,
The stats say 30 days but that’s a bit misleading. Many listings are cancelled and re-listed at a lower price when the first price draws no buyers. It sets the “days on the market” clock back to zero and makes this stat difficult to track. I have registered my complaint with the SRAR and asked them to seek a solution for this.
Jedi,
These catwalks might be convenient for walkers but they’re a royal pain in the butt for homeowners. They create little voids where delinquents like to hang on and bust stuff up.
Crikey,
Lol. I guess you would have access to those stats, wouldn’t you?
jrochest,
Thanks for the link. I’m going to take that in.
April 29th, 2009 at 10:51 AM
Norm,
Do you think the Merrill Lynch report will even have an impact? This crazy market has had (at least, up to this point) a mind of its own, defying what you might say is “economic logic.”
P.S. I may assert that I didn’t need to be told that the market (as it stands right now) is grossly and unjustifiably overvalued, but I most certainly didn’t know enough to buy a damned house before the market went all crazy, and armchair investors started messing around!
; )
April 29th, 2009 at 10:52 AM
Robin,
There were other economists who rated Saskatoon as overvalued last fall. Those comments didn’t seem to have much of an impact then, but I think that the “fundamentals” are starting to bring this market back to reality. It’s taken a long time but eventually deteriorating affordability has to have an impact and the market starts to work the way it should. For you and others who’ve been sidelined by high prices and outrageous rents, things start to improve and just get better with time. This report is really just stating what’s already obvious to most people. Even the most bullish seem to feel that prices moved too far, too fast.
April 29th, 2009 at 10:52 AM
jrochest,
Thanks again for the link to the BNN video. I also thought this guy made a lot of sense. A few things that I took away from this.
9% Canadian “overvalue” doesn’t seem like a huge deal and he was didn’t sound terribly concerned about price drops east of Manitoba.
Price drops west of Ontario seem “certain” but he did say he didn’t think it would “crash.”
3 times income metric was more appropriate 20 years ago when interest rates were higher.
Real estate is not going to be the great kind of “investment” that it has been over the last decade.
April 29th, 2009 at 10:52 AM
He’s not worried about any place that hasn’t had significant runups: I think elements of the Toronto market are going to have problems, though. Condos are appallingly overbuilt.
Single family houses will correct too, but much less aggressively: the bidding wars are already cooling down.
The rest of Ontario & anyplace East hasn’t had massive year-over-year increases and should be okay. Maybe Montreal, maybe not.
BC is toast: Victoria and Vancouver are both very very bad, and the newly minted resort towns in the Okanagan aren’t going to fare well either (million dollar townhouses in Kelowna?)
Alberta is already correcting, and it will keep correcting.
And our bubble was a secondary bubble blown by Alberta money. I’m still holding to my original call of a drop back to 2006 prices: I think that was the last time that local money was driving the market. I note, with some delight, that he pointed out that prices had climbed well beyond present and *expected future* wage levels.
April 29th, 2009 at 10:54 AM
http://www.canada.com/saskatoonstarphoenix/news/business/story.html?id=23518fe5-815b-4680-87da-43fb3e664e0c
“Janzen acknowledges that sales numbers are down from “the 2007 frenzied market.” He says the current prices reflect a correction and are on par with those from 2005 and 2006″
Kind of take issue with this, prices are by no means on par with 2005 when many 3 bedroom condos in Lakeview were $80,000 to $100,000 now Norm’s $180,000… in general, everyone and their dog know prices are way up in comparison to sales numbers and way up in comparison to 2005/6.
And a link even you couldn’t anticipate Norm.
http://healthandfitness.sympatico.msn.ca/Canadas+fattest+and+fittest/DietFitness/Canadas+fattest+and+fittest.htm?isfa=1
April 29th, 2009 at 10:54 AM
Lol. So, don’t move here unless you want to get fat?
“Kind of take issue with this”
Definitely a misquote. Janzen’s release says, “Residential unit sale numbers are down from the 2007 frenzied market but right on par with home sale numbers in 2005 and 2006 and substantially ahead of 2004.”
April 29th, 2009 at 10:55 AM
Hey Norm
thanks for your response. I guess you would have a good idea how long it is taking to sell a house on average. On average how long is it taking to move your clients houses?
April 29th, 2009 at 10:56 AM
Ricky,
I’ll guess that the local average is somewhere between 45-50 days.
In a market like this one, price is key to selling time. If you’re 5% above current comparables it will take an average of forever to sell. If you’re 5% below you’ll probably be hanging a sold sign in under two weeks.
Agents are noting that properties they thought they had priced well compared to recent sales aren’t even getting showings. Look at what else is available (comparable) and price on the low end or be prepared for a long market time with potential value losses. I’m advising everyone to price aggressive for a quicker sale. If someone spent all of July on the market waiting for someone to pay too much, their home probably went down 5% while they were waiting.
April 29th, 2009 at 10:56 AM
Norm,
A downward correction of 20% in housing prices would be healthy for Saskatoon but it would not be surprising if it was steeper than this.
What could make it steeper is the degree of new condo and new house development in and around Saskatoon. If the pace of building does not drop significantly over the next few months, the correction could be deeper. And also the number of outside speculators that are now selling. If they can’t hold on and decide its easier to take a small loss and get out now rather than a bigger loss later by holding. There could be a rush to get out. My guess is that rent prices will also decrease. Which also is a good thing. To get an idea of value of houses in Saskatoon: I was in Paris recently and you could buy a condo with a view of the Eiffel Tower, albeit smaller than one here in Saskatoon, for about the same money as the average priced condo here.
Norm, it would be valuable to have the statistics for new house and condo developments in and around Saskatoon.
April 29th, 2009 at 10:58 AM
Roger,
I think a greater than 20% correction would be a big deal but I won’t be at all surprised if it happens either. News seems to be getting worse in recent weeks.
I had coffee with a builder last week and got the impression that they are well aware of what’s going on.
“I was in Paris recently and you could buy a condo with a view of the Eiffel Tower, albeit smaller than one here in Saskatoon, for about the same money as the average priced condo here.”
Hmmm. My son was just in Paris. I heard it was $30 for a sandwich at the airport.
“Norm, it would be valuable to have the statistics for new house and condo developments in and around Saskatoon.”
I’m going away for a couple of weeks after this week and when I get back I’ll be spending some time thinking about what we can do here to add some interesting content. Thanks for the suggestion.
April 29th, 2009 at 10:58 AM
Thanks for the feedback Norm.
I make a point of not eating at airports-since Narita-but everything in Paris was much more reasonably priced than London. It seemed almost at par as the prices here. I’m using a price of approximately 300,000 as a price for condos here in Saskatoon-maybe this is too high. You aren’t going to get much for that in Paris, but you will get something quite livable.
The main point as to why a correction is necessary, and I, even though I have several properties, would be glad if it happened, is because our children are mortgaging their futures in order to pay us the high rent, and the high house prices.
Enjoy your vacation.
April 29th, 2009 at 11:00 AM
After reading all the comments the one factor no one has mentioned is the value of the Canadian dollar in relation to other world currencies and especially the US dollar and Euro. The strong economy in Saskatchewan compared to the eastern provinces and the correction in the Saskatchewan market over the last few years is about par with those that corrected in the east years back and also what caused the huge increase in BC real estate a few years before. I’m amazed that many feel the prices are to high but fail to factor in the very low wages the people of Saskatchewan have had to live with for so many years as well as the limits imposed by past provincial governments on investment. When investment bankers start making noises about the value of something its usually because their incomes are less in a hot economy and low interest rates. This is the same bunch that pushed the sub-prime mortgages on Canadians when the same was failing in the US and costing them billions in lost income.
April 29th, 2009 at 11:03 AM
I personally think that this economist like a lot of others tend to view Toronto as the center of the universe and think of anything outside of Ontario as the outback. You want proof it?… The report stated that every market except Toronto was over valued. Toronto is apparently at fair value… a little self interest there. I think that by it’s self brings into question the entire report. If you had a paper copy it would be good for toilet paper.
April 29th, 2009 at 11:03 AM
Roger,
As a father of two (19 & 22), I would also like to think that my kids could have an opportunity to settle in their own home here someday. I agree.
Zipr,
Sure, we’ve seen some decent wage growth here but the I think future affordability studies will confirm that it costs a higher percentage of income to pay for a home in Saskatoon than most other Canadian cities. A few years back, we were way down on the cheap scale and that probably not right either.
Brian,
Interesting observation. Seeing the west succeed is a tough pill for some easterners to swallow.
April 29th, 2009 at 11:03 AM
Norm,
this report from Merril weights heavily on past affordability.
Toronto is not close to their worst affordability which was about 65 and historically they are between 35 and 45. That is where they are now, or close to it.
Saskatoon’s highest affordability before was under 30. Now we have passed 45. Historically we are between 20 and 30.
I think this is how this report is partly being measured and I don’t think it is a west vs east thing. I still have to watch that video yet.
http://www.rbc.com/economics/market/pdf/house.pdf
April 29th, 2009 at 11:05 AM
The video seems good. The guy from Merril seems to be a by the numbers guy, not on one side or the other. I think he’s echoing something many of us wonder about wages, about affordability etc. Did you guys hear about the unemployment stat that if you’re out of work over a year you get taken off the list? Bizarre!
April 29th, 2009 at 11:05 AM
Late to the party, I know, but I’ve been out of town and just read this.
Did anyone besides me notice that the SRAR response actually AGREED with Merril-Lynch, not refuted them as people seem to be thinking?
REALITY: A house that was selling for $150k before is now selling for $300k (or more – basing this on the ‘prices have doubled in the last two years’ statement).
Merril Lynch says: “Houses overvalued by ‘as much as 50%.”
Translation: A house that is selling for $300k in today’s market ‘should’ be selling for $200k.
SRAR says: “The association would argue that the Saskatchewan market was at least 30 to 40%
undervalued…”
Translation: A house that used to sell for $150k in 2006 ‘should’ have been selling for $195k to $210k (+30% to 40%).
AREN’T THEY SAYING THE SAME THING?? Namely, that the $150k (2006) house should be worth $200k (2008), and not $300k (2008). Is the average reader really so innumerate not to understand how percentages work and catch this? Or am I missing something?
April 29th, 2009 at 11:06 AM
Bookrat, the key phrase is “as much as 50%”, meaning it can and will vary widely based on the price point and type of property. I suspect that most condos (especially conversions) would to fall into the 50% overvaluation, average houses probably in the 25%-33% range and some of the higher-end houses probably in the 10-15% range.
With your example, a 50% overvaluation would mean a $150k house is probably worth closer to $225k (not $200k; 50% of $150k = +$75k).
April 29th, 2009 at 11:07 AM
Bookrat,
Lol. Good catch.
I suppose there is some wiggle room when words like “at least” and “as much as” are thrown in the mix.
For anyone who is interested, a copy of the Merrill Lynch report is available on line at
http://research1.ml.com/C/?q=yCWiGSUvzI3ltljEpgrEYA%3D%3D
I’ll be giving it a god read today, and if my suspicions are correct I’ll be back to tell you why I think David Wolf is just pulling numbers out of his head.
Meantime, consider this. Saskatoon is apparently “as much as 50% overvalued” and Regina, where the average selling price is $50,000 lower and the average income is nearly 10% higher is “48%” overvalued.
April 29th, 2009 at 11:07 AM
Norm, I look forward to reading your analysis. I had not been aware of the Regina numbers, and they do make it sound like someone is pulling figures from their nether regions.
Drake, as I grok the percentages, you’re starting from the wrong end. As I see it, saying that A $225k is ‘worth’ $150k means that it is 33% overvalued – 67% of the house’s selling price is ‘real’ ($150k) and 33% ($75k) is the ‘overvalue’.
That’s the kicker in my calculations – you have to start with the selling price and compare it to ‘real’ value in both cases:
a) A 200k house that ‘should’ sell for $300k is undervalued by 50%, while
b) a 300k house that ‘should’ sell for 200k is overvalued by ‘only’ 33%.
That’s how it was learned to me anyway, and that’s how I come up with my ‘both sides are saying the same thing’ hypothesis.
April 29th, 2009 at 11:08 AM
Bookrat, if the home were worth $150k in 2006 and $200k today, it would have increased in value by 33%. An overvaluation of 50% means it should actually be worth closer to $175k. I do follow where you’re coming from (I had initially been thinking along the same lines), but a few other users seemed to indicate that the above is the correct way to determine overvaluation.
April 29th, 2009 at 11:09 AM
Drake
$200,000 / 150% (50% over valued) = $133,333
or
$133,333 house increased 50% in value = $200,000
April 29th, 2009 at 11:15 AM
Housing prices dip nationwide
http://www.canada.com/saskatoonstarphoenix/story.html?id=0012866d-3439-4634-98dc-670656bf2371
April 29th, 2009 at 11:16 AM
Think $300 to $350,000 is a LOT!! for classy College Park? 1,000 sq ft ish?
http://www.cbc.ca/canada/saskatchewan/story/2008/08/14/cocaine.html#socialcomments
To think, looked at this guy’s neighbours!