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moneysense.ca, 30/04/08
Global Housing Bust
The news on the housing front out of the U.S. continues to be bleak – prices were down 12.7% on average in 20 markets in February 2008 compared to the same time last year, with prices dropping 20% or more in Las Vegas, Miami and Phoenix. In Canada, at least one analyst boldly declared the housing boom “officially over”, not to mention an entire grim book on the subject but the IMF thinks that Canada is in a much better position compared to other major economies. Here’s the housing bust is playing out around the world:
Australia: Home prices have started to fall in many Australian cities (Melbourne and Sydney) and some estimates suggest property prices could fall as much as 25%. With interest rates at 7.25%, many reports indicate that overleveraged homeowners are struggling to pay the mortgage.
Ireland: The Independent newspaper colourfully labelled 2007 as “the year the roof began to fall in” and another later report notes that Irish home prices fell by an average of 7.3% in 2007.
United Kingdom: Reports indicate that the housing bubble has already started to deflate in the U.K. The Times featured anecdotal reports of falling home prices, while The Economist magazine calls for a “hard landing”.
Spain: Property sales are down, prices are moderating and home buyers are treated like movie stars.
India: After prices tripled over four years, reports indicate that housing prices have fallen as much as 20 to 30 percent.
moneysense.ca, 30/04/08
I like reading those kind of articles but it’s so hard to tell what is really happening given the media’s tendency to write whatever sells newspapers.
Even the summary of bad RE markets in the US might not be so bad if you look at the entire market.
If my house value dropped 20% – A) I probably wouldn’t notice it since I don’t even know my current house value. and B) so what?
Mike
Mike: Good point. I find this story fascinating because real estate markets are supposed to be local but the housing bust seems to be happening everywhere. I fall in the same boat as you. If home prices in Ottawa fall, I’ll be in the ‘don’t care that much’ category. Actually, