The REALTORS® Association of Edmonton released the stats for real estate sales in July today showing that housing prices cooled in July. Single family dwelling prices slid 3.1% while condo prices were down a marginal 1.5% and the overall residential average price dropped 1.7% to $329,734 from $335k last month. The overall median sale price was almost unchanged at $313,000 compared to $315,000 last month. This suggests that lower luxury sales affected the overage average as we suspected when we reported our numbers on Monday.
"The number of homes in the inventory is giving buyers’ choice," said Larry Westergard, president of the REALTORS® Association of Edmonton. "As a result many buyers are taking their time and prices are beginning to soften slightly. At the same time, some sellers who have been standing firm have been pushed to discount their initial list price."
Although inventory of homes and condos within the city limits is still creeping up, the inventory for the board as a whole dropped to 8,892 residential properties.
New listings were off 15% from last month and 3.3% from last July and are falling back into the "normal" range.
As we discussed last month, the Association has made efforts to improve the accuracy of our stats; some sales are reported after the stats are released so the Association now goes back and corrects the numbers. For example, last month when the press release came out 1539 sales were reported for June, and this month the numbers show 1741 for June. I’ve decided to show both the reported numbers and the adjusted numbers in my chart, with a projected number for July so we can compare apples to apples. No matter how you look at it, we saw very low sales in July:
From our perspective this inversion of sales is mainly related to a significant amount of demand moving forward in 2009 to take advantage of lower interest rates. On June 17th this year we suggested people get "ready for the headlines", where we basically outlined there would be lower sales. Some people see the current trend as a race for the bottom while I have perhaps a slightly different take. I saw one comment on our blog who compared us to Florida. I mean come on, Flordia? Not even close. Our inventory levels are not that out of line and compared to other markets our lending practises and economic fundamentals are extremely different.
Anyway, in regards to the number of homes for sale… If seasonal trends hold true to form we will see inventory soften for the rest of the year, the question is "by how much?" With the sales at these levels a drop in listings will mainly be precipatated by expired listings or people just taking their properties off of the market. I’d like to know when demand will normalize. If the inversion principle holds then September / October will see more normalized sales and then you will see headlines saying how "sales are 15% higher than last year" and so on. One thing I have certainly cautioned my sellers on is that if you do see a lower offer than you normally would have considered, I wouldn’t discount it without a good hard look at the overall fundamentals.
Why can’t the blog title read ” Single Family and Condo prices down in July” ?
Why try a tongue twister ??
Exactly. It’s not about where prices have been, but about where they’re headed.
The Florida comment is indicative of so many posts on this blog – bearish with no factual or statistical information. I would like you to do another survey asking your bloggers who owns a house. My hypothesis is that most of the bears on this site do not own a home. I would also hypothesise that they will never own a house because they live in a perpetual state of fear of not buying at the bottom of the market. Stating that the market will crash 20% may make you sleep better and give you a reason to justify why you don’t own a home but the reality is it doesn’t get you any closer to owning a home and that is too bad. It is sad hearing about people in retirment wasting money on rent.
@Spud:
Why not back your own speculation up with some facts and statistics? If you’re advocating a bullish position on real estate values, what is the basis for that position?
At current price levels I’m bearish, but that is only because the average income in Edmonton lower than what would typically be necessary to support with the current average house price in Edmonton. The local (and indeed national) house prices got where they are today via increased availability of credit, but credit availability is likely to decrease in the future if interest rates continue to rise. To me, this seems to be a very rational position. I’m not emotionally attached to this position, and if you could show me that it would cost me less to buy, I would abandon this position in a heartbeat.
I like what Sara did about a week ago, she illustrated that a 0.25% increase requires a 5% lower house price in order for monthly payments to remain the same. This did a great job of illustrating the kind of downward pressure on house prices a interest rate increase has. From the bulls on here I haven’t seen any bullish argument as succinct as that one.
“the average income in Edmonton lower than what would typically be necessary to support with the current average house price in Edmonton”
I’m pretty sure this is not a correct assumption – From my memory, the most recent CMHC report showed Edmonton’s affordability index in good shape (particularly compared to the rest of the country)
My apologies – as with many others on this site, I am too lazy to go to the CMHC site and pull any actual data
I’ve been told us that your front-end debt-to-income ratio should be 28% or less. That is, you should pay no more than 28% of your gross income toward housing expenses. The back-end ratio was 36%, which meant that your housing expenses and debt payments combined should total less than 36% of your income.
This aligns with what is said on the front page of patrick.net: “Banks say a safe mortgage is a maximum of 3 times the buyer’s annual income with 20% downpayment.”
Of course, not all mortgages are considered safe by banks which is why CMHC exists. It insures the mortgages that banks consider unsafe. This is why I think it’s an excellent metric – if you need CMHC to insure your loan, you can’t afford to purchase that house.
