Canadian house prices: a regional picture

Judging from the latest statistics, the Canadian housing sector remains fairly solid, particularly when compared with that of the United States, which is mired in a slump. That said, last month, a slight crimp appeared here, too. During June, the average selling price for existing homes fell by 0.4 percent compared to the same month the year before. The big question now is whether that little drop means anything.

At first glance, you'd have to say no. For one, the decline is tiny, especially when measured in conjunction with overall house prices, which have more than doubled in Canada during the past 10 years. Furthermore, the job market, which is a key driver of real estate sector demand, remains relatively solid. According to Statistics Canada's most recent Labour Force Survey, employment remained stable in June for the second consecutive month, and the overall unemployment rate came in at a respectable 6.2 percent.

In addition, interest rates, which for many buyers represent the single largest cost involved in owning a home, also look fairly attractive. Though creeping up slightly, mortgage rates remain extremely low when measured on a historical basis.

Housing sector activity remains strong

To be judged fairly, price data regarding existing homes need to be evaluated in context. For example, the Canadian Real Estate Association, or CREA, recently released data collected via its Multiple Listing Service for the first six full months of the year, and those numbers look far better. During that period, the average selling price of existing homes actually increased by 3.6 percent.

Recently released data regarding new home construction also look strong. Although housing starts slipped slightly in June to a seasonally adjusted annual rate of 217,800 units, according to the Canada Mortgage Housing Corporation, the pace remains near record levels.

Contractors' selling prices for those new homes also continue to rise. In May, new home prices rose by an average of 4.2 percent compared to the same month the year before. And while the rate of those increases has been tailing off in recent months, the increases remain well above the core inflation rate.

In fact, things are going so well that CREA experts, though cautious, expect a positive year for housing prices. "The resale housing market is more balanced that it was last year in all major urban centres," says Gregory Klump, the association's chief economist. "The frenzied pace for sales activity has faded, with buyers now better able to shop around before making an offer. Price increases are expected to be modest in the second half of 2008, as sales continue easing and listings remain high."

New listings remain high

So, if many housing sector indicators continue to look relatively strong, how could the average selling price of existing homes have fallen last month? Well for one, the amount of new listings is also very high. According to CREA, 332,958 units were put up for sale during the first half of the year, up 8.1 percent compared to the same period the year before. And when there are more homes to choose from, shoppers can haggle to get a better deal.

However, even more importantly, much of the decline in average house prices is simply a reflection of previous surges that occurred in the Calgary and Edmonton areas. For example, during 2006 and 2007, the average selling price of existing homes sold in Alberta rose by a mind boggling 30.8 percent and 24.8 percent respectively.

The trouble is that those kinds of performances are hard to top. In essence, prices there were thus destined to cool off. When they did, they brought the rest of the Canadian averages down with them. The irony is that this all occurred at the same time that average selling prices hit record highs in close to a dozen other markets across the country, including Ottawa, Montreal, Saskatoon, Saint John and Kitchener-Waterloo.

Of course, all of this is not to say that house prices on a national basis will not decline further. In fact, many observers have already said that housing demand growth will taper off for this year as a whole. However, compared to the increases that we have seen in recent years, there are few signs that any impending correction would be more than a minor affair.

By: Peter Diekmeyer - economics columnist

Home ownership at record levels; Canadian mortgage debt headed to $1-trillion mark

TORONTO - Never before have so many Canadians owned homes. And never before have they owed so much for the privilege.

Interest rates at or near historical lows combined with low unemployment and recent changes that allow people to buy houses with less money down and pay off mortgages over longer periods resulted in 68.4 per cent of Canadians in the housing market in 2006.

That's up from 65.8 per cent in 2001 and 60 per cent in 1971, according to the latest Statistics Canada data.

The increase comes despite the fact that the cost of housing in many cities across the country has gone through the roof, outstripping inflation by far, while median incomes have essentially flatlined.

"Low mortgage rates have helped offset much, but not all, of the impact of rising house prices in recent years on mortgage debt-service costs," said Bertrand Recher, a senior economist with Canada Housing and Mortgage Corp.

The overall result has been a small increase in the percentage of Canadian homeowners who spend more than 30 per cent of their gross income on shelter costs, according to Statistics Canada census data.

