Headlines boasting "Canadian home sales increased by 73%" were in almost every newspaper across the country today as the Canadian Real Estate Association released the national housing sales numbers for November today. That is a huge increase, but you also have to keep in mind that last November was one of the worst months for home sales we've seen in a very long time.
The question is, are Canadian home buyers overly confident? Sales are surging because of high affordability and low interest rates, but what happens when the rates inevitably rise?
According to an article in the Globe & Mail economists are encouraged by the increase in new listings, which they hope will slow the increase in average prices we've seen nationally for the past few months. In other words, they hope the housing market continues to improve, but more slowly.
The article gives a great example of what a small increase in mortgage rates will due to monthly payments – a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750.
While residential home sales in Edmonton have increased dramatically year over year, (1261 this year compared to 891 in November '08) our average sale price is about equal to that of last year. Slow and steady wins the race not volatility, and I for one am pleased to report that Edmonton is a bit behind the national average this time! We already set one record this week (for the lowest temperature) lets keep it to that, unless the Oilers can set a new record for wins in December!
When considering purchasing a home at todays ultra low rates make sure to consider higher future rates and be comfortable renewing your mortgage at 5-6% interest. If you are comfortable with that you will be in a much better position than many others when it comes to renew in 5 years.
This pretty much sums it up…
http://www.tradersnarrative.com/david-rosenberg-canadian-real-estate-near-bubble-3358.html
Not sure what it’s summing up though George. Remember that when someone talks of a Canadian real estate bubble, just as in a U.S. bubble, they are talking in generalities. Each nation has several regional economies inside it. By far the biggest disaster for the U.S. market has been centered in only 4 states, Florida, Arizona, California and Nevada. I believe that the greatest argument for frothiness in Canada is centered in Vancouver and Toronto. Since they are the biggest markets, they also skew the numbers quite a bit. Your link uses the Canadian average family income as well. In Vancouver using average family income for average prices you get something like 8X average income. In Edmonton, the last numbers I could find for average family income was in 2006 and it was a 87,300. Using the Alberta governments average wage settlement for all industries for 2007, 2008 and til April 2009 I come up with Edmonton average family income of 98,465. With average residential prices, according to Sheldon and Sara at 316,000 at the end of Nov. 09, you end up with a 3.21X family income…not exactly a huge overshoot if the general consensus is 3X family income is the upper limit of “normal”. The fact our inventory levels have returned to a more manageable level, sales have returned to an average level and factoring prices are little changed this year is actually a good argument that Edmonton’s real estate market is not over heated and looks to be more substainable compared to some other headline grabbing markets in the country.
Good comment, Itchy. I am not so sure about Toronto prices, though. I just came back from a 2-week business trip and had time to look around and do a bit of research.
Townhouse prices in some good neighborhoods seem very reasonable, compared to Edmonton, and have not gone up anywhere near as much, since 2002, when we left Toronto to come here.
There are some nice single family homes in Ajax and Pickering, in good commuting distance from Toronto that are on the market for about 450K. I have seen similar houses on MLS here for significantly more than that (minus the brick!)
After this trip, I am really not sure that I want to spend 700-800K on a house here. I am thinking that my chances of reselling at that price would be better in Toronto.
This is a statement reflecting our personal circumstances. I am NOT advocating that people should leave Edmonton and buy in Toronto. We are currently flexible in terms of where we can live, given the nature of our jobs, but family circumstances might dictate that we move within the next few years, on relatively short notice.
At that time, we don’t want to be stuck with a higher-end home that can’t be sold fast and without loss, although it’s very tempting right now to get into that market.
I am just worried about the overall inventory of higher-end homes and Edmonton income levels to absorb the ones that will come on the market over the next few years, as an ageing population downsizes.
We’ll probably continue sitting on that uncomfortable fence for another few months before making a decision.
Wow…mdm I usually agree with your comments but comparing Ajax and Pickering to anything in Edmonton makes no sense at all to me. I’m from Ontario and living in Ajax may as well be living in Red Deer – it’s an hour commute to Toronto at the best of times. I agree that higher end homes may be over supplied here, but to compare fairly to Ajax you should consider homes in Spruce Grove or Stony Plain…you can get a gorgeous home for $600k there and it’s only 20 minutes from Edmonton.
The report is what it is. Was it broken down by regions? No it wasn’t. But it still gives very good information showing prices based on fundamentals are making 2-3 standard deviation moves (price to income measure and price to rent measures). If you can understand that then you know what’s coming.
What we can’t see from the income, price and inventory stats is the number of 5% down/35 year mortgages in the region. A co-worker in my lunch room was talking about his mortgage for a newly built home in Ellerslie bought on a 35-year variable rate the other day and how hard it would be if interest rates went up a couple points. Yikes! Makes me wonder about the effect on demand Flaherty’s plan to reduce terms and increase down payments requirements will have on the market.
Despite what the statistics may say, my observations of home buyers lead me to believe that they are not overconfident.
When I speak to first time home buyers, since many of them are very green to the home buying process, they all seem to proceed with extreme caution.
Further to was already said in this thread, I advise them to do their analysis today, taking into account future interest rates. Stress Testing either a real estate portfolio or a single purchase is so important to do in these times of low interest rates.
People that do not, are going get a rude awakening when interest rates rise, and they are not able to afford their payments.
Merry Christmas and Happy Holidays!
Regards,
Neil Uttamsingh