Anyway, by that measure, can the average family (well, average household income) afford to buy the average house in Edmonton? Not yet, but if the current rate of price declines continue they may be able to afford a house in late 2011.
Hi Spud,
BTW, I love the name. I also like your posts – I always find them to be very informative and yes, I know it’s a blog – but I believe what you say to be very real and interesting. Gives me stuff to think about.
Spud,
To date, I cannot recall you including one bit of factual or statistical info in your rants. Please enlighten us. You need to do a better job defending your position than just calling bears “bitter renters.” I know, I know, I could use more stats and solid info in my own posts as well.
Here you go:
Current average house price = $330k
Average household income = $90k
Affordbale housing is defined as repayments not exceeding 30% of a households gross income income according to CMHC
Assume an interest rate of 6.5%. I know you can get much lower but don’t want to be accused of being biased.
Assume a $30k deposit on the house to leave a mortgage of $300k.
The annual repayments on a 25 year loan are $24,308. That is 27% of gross household income. And that is on a 25 yr loan.
So Spence and Dances, even factoring in higher interest rates and paying the loan off in 25 years the average house price is still within the definition of affordable housing.
So what is it that is going to cause a 20% drop in prices?
A fall in household income? I haven’t seen that predicted anywhere.
Interest rate rises? I have factored that in.
Please enlighten us oh bearish one.
“Average household income = $90k”
I don’t make two incomes.
And I make double that (not really)
So what’s the point you are trying to make? All you are demonstrating is that you are below average (income-wise, anyways).
I guess you can choose to either buy a below average price house or keep complaining…
First, I’d like you to cite the source for your numbers. The best I can do as far as an authoritative source for these numbers is Stats Canada
Median total income, by family type, by census metropolitan area : http://www40.statcan.ca/l01/cst01/famil107a-eng.htm
In 2007 for Edmonton it’s $83,460
Now, the last number they have is 2007, which was the “peak” of the economic boom, and predates the subsequent layoffs in the energy sector. I don’t think the numbers would have risen much higher than this, but 2007 is the most recent data I see on that site. Please cite your source of data for household income data for Edmonton.
“So what is it that is going to cause a 20% drop in prices?”
Well, one reason why I think there will be some sort of correction is because right now in Edmonton it is a much better deal to rent than it is to buy. One choice for that example family is that they buy a house for $330,000 and pay $24,308 annually just for the mortgage (ignoring property tax and upkeep costs). For that amount of money they won’t get a very nice house in Edmonton.
Another choice is that they could pay $22,800/yr and live in a much nicer house. I’m currently living in a house that is valued over $500k (based on MLS listings around me), and I’m paying $1900/mo rent. Alternatively that family could pay significantly less than I am and live in a house comparable to the $330k house that they would be buying for the $24,308 number that you calculated. They could put the savings they get from renting into some low-growth financial product (say, a GIC) and come out ahead very quickly.
To help illustrate the point, go to the NY Times buy/rent calculator and lets plug in the numbers for this example family:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
To rent a $330,000 place, I estimate you could get that for about $1400/mo, maybe less, but I’ll use $1400. 6.5% interest, lets bump up the average appreciation to 2% (since in the long term real estate appreciation tracks closely with inflation). 3% average rent increase/year.
Buying is better than renting for the first 24 years. Very few people stay in a house that long so in the current market renting is the way to go.
we just rented out a house that was realistically valued at $405,000. and it rented for $2200/mos. So you are getting a very good deal in rent from my perspective.
The issue of people putting away money into slow growth investments seldom works. People just don’t do it or they tap into it or inflation eats it away.
In theory it sounds great, however a home is more than just an investment to many people. Its where people want to live, where their families are anchored and where they feel safe. Just my two cents as to why an emotional quotient has many people not accepting the simplified theory of rent being the better choice for them.
First off, homes that are occupied as principal residences are not investments. They are consumer durables, and nothing more.
Regardless, you have successfully illustrated the overvalued condition of the Edmonton (and Canadian) real estate market — at this time, it is a far better financial decision to rent your principal residence than to buy it. And people say realtors never tell the truth!
I would also suggest it is irrelevant what the monthly savings from renting vs owning are spent or invested on; there are few consumer goods available in Edmonton more overpriced than shelter, and a ton of better investments that are, you know, actually investments.
Spence,
I also like your posts.
I like a good discussion.
Average “residential” sale price 330K —
Not average SFH house price …
Average SFH is 380,000
90K x 3 = 270,000
That’s a measly 76K and then you got yourself 20 percent downpayment and a fundemental mortgage!
Oh — But your income would have to be 126,000 (Pocket Change) for that to be fundemental.