But latest CMHC figures show a sharper spike in mortgage-carrying costs in terms of after-tax income.

In 2007, average household spending on monthly mortgage payments had reached 37 per cent of after-tax income, up from 32 per cent in 2006.

"That's significant - mortgage carrying costs are increasing," said Recher.

"This burden is heavier on the shoulders of first-time buyers because they don't have the equity."

Most analysts, however, see little comparison between the Canadian housing market and its American counterpart, where hundreds of thousands of homeowners suddenly found themselves in way over their heads, creating a financial meltdown.

Canadian financial institutions jealously guard the number of mortgage defaults they endure. But among the country's big banks, only about 0.27 per cent of homeowners were three months or more in arrears on their payments.

"Anecdotally, we are not seeing any rise in arrears or defaults across the country," said Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, an organization that speaks for mortgage lenders.

"Canadian underwriting standards by lenders and mortgage insurers are much more thorough than they are in the United States. Canadian lenders are much more conservative."

One key factor in the rise of home ownership is the relatively new option of mortgages amortized over 40 years.

Paying off loans for homes over a longer period means much higher total interest costs, but lower ongoing monthly payments. The effect is increased affordability. Growth in such long-term mortgages has been nothing short of dramatic, figures show.

Between the fall of 2006 and fall 2007, 37 per cent of all mortgages carried amortizations longer than 25 years, up from nine per cent in the preceding period.

"Clearly they're very popular," said Murphy, adding that not only first-time buyers are opting for the new choice.

One real estate investor-analyst who disagrees with the rosy assessment of the Canadian market is Liberal MP Garth Turner, who argues too many people, especially younger buyers, are taking on too much debt to buy into the housing game.

Low interest rates coupled with 40-year amortizations and negligible downpayments might make it easier to buy higher priced homes, but it's also leaving buyers vulnerable, Turner says.
"The inevitable conclusion is that the current Canadian real estate market is floating on a sea of unrepayable, and perhaps unserviceable, debt," Turner maintains in his book, "Greater Fool."
Collectively, it is a lot of debt.

In total, Canadians owe an amount fast approaching $850 billion on their homes, more than double what it was a decade ago, with percentage growth in double digits in recent years.

If trends continue as expected, the value of all outstanding mortgages will surpass the $1-trillion mark sometime toward the end of next year.

The federal government is keeping a close eye on the developments, according to Finance Minister Jim Flaherty.

"We have been monitoring the mortgage market, as we do, and we've seen a trend toward longer amortizations and smaller down payments, and that is a matter of some concern," Flaherty said recently.

"We're continuing to watch that."

Mortgage insurers, who take care of defaults, have also tightened their criteria.

Still, any concerns over the situation appear, at least for the moment, to be outweighed by more positive views.

Overall economic conditions remain healthy in Canada, with unemployment close to historical lows, Recher noted.

In addition, the forecast is for the rapid growth in house prices to moderate substantially while interest rates are expected to remain relatively stable, at least over the next year or two.

One group blissfully unconcerned about rising carrying costs are those aging baby boomers who have paid off their mortgages, a group that has grown in recent years.

More than 42 per cent of all homeowners hold no mortgage at all, according to Statistics Canada.

Many longtime owners have taken their equity and downsized to condos, joining the flood of first-time buyers who have gained their first toe-hold in the world of home ownership by entering the relatively affordable condo market.

About 10 per cent of households are now in condos, a tripling in 25 years.

"There's been quite an increase . . . in the percentage of owner-households that are in condos," said Willa Rea, senior analyst with Statistics Canada.

"There's a good deal of young people buying in and becoming homeowners. We've seen quite an increase there."

While shelter costs for homeowners have risen, they remain higher than those for renters. Roughly 40 per cent of renters spend 30 per cent or more of their income on shelter.
"That hasn't changed," said Rea. "It's pretty stable there."

The analysis released Wednesday is based on census data collected more than two years ago. The next census will be taken in 2011.

© The Canadian Press, 2008

No bailout for irresponsible financial institutions, says Bank of Canada governor

OTTAWA - The governor of the Bank of Canada says he will take a tough stand with financial institutions that wind up near bankruptcy because of poor decisions.

