Overpriced and Overbuilt: Canadian Housing Market Returns to Fundamentals: TD
Released yesterday by TD Economics, this report on Canadian housing.
Looking back on the boom in Canadian home building from 2002 to 2008, it is now clear that unsustainable price increases drove unsustainable levels of building. This overbuilding will weigh on markets over at least the next three years. Even as Canada recovers from the cyclical downtown, house prices will only rebound sluggishly and new residential construction will remain depressed, owing to this structural weakness. While newly built houses were being rapidly purchased by new homeowners during the housing boom, our view is that house prices exceeded the value of housing that was justified by fundamentals by approximately 9% nationwide during 2004-2008…particularly on the Canadian prairies.
Overpriced and Overbuilt: Canadian Housing Market Returns to Fundamentals: TD
Thank you to Crikey for the heads up.
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 @Norm_Fisher.
Norm Fisher
Royal LePage Saskatoon Real Estate
29 comments so far. We'd love to hear your thoughts.
April 25th, 2009 at 12:35 PM
OVERBUILT?? OR A SUDDEN BURST OF REDUCED DEMAND??
“This overbuilding will weigh on markets over the next three years”
They state this as a fact, but I’m not convinced we ‘overbuilt’. The headline seems to suggest that in some way the Canadian Home Builders are to blame. (It was them! Get ‘em boys) Saying we overbuilt is suggesting we got ourselves into this mess. What the TD won’t admit is the USA dictates our economy and we have little if not nothing to do with it.
It is safe to say we are experiencing a sudden economic slow down which results in reduced demand. Sure as a result we might have become overbuilt, but not the other way around.
Based on this article I’d say that the TD thinks they can see into the future, at least 3 years anyways…seems to me the economic slow down caught them by surprise…thoughts anyone?
April 25th, 2009 at 12:36 PM
L.oki,
“Based on this article I’d say that the TD thinks they can see into the future, at least 3 years anyways”
This is fairly typical of economists.
“It is safe to say we are experiencing a sudden economic slow down which results in reduced demand.”
Reduced demand from unsustainable highs. Units sales in March for the Saskatoon area were more or less normal, even though well below last years. Seems like a supply issue to me. Given the sharp decline in housing starts here, I can’t see it taking “years” to sort out on the single family side. We should be quite satisfied with the number of units we’re moving though.
April 25th, 2009 at 12:36 PM
Agreed
April 25th, 2009 at 12:37 PM
Right now nothing has changed.
Current activity only supports my assertion that the “economic downturn” is just another red herring from class warfare.
If people are paying $200k+ for a home, they are spending too much and beyond their means.
When the “tough economic times” actually hit, the middle class will know it. And there will be a reckoning.
But until then, speculation on the resulting impact of something that doesn’t even exist is just plain sick.
April 25th, 2009 at 12:37 PM
Jobless rate hits seven-year high
http://tinyurl.com/d9mdlb
Nationally, March’s employment losses were spread among core-aged men (25 to 54), youths (15 to 24), and women 55 and over. Since the start of the downturn in October, employment has fallen by 3.1% for core-aged men, the largest five-month loss in 33 years. For young people aged 15 to 24 years- unemployment rate up to 14.8%, the highest in 11 years.
Here’s Saskatchewan specific information from StatsCan:
http://tinyurl.com/cfmuxa
“In March, employment in Saskatchewan declined by 3,000. Despite the loss in March, employment in this province is unchanged compared with October 2008. The unemployment rate, at 4.7% in March, has increased by 0.8 percentage points since October.
Despite increases in their unemployment rates, Saskatchewan, Manitoba and Alberta continue to have the lowest unemployment rates in the country.”
April 25th, 2009 at 12:37 PM
The word is officially out as per the S-P:
House prices decline in city
http://tinyurl.com/c7eawe
Saskatoon house prices have declined 11 per cent year-over-year, although the early spring market seems to have brought a little rebound, Royal LePage reported Wednesday.
That tightrope was very nicely balanced, Norm. Very impressive!
April 25th, 2009 at 12:39 PM
Thanks Crikey,
The quarterly RLP House Price Survey is one of my favorite times.
April 25th, 2009 at 12:39 PM
If a housing slump happens in Saskatoon, it can happen anywhere.
Housing Slump Hits Manhattan
http://www.nytimes.com/2009/04/09/realestate/manhattan/09real.html?_r=1
April 25th, 2009 at 12:39 PM
From the SP article:
“However, the number of homes for sale on the MLS system has dropped to 1,400 from a peak of 1,800 at one point last year.” This statement in itself is a bit misleading, because inventory always drops at the end of the year from the peak in the Summer. And we haven’t reached peak inventory yet for 2009, so it implies that inventories aren’t as overinflated as they were last year, which may very well prove to be the case – but we have 3-6 to see if that holds or whether we set some new inventory numbers this year.