Don’t get what you mean small business. Even on a $380k house at 6% interest rate, $30k deposit repayments would be $27k a year. And that is a 25 year mortgage. Repayments are still less than 30% of the gross household income of $90k. Therefore by CMHC definition is still in the bounds of affordable housing. If you want to make it more affordable take out a 30 year mortgage.
So … let’s go through the math —
Average ‘income’ = 90,000K X 3 = $270.000
Average SFH price = 388,000K (According to previous day post)
Let’s say you somehow put 20% down = 77,600K
House 388,000 – Down 77,600 = 310,4000
Looks like the ‘average’ Edmontonian needs another 40K to fundementally buy an ‘average’ SFH.
Consider yourself enlightened.
Ohhh my bad — We are talking CMHC qualifying standards.
Not whether or not housing prices are fundementally sound to income.
I personally taking all the steps I can to avoid a CMHC backed mortgage.
So the prices seem pretty unrealistic to me.
Who knows — Maybe i’m the one drinking the kool-aid.
I saved for 4 years, i can wait a month or two.
Definition of affordable is mortgage repayments of no more than 30% of a households gross income NOT 3 times the annual income.
You are missing taxes and heating etc. in your equation. According to CMHC they are part of the 30%.
Spud,
CHMC’s direct quote is
“The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.
Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.”
http://www.cmhc-schl.gc.ca/en/co/buho/buho_005.cfm
The relevant carrying costs beyond my actual mortgage average about $400/month. I have a small house. Let’s say the average carrying cost beyond the mortgage was $500 dollars/month. Over the course of a year that would add up to $6000K. This would represent a 25% increase in the carrying costs compared to your example. In the end, this new figure would amount to about $34%. This figure is only slightly above the figure CMHC mentioned and really does not concern me as much as our collective disregard for rule #2.
I repeat,
“Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments”
If we work my previous number of 34% into this equation, we are left with 6% of our gross monthly income to service car payments, personal loans and credit car payments. There are a lot of new BMWs in my neighbourhood Spud. Do you know what the monthly payment is on a new BMW is? More than my mortgage. As I have argued all along, it is the over indebtedness of Canadians that will put downward pressure on real estate. If real estate debt was our only problem we would be fine. But it is not. We are amongst the most indebted people on earth.
http://www.thestar.com/business/article/807679–canadian-households-among-the-most-indebted-of-oecd
http://www.theglobeandmail.com/report-on-business/canadas-brewing-debt-storm/article1537623/
60% of Canadians would have a hard time paying their bills if their paycheque was delayed 1 week. That is a lot of us. .
http://ca.news.finance.yahoo.com/s/14092009/2/biz-finance-majority-canadian-employees-living-paycheque-paycheque-survey-shows.html
We have over done it man. The cookie jar was left op
Sorry about the double post guys. Just one more point though. Do you think the average couple making $90k is trying to get into a $330K property (a 1/2 duplex)? I doubt it.
Average indicates there are people below and above the $90k. Just as there are houses above and below the average $380k.
I have owned house all my working life (30 years) both here and UK. I have never before anticipated renting. However, I sold my property just before Christmas 09, and decided to rent an apartment while I kept an eye on the market and the recession. I started looking in the spring 10, but when I saw the unrealistic panic buying (reminisant of 06 when I came to Canada and purchased my house) I decided to wait a while longer.
In 06 the fundamentals were in place for the price increases we saw, however once those fundematals were removed (which the recession did, we live in a global economy), the justification for RE prices increases in 06 and late09/early10 had no founding.
I believe the graphs show that the ‘housing buble’ started in 06 and it is from there that we need to extrapolate forward to have a realistic indication of where things may go.
Lets be clear here, if prices drop significantly, it’s because the economy is struggling, in that scenario Joe Average, whether a bear or a bull, is going to suffer pain and I dont believe house prices being lower is going to help in the overall scheme of trying to make a living. It will only benefit people with loads of cash to buy and invest for better years.
Personaly I beleive there are many people out there who can meet the commitments of a mortgage but are in a position to wait things out untill they are more certain of where the whole economy is going, not just housing.
Speaking of the rental market, I was half asleep having my morning joe watching Global, and I’m sure they said the rental vacancy rate dropped to 2.9% from 5.2%. Did anyone else see this? I’ve gone online but can’t seem to find any reference to the report. Seems like too massive a drop to be correct to me. If true it would tell me 1 of 2 things or a combination of both. Either people are moving back to Edmonton in a big way, or that big spike in inventory was driven by people that were renting out property selling them, thereby removing them from the rental pool. Anyone have any light to shed on this?
O.K. I found the info re rental vacancy buried in the end of month housing report on the Edmonton Journal site. Apartment vacancies did indeed fall from 5.2% to 2.9%……..very interesting.
The apartment vacancy rate is down to 2.9 per cent from 5.2 per cent in April, and rents are likely to climb over the next six months, according to CB Richard Ellis’s latest report.
“We are finding that with the vacancy rate decline, landlords are beginning to eliminate incentives. It appears that the downward trend (in rents) has shifted, and we will likely see rates begin to climb in the latter half of 2010.”
Read more: http://www.edmontonjournal.com/business/Rents+head+home+prices+down+Edmonton/3358728/story.html#ixzz0vkhRAKc3
Check both Edmonton Journal and Edmonton Sun (August 5) who carry stories on this matter. Yes, vacancy rates are falling to the figures reported and rents are on the way up.
“Lets be clear here, if prices drop significantly, it’s because the economy is struggling, in that scenario Joe Average, whether a bear or a bull, is going to suffer pain and I dont believe house prices being lower is going to help in the overall scheme of trying to make a living. It will only benefit people with loads of cash to buy and invest for better years.”
Indeed, charles
Personally I will buy because I want a home – for long term.
(once I sell my ole place! Which I may have to take off market for a while first LOL)
Spud,
CHMC’s direct quote is
“The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.
Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.”
http://www.cmhc-schl.gc.ca/en/co/buho/buho_005.cfm
The relevant carrying costs beyond my actual mortgage average about $400/month. I have a small house. Let’s say the average carrying cost beyond the mortgage was $500 dollars/month. Over the course of a year that would add up to $6000K. This would represent a 25% increase in the carrying costs compared to your example. In the end, this new figure would amount to about $34%. This figure is only slightly above the figure CMHC mentioned and really does not concern me as much as our collective disregard for rule #2.
I repeat,
“Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments”
If we work my previous number of 34% into this equation, we are left with 6% of our gross monthly income to service car payments, personal loans and credit car payments. There are a lot of new BMWs in my neighbourhood Spud. Do you know what the monthly payment is on a new BMW is? More than my mortgage. As I have argued all along, it is the over indebtedness of Canadians that will put downward pressure on real estate. If real estate debt was our only problem we would be fine. But it is not. We are amongst the most indebted people on earth.
http://www.thestar.com/business/article/807679–canadian-households-among-the-most-indebted-of-oecd
http://www.theglobeandmail.com/report-on-business/canadas-brewing-debt-storm/article1537623/
60% of Canadians would have a hard time paying their bills if their paycheque was delayed 1 week.
http://ca.news.finance.yahoo.com/s/14092009/2/biz-finance-majority-canadian-employees-living-paycheque-paycheque-survey-shows.html
We have over done it man. The cookie jar was left open for way too long.
Hey Sara,
Sorry about all of these posts. The comments are not showing up on my computer in the right format. It is now looking like I have posted the same thing 3 times in the last 24 hours. Can anyone else see that?
Last try. Could just be the links, so I removed them from this.
Spud,
CHMC’s direct quote is
“The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.
Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.”
http://www.cmhc-schl.gc.ca/en/co/buho/buho_005.cfm
The relevant carrying costs beyond my actual mortgage average about $400/month. I have a small house. Let’s say the average carrying cost beyond the mortgage was $500 dollars/month. Over the course of a year that would add up to $6000K. This would represent a 25% increase in the carrying costs compared to your example. In the end, this new figure would amount to about $34%. This figure is only slightly above the figure CMHC mentioned and really does not concern me as much as our collective disregard for rule #2.
I repeat,
“Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments”
If we work my previous number of 34% into this equation, we are left with 6% of our gross monthly income to service car payments, personal loans and credit car payments. There are a lot of new BMWs in my neighbourhood Spud. Do you know what the monthly payment is on a new BMW is? More than my mortgage. As I have argued all along, it is the over indebtedness of Canadians that will put downward pressure on real estate. If real estate debt was our only problem we would be fine. But it is not. We are amongst the most indebted people on earth.
60% of Canadians would have a hard time paying their bills if their paycheque was delayed 1 week.
We have over done it man. The cookie jar was left open for too long.
So because “lots of people in your neighbourhood drive BMW’s” the housing market is up the spout. Fair enough.
You support bull!!!??? Interesting.
Spud,
I provided links that demonstrated my point. The BMW line was just anecdotal evidence. If I could use puppets to get the point across to you I would. No one could seriously argue that we do not have a major debt crisis brewing in this country. BTW, your lack of understanding of debt service ratios confirms my previous suspicion that you have very little experience in RE. Be careful, it is a high stakes game.
Spence’s data should lead to a conclusion: bull market!
Spence,
I dont see your link to the data that tells us that the Canadian debt situation is much worse than is alluded to by the CMHC with thier 32%/40% affordability rule (i.e. that on average….”other” debt is 8% of monthly household income).
I also thought I would have seen this splashed all over the news as the media love this kind of thing
Can you repost?