Mark Carney says the central bank won't be bailing out Canadian financial institutions like the U.S. government did when the Bear Stearns brokerage, one of the giants of Wall Street, ran afoul of the subprime mortgage mess.

"If you cannot make a judgment (on the value of an asset), you should not own the security," Carney told a Senate committee Thursday.

"There is very high value if a situation came about to ensuring the shareholders and senior managers bear the full consequences of their actions," Carney said.

"The Bank of Canada has a role to become lender of last resort, but we would do that on the advice of the Superintendent of Financial Institutions that the institution is solvent, not because the institution needed money."

Carney said the central bank would come to the rescue of a chartered bank in the case of a temporary liquidity problem, if the institution had sufficient capital to be considered viable.
But he added if investors and managers thought there would always be a safety net, they would be encouraged to take inordinate risks in order to maximize profits.

Canada has a relatively small number of chartered banks and there's little chance of bankruptcy at any of the biggest. However, there are also a number of small, little-known chartered banks, as well as mutual fund companies, investment dealers and other financial services companies without the resources of the Big Six.

Carney's harsh stance Thursday appeared aimed at possible future behaviour by Canadian financial institutions than any past transgressions, as he mostly praised the chartered banks for leading the world in moving to meet new disclosure requirements recommended by the Financial Stability Forum last month.

And he repeatedly stressed that tight credit conditions are not as bad in Canada as in the rest of the world, saying while the banks are having some difficulty obtaining financing, the cost of inter-bank lending is about half that in the U.S. and Europe.

Carney also said that it may be possible that the International Monetary Fund's estimate of total global losses of US$945 billion from the U.S.-originated financial crisis may be overly high, although he gave no estimate himself.

As he did the previous day in testimony before a Commons committee, the bank governor defended his request for new powers to expand the list of assets the Bank of Canada can accept in injecting liquidity during the current tight credit situation.

The change would give the Bank of Canada the same flexibility as other central banks in the industrialized world, he said.

"This is a core recommendation of the Financial Stability report which was endorsed by all G-7 finance ministers and governors last month," Carney said. "These are powers (that other central) banks have and use."

Speaking to reporters after his testimony, Carney said he was sticking by his forecast that Canada's economy would suffer through a slow first half of the year and start to recover in the second half despite Wednesday's Statistics Canada report that the country's gross domestic product actually shrank by 0.2 per cent in February.

He said the central bank does not put great weight on monthly statistics, which sometimes get revised and can be volatile.

"We're talking about an economy that has grown 3.3 per cent for 15 years," he said. "There have been big shocks, but there's a lot of strength in the Canadian economy. There's a lot of strength in domestic demand."

© The Canadian Press, 2008

Canadian economy in good shape despite possible U.S. recession: CIBC economist


LAKE LOUISE, Alta. - Canada will be relatively sheltered from a possible U.S recession because of our booming resource sector and minimal exposure to subprime mortgages, CIBC World Markets (TSX:CM) senior economist Avery Shenfeld says.

Shenfeld told a conference Thursday the recent spike in commodities like oil and natural gas reflect "the kind of numbers that you see amidst a global economic boom."

Canada benefits from the fact that it is an exporter of oil, which surged above US$110 a barrel on the New York Mercantile Exchange on Thursday.

"Increasingly Canada's become almost a petro-currency where the fluctuations in the price of oil drive the story almost day to day of the value of the Canadian dollar," Shenfeld said.

"When you are a resource exporter, which Canada is to a significant degree, you're getting more for each barrel of oil each tonne of nickel."

Any growth of the Canadian economy will come almost entirely from resource-rich Western Canada. Meanwhile the manufacturing heartland in Central Canada, which depends on selling exports to the United States, is experiencing virtually recession-like conditions.

"The key difference here is if Canada were an island unto itself, if we didn't trade with anybody, we'd be in a boom not a bust," Shenfeld said.

"If Canada were not a trading partner with the U.S. we'd be projecting a boom in the Canadian economy in 2008."

Canadian domestic demand has been growing at a much higher rate than in its neighbour to the south. That is mostly due to our relative insulation from the subprime mortgage crisis in the United States.

"Canadian banks tend to be pretty boring institutions. We're not as exciting as those Wall Street institutions. We don't try invent as many ways to lend people money who can't pay it back," Shenfeld said.

"So the net result was that we never really had much of a subprime mortgage market. It's not blowing up as a result."

© The Canadian Press, 2008

House prices jump 45%

Market expected to climb, after record-breaking 2007

The past 12 months have been record-breaking for residential Realtors in Saskatoon, with 4,446 homes sold, an average price 45 per cent higher than 2006 and a total dollar volume topping $1 billion.

According to year-end figures released Thursday by the Saskatoon Region Association of Realtors, $1,034,826,425 in residential property was sold in the city, a total residential dollar volume 88 per cent higher than 2006's total of just over $550 million. The average price of a home in the city reached $232,754, up 45 per cent from 2006's average of $160,586.

It has been a landmark year for real estate in Saskatoon, said the association's executive officer Harry Janzen. With a rolling six-month average home price of $250,428, Janzen said the past 12 months have been a whirlwind for the industry.

It was a year of numerous milestones, he said.
"If we look at the month of August, it was the first (time) that we surpassed $1 billion in total MLS dollar volume, which represented a 97 per cent increase from the previous year. But the other milestone was accomplished in December as we passed the $1-billion mark in residential dollar volume," he said. "Those are actually quite incredible numbers for our marketplace, and certainly that translates into the average selling price which has been consistent over the past six months."

In December, the average price of a home reached $255,271, up 46 per cent from December 2006 when the average price was $175,301. December was the second month in 2007, along with October, that the average price topped $255,000.

A high average at the end of the year indicates a strong market for the next 12 months, said Janzen. Driven by in-migration and a strong economy, 2007 home prices also reflected a market correction. Prices are expected to continue to rise this year, though not with the intensity of 2007 increases.

"We're very stable around that $250,000 mark, but will those prices go up? I certainly believe they will, because demand dictates price. We have indicators from every area that there's a strong confidence in the Saskatoon market -- there's exceptional optimism, probably more than I've ever seen," he said.

Homes in the $300,000 to $400,000 range were the best-sellers of the year, Janzen said, but that didn't stop prices from rising on smaller, starter homes. With people priced out of the market and investors capitalizing on a strong economy by raising rents or converting apartments into condos, the rough side of a gleaming real estate market quickly came to light. The executive officer said other Canadian cities, such as Calgary and Winnipeg, that have recently dealt with the question of affordable housing, act as benchmarks for Saskatoon.

"There's no question that an active real estate market has some inherent issues, and certainly housing affordability is on the front burner," he said. "One thing I can say with 100 per cent confidence is our province, and most importantly our city, have been very proactive in trying to prepare for the issue of affordable housing. These issues are not unique to Saskatoon, they are inherent with any active real estate market."

Although the banner year for residential real estate wasn't universally positive, Janzen said Saskatonians can expect more of the same in 2008.

"I guess it might be said that anyone who's out there thinking, 'I'm going to wait to purchase a property because prices are going to come down,' we should encourage them to not think that way."

Now is the time to try and buy, said Kent Bittner, mortgage broker and owner of Dominion Lending Centres on Saskatoon's Wall Street. People trying to enter the market for the first time are concerned they will be left out in the rush, he said, and their worries are valid.

"We do see people, call them first-time homebuyers, caught in the market where they know what's going on, they've heard that prices have been increasing. They're fearful that they will be left out in the dark if they don't get into the market soon," Bittner said. "Somebody that's looking right now is best to look seriously in the next couple months rather than waiting for the spring months, because last year people could have easily paid 30 per cent more just waiting a couple months."

Higher prices are making it more difficult to qualify for loans, he said, saying a $150,000 starter home 18 months ago likely retails for closer to $250,000 today. Bittner added the price barrier is too much for some to compete with, but lending institutions are offering products that make getting into a home for the first time a little easier.

"There's definitely some people who are not able to afford what they would consider adequate housing, but, as a side note, there have been extended amortization and debt service ratios which have come into our market in the last couple of years which have kind of coincided with increased pricing. So prices have made it tougher to qualify, but yet we've had products out there that do make it easier on that end, too," he explained.

With home prices expected to rise through 2008, the broker suggests people thinking about buying a home move forward with their plans.

"With what's happened in Saskatchewan here, in Saskatoon $250,000 used to be a fairly big number; $500,000 isn't even a big number any more," he said. "I think people who are renting, the longer they are renting the less chance they have of purchasing."

What 2008 holds for the Canadian economy

The new buzz word among economists in recent weeks has been "decoupling." With the American economy slowing, the big question now is whether the rest of the world will follow suit as it usually does, or whether other countries are sufficiently decoupled from the US that they can continue to grow without support from American consumers.

Nowhere is the decoupling question more relevant than it is in Canada. Close to 25 percent of Canadian Gross Domestic Product, or GDP, ends up as exports to the US, so if our biggest customer catches a cold, we tend to get pneumonia. According to one expert, things aren't likely to be any different this time around.

"Canada's economy is headed for weaker times in 2008," said Craig Alexander, deputy chief economist at TD Financial Group, in a recent note to clients. "The good news is that Canada is well positioned to weather the storm. The domestic economy remains solid and the risks in the real estate market remain limited."

Although the Indian and Chinese economies remain exceptionally robust, "the correlation between overseas economic growth and US consumer activity has remained strong," says Alexander. "This implies that the coming tightening in American purse strings will act as a major dampening factor." Alexander expects world GDP growth to slow from 5.2 percent in 2007 to 4.2 percent in 2008. Canadian growth is expected to slow to 1.9 percent in 2008 before bouncing back up to 2.5 percent in 2009.

A dose of preventive medicineAccording to Yanick Desnoyers, a senior economist at National Bank Financial, the Bank of Canada's move to cut interest rates earlier this month may prove to be prescient. The strong loonie, coupled with tighter credit south of the border, is putting a crimp in the growth of Canadian exports. The fact that domestic inflation remains well contained gave the central bank room to act earlier than it might otherwise have.

"In terms of domestic demand, the U.S. economy is ambling, while Canada is running full steam," comments Desnoyers. "In stark contrast with the situation south of the border, house prices here continue to climb, with the resulting real estate wealth and a strong job market providing solid support for consumption growth. However, with the US consumer almost completely tapped out, the risks that Canadian exports will be hit hard are much higher than many believe."

Recent real estate performanceOne area that has done quite well recently, but which could see some cooling off next year, is house prices. According to the Canadian Real Estate Association, or CREA, existing home sales in Canada reached record levels during the first 11 months of this year. The average price of a home sold via the association's Multiple Listing Service, or MLS, rose by an impressive 11.6 percent to $332,807 in November.

According to one CREA spokesperson, worries that the effects from the sub-prime loan debacle in the US would spread to Canada's housing sector have yet to be confirmed. "Our association has not received any reports from realtors that creditworthy homebuyers are having difficulty getting mortgage financing as a result of the sub-prime meltdown," says Anne Bosley, CREA's president.

Housing starts also remain strong and ran at an annual rate of 227,900 units in November, a pace that is almost unchanged from the previous month. That said, the rate of growth in the selling price of new houses slowed again last month for the 14th consecutive month. According to Statistics Canada, contractors' selling prices for new homes rose by 6.1 percent between October 2006 and October 2007, down from a 6.2 percent year-over-year increase the previous month.

Existing home prices have now risen in the double digits for the past three years. However, despite the Canadian real estate market's impressive numbers, Douglas Porter, an economist with BMO Capital Markets, believes that that strength is unlikely to continue forever. That said, the slowdown will be moderate. "Housing may not manage to pack as strong a punch next year as it did in 2007 for the Canadian economy," says Porter. "But it's also unlikely to suffer a knockout blow, a la the US market over the past year."

In short, while the US economy may not be completely decoupled from Canada's, Canadian homeowners can at least rest assured that for the time being, their real estate market looks like it is.

By Peter Diekmeyer of Bankrate.com

81 per cent of Canadians satisfied with their mortgages

Canadian Association of Accredited Mortgage Professionals survey shows longer amortization and flexible terms keep mortgage industry buoyant

TORONTO, Ontario, November 07, 2007 — The vast majority of Canadians (81 per cent) are happy with the terms of their mortgages thanks in large measure to "good interest rates" and longer amortization options, according to a report released today by the Canadian Association of Accredited Mortgage Professionals (CAAMP). Significantly, thirty seven per cent of Canadians who have taken out a mortgage in the last year have chosen amortization periods of more than 25 years. The information was gathered by Maritz from an online survey of 2,000 Canadians in late September and analyzed in conjunction with CAAMP economist, Will Dunning.

While mortgage rates continue to be the most common factor consumers use to rate satisfaction with their mortgages, consumers are clearly pleased with the many new alternatives they have. Fifty-eight per cent cited more choice for payment options and mortgage terms as reasons for being satisfied with their current mortgage.

"Canadians, particularly first time homeowners, are looking for lending products that can help them enter the market as prices continue to rise," said Jim Murphy, AMP, President and CEO of CAAMP. "Alternative lending products, such as longer amortizations, with the option to renegotiate terms, are keeping the housing market accessible to a wider range of investors."

Most Canadians chose their mortgage lender because of the rate offered and most said they sought two or less quotes, suggesting that at least on rates, there is not much difference among institutions. The number of Canadians who have consulted with a mortgage broker remained unchanged from last year at 28 per cent; however for those new mortgages taken out during the last year, the number consulting mortgage brokers rises to 43 per cent. The majority of Canadian mortgage holders continued to consult with one of the major banks when taking out a mortgage.

The survey asked Canadians about the turmoil in the United State's sub-prime mortgage and housing markets. Most Canadians said they are aware of the events, and that they are concerned about them to varying degrees. However, they see little impact on themselves - even among those who are concerned to some degree, 58 per cent said that the changes in the U.S. have had no effect on their recent decisions.

"Canadian homebuyers are a sophisticated and savvy group," said Andrew Moor, AMP, CAAMP Chairman. "They have a risk management attitude. Canadians understand that our mortgage market remains strong and stable, even as they continue to keep a close eye on interest rates."

Growth of residential mortgage credit continues to accelerate - during the past two years, it expanded by an average of $77 billion per year, or 11.4 per cent per year. The volume of residential mortgage credit outstanding is forecast to grow by 11.7 per cent in 2007, 9.3 per cent in 2008 and 8.4 per cent in 2009. Total mortgage credit is projected to reach $963 billion by the end of 2009 and will surpass $1 trillion during 2010.

The mortgage market's expansion in recent years is related to strong housing market activity. The volume of sales more than doubled (rising by 144 per cent) in the six years from 2000 to 2006, for a growth rate of 16 per cent per year - resulting in a rapidly rising requirement for mortgage financing. Over the same period, outstanding residential mortgage credit expanded at a rate of 8.9 per cent per year.

Canadian attitudes towards buying a home varied according to their locations. Those most negative pointed to high house prices. Those most positive cited low interest rates. When asked if "now is a good or bad time to buy a home in your community," British Columbians were slightly less positive about buying than a year ago while Saskatchewan and Alberta were the only two provinces where a majority gave a negative response (60 and 59 per cent respectively) reflecting the heated housing markets in those two provinces. In the East, Quebec and Ontario, respondents were more positive about buying at this time.

About CAAMPEstablished in 1994, the Canadian Association of Accredited Mortgage Professionals (CAAMP), formerly the Canadian Institute of Mortgage Brokers and Lenders, is Canada's national mortgage industry association. CAAMP has assumed a leadership role in the industry it serves and has set the standard for best practices for Canada's mortgage practitioners. In 2004, CAAMP created the Accredited Mortgage Professional (AMP) designation as part of an ongoing commitment to increasing the level of professionalism in Canada's mortgage industry.

As a membership-based organization, CAAMP strives to develop its network of professionals and to represent the interests of these individuals to government, media and consumers.

CAAMP has attracted over 10,000 members and 1,100 companies from across Canada - representing over 90% of Canada's mortgage activity. CAAMP members make up the largest and most respected network of mortgage professionals in the country. CAAMP's membership base consists of mortgage lenders, brokers, insurers and other industry participants.

CAAMP's other primary role is that of consumer advocate. On an ongoing basis CAAMP aims to educate and inform the public about the mortgage industry. Through its extensive membership database, CAAMP provides consumers with access to a cross-country network of the industry's most respected and ethical professionals.

In September/October 2007, Maritz Research conducted a 21-question telephone survey with 2,000 Canadian consumers. A sample of 2,000 Canadians ensures an accuracy of + 2.2%, 19 times out of 20.

A copy of the survey is available at www.caamp.org