Housing bubble possible, not likely
Via: The Montreal Gazette
If you're a homeowner, the past six months or so have been reassuring. Last winter's nationwide collapse in home prices has not only eased, but by some measures completely disappeared.
That's great news if you might want to sell any time soon. Of course, it's not such great news if you'd like to buy.
Indeed, some have even begun to wonder if a new bubble in home prices might be starting to inflate. That's not likely in the opinion of most analysts, but it's not impossible, either.
The Canadian Real Estate Association's average of all Canadian transactions in September might seem to justify such fears, showing prices at an all-time high of $331,602, up a blazing 13.6 per cent from a year earlier.
Another yardstick, the Teranet-National Bank House Price Index, is a better measure, though, because it carefully removes the distortions caused by strong rebounds in the high priced markets like Vancouver and Toronto.
The August version of this index appeared yesterday and confirmed there's a strong uptrend. It showed prices still down from their peak last year, but only by 3.4 per cent.
Details of the index also showed values rising in every one of the six major cities tracked, with three of them - Montreal, Ottawa and Halifax - already above previous peaks. A fourth, Toronto, was within two percentage points of reaching a new record.
As a result, the affordability of homes has dropped sharply across the country. After improving to better than average this year, it has deteriorated substantially in the past few months, says a report from the Desjardins credit union group.
While Vancouver, as usual, shows the worst affordability of any major city, even relatively low-priced Montreal is less affordable than its long-term average. This estimates the gap between average household take-home pay and the income needed to buy an average home.
Montreal's average income is just 31 per cent higher than needed to buy a home, down from the long-term average cushion of 39 per cent. Toronto's positive income gap is only 26 per cent, but a little better than the long-term average of 19 per cent.
And Vancouver is now a first-time buyer's nightmare. Households today earn only 80 per cent of what it's estimated they need to afford an average home, for a negative gap of 20 per cent. That's even worse than the long-term average of negative 13 per cent.
So if prices are already rising much faster than people's ability to pay, could this lead to a new real-estate bubble?
Certainly it's true that one key factor, interest rates, now make the payments on a home mortgage a screaming bargain. That's good for buyers in the short run, but tends to make prices balloon over time.
Since the Bank of Canada has virtually guaranteed that rates will remain ultra-low through the middle of 2010, you could wonder if this will boost demand too much, inflating prices to an unhealthy extent.
"Yeah, there's definitely some risk of that," says senior economist Michael Gregory at BMO Capital Markets, but he's not worried yet. Similarly, economist Marc Pinsonneault at the National Bank says this is not his most likely scenario.
Pinsonneault thinks it's more likely that price increases will moderate as owners boost the number of homes listed for sale, giving buyers more choice and thereby easing upward pressure on prices.
Of course, even a bigger supply wouldn't prevent a price bubble if rates stayed too low for too long, but Pinsonneault believes the central bank will act before this happens.
Gregory agrees, but he's watching the market to see if any of the usual warning signals, like speculative buying of income properties, start to appear.
"You begin to worry when housing begets more housing," he said. "That's when alarm bells really go off."
If you want a more precise guide, try his triple double-digit rule. If year-over-year growth of three indicators - existing home prices, new home prices and mortgage credit - hits double digits, it's a warning that the market is overheating.
So far, existing home prices are there, up more than 13 per cent (Gregory uses the real
estate association's figure). But new-home prices are actually down three per cent from a year ago and mortgage credit is up by just seven per cent. So Gregory still isn't worried.