“Buyers should definitely be thinking about interest rates and whether to make a buy while they’re low” — good advice, Norm.
April 25th, 2009 at 12:40 PM
Jason,
and Joanne adds, “Still, 1,400 is well above average for the Saskatoon market, even at this time of year.”
These stories involve a fair bit a prep, a written release and often, 10-15 minutes of discussion. You end up with something the average person can read in a couple of minutes with a small fraction of what was said actually making the piece, and it’s never exactly how you may have written it yourself. All in all, I’m quite happy with the way it came out.
Thanks for the feedback.
April 25th, 2009 at 12:41 PM
Norm,
Very interesting article and you presented a well balanced point of view. The fact that this was the leading article on the business page, with an eye catching headline, should result in considerable impact.
Buyers surely will be thinking about striking a good deal (i.e. strong underbid) and some sellers will realize that last years peak prices are history. It will be interesting to see what transpires in the months ahead.
I imagine some of your colleagues in the real estate industry will be less than pleased with this article. It is not like the real estate board news releases that we see every month.
April 25th, 2009 at 12:41 PM
At the end of last summer I told a coworker that I predicted house prices would fall 25% by the next year. It will be interesting to see where we are in late summer.
(And I still bought a house in late summer last year, I had equity in my condo that I wanted to be able to use before it went away, and interest rates are great.)
April 25th, 2009 at 12:42 PM
The Media does not take their cue from the people that advertise in it or on it.
The fact of the matter is most economists think that a 10% drop is nothing and inventory although high is acceptable. Do I agree? No!
However, don’t confuse your conspiracy theory with dumbness. The fact of the matter is the average person just does not get it, including the person writing the story.
I can assure you that some reporter was not called into the office of the Star Phoenix, and told to spin this so that they would get advertising dollars.
Truly the guy probably had five other stories to write that day looked at the press release and regurgitated it back to the common folk.
Nix
April 25th, 2009 at 12:43 PM
In fairness to “renter” I think he was referring to the inventory being down from the peak last year. The article led the reader to believe that inventory levels were high but not as bad as lst year.:
——snip snip—–
“A high number of listings have brought downward price pressure to the Saskatoon market. However, the number of homes for sale on the MLS system has dropped to 1,400 from a peak of 1,800 at one point last year.
Still, 1,400 is well above average for the Saskatoon market, even at this time of year.”
——snip snip—–
What was missing was that inventory levels will start rising quickly now that we are in the spring sales season and will likely surpass 1800 before too long.
But I still think it was a balanced article and we can thank Norm for being fair and candid with the press.
April 25th, 2009 at 12:43 PM
Alex “If people are paying $200k+ for a home, they are spending too much and beyond their means.”
Can you please elaborate on how you have arrived at this figure?
I’ve always thought that good financial planning states that you should NOT be carrying a mortage which is more than 2.5 times your gross income and that Gross debt services ratio should not exceed 32% (in terms of your mortage – and this would be at the absolute top end of the debt ratio).
To generalize that no one is Saskatoon should be paying more than $200,000 for a home and are paying beyond their means is not a legitimate statement.
To state that people should be careful with their debt load (particularly during a downturn in the world economy) would be a more legitimate statement (and solid advice).
Captcha “eluding problems”
April 25th, 2009 at 12:43 PM
Norm, I’m not saying the article wasn’t more balanced, but in reality I think that may be attributable more to the fact that it’s becoming harder to “spin” cold, hard data. In case it wasn’t obvious from my comments, I thought you came off as both knowledgeable and credible – without sounding like many of the shills in your industry. Kudos for staying the course!
April 25th, 2009 at 12:44 PM
Nix, all conspiracy theories aside, you would have to be pretty gullible to believe that at some point advertising revenues don’t factor into the editorial equation. I’m not implying that this article was “purchased”, but at the same time I don’t think if the headline had read “House prices plumet in city: Thousands of new homeowners now underwater” it would have gone over that well in the sales department, either. No matter how you try to spin the ‘fair and balanced reporting’ aspect, it’s hard to dismiss the inherent conflict of interest.
April 25th, 2009 at 12:44 PM
Pam,
A $200K mortgage may be affordable now. However, interest rates at this point in the cycle are not normal. A 200K mortgage with a ten per cent mortgage rate is not so affordable.
Never confuse price with value.
I may be wrong, but the ratio given of 32% is supposed to include things like insurance, property taxes, utilities and all the other bills associated with owning a house, not just the interest and principle payment of the mortgage.
Nix
April 25th, 2009 at 12:44 PM
Pam, in general terms Alex is right. We’ve simply offset affordability with creative financing. But this new model will not hold up under higher interest rates. All you have to do is look at the US housing market for a glimpse of where we’re headed.
April 25th, 2009 at 12:45 PM
“A $200K mortgage may be affordable now. However, interest rates at this point in the cycle are not normal. A 200K mortgage with a ten per cent mortgage rate is not so affordable.”
Whatever. So lock in for ten years. At less than 6 percent! Then, in ten years, your wages will almost certainly be at at least 20 percent higher, offseting any extra interest you may have to pay on your remaining mortgage then. Unless you think inflation will run lower than 2 percent over the next ten years. But nobody thinks that. If a mortgage is affordable to you now, and you can lock that affordability in for ten years, you have nothing to worry about when it comes to rates down the road.
April 25th, 2009 at 12:45 PM
Mark,
You are missing the point. People are so in over their heads that they are not locking in the rate for five or ten years. They are using variable rate mortgages to get the lowest possible rate so they can make payments on a house they otherwise could not afford.
This is not America and you cannot lock in your interest rate for the life of your mortgage. So, even if you lock in your rate at say 5.75 per cent for a ten year period. People never think what would happen if at the end of that ten year period interest rates are 15 per cent.
People have become complacent in their thinking about interest rates always being low, because for the last 20 years interest rates have been low. This is a mistake and will not continue indefinitely.
Nix
April 25th, 2009 at 12:45 PM
Sorry if this was already mentioned. For those interested in the Regina market:
“Regina housing starts down in March”
“There’s a lot of builders who built homes in the last couple of years for customers who were actually speculators, so they’re not actually moving into those houses,” he said. “Now those houses are on the market. It does make selling a custom home, that we’re going to build for you, tougher.”
http://www.leaderpost.com/business/Regina+housing+starts+down+March/1478186/story.html
This is the same nonsense that went on in other places around the world.
April 25th, 2009 at 12:46 PM
Being an alcoholic and a smoker is cheaper in Sask than Alberta here is the sad story for you all. I think they should tax it a little more then use the money to boost health care just my thoughts anyways =op
http://ca.news.yahoo.com/s/cbc/090408/canada/canada_edmonton_edm_cigarettes_alcohol_1
April 25th, 2009 at 12:46 PM
“You are missing the point. People are so in over their heads that they are not locking in the rate for five or ten years.”
Can you back this up? Or is this just a guess? What percentage of homeowners in Saskatoon would you say are ‘so in over their head’ they they can’t even afford to lock in?
In any case, fixed rates now are as low as variables were last year. So if there truly are lots of people who bought at the peak and are now clinging to variables as their only hope, they can now switch over to a fixed without really paying more than they originally were.
” So, even if you lock in your rate at say 5.75 per cent for a ten year period. People never think what would happen if at the end of that ten year period interest rates are 15 per cent.”
As noted above, ten years is a long way off, and inflation will cushion any possible interest shock by then. Ten years out, and assume 20 percent higher family income give or take (and that’s assuming the same job and no upward movement as you grow older). That can cover a lot of extra mortgage costs, if needed. In any case, 15 percent would be extreme, and you would simply get a variable at that point and ride it down. Most likely you’ll be looking at a historical average of around 8 percent ten years down the road.
April 25th, 2009 at 12:46 PM
I agree with Mark and his way of thinking for locking in affordability. If you can afford it now lock it the mortgage for 5-10 years.
If you can’t afford it, don’t buy it. This is the approach I’ll be using.
April 25th, 2009 at 12:47 PM
The_Chartist,
Interesting story. That’s definitely been part of our problem here. I’m not sure how you deal with this as a builder but it must kinda suck to find yourself competing against your own product.
Rates: How about a five year at 5.05% or a ten year at 5.25%.
http://mortgagegrp.com/site/SK/rates.asp
Ridiculous really.
April 25th, 2009 at 12:47 PM
Even more incredibly, it looks like the 7-year is 5.05%- it appears the 5-year is 3.85%. Now that is something.
April 25th, 2009 at 12:48 PM
1 Year Closed 3.00 %
2 Year 3.79 %
3 Year 3.89 %
4 Year 4.04 %
5 Year 3.85 %
7 Year 5.05 %
10 Year 5.25 %
With those rates the 5,7, and 10 year rates should be attractive for some buyers I’m sure.
April 25th, 2009 at 12:48 PM
Pam,
By your figures, people are overextended.
You prove my point.
Captcha: “massaged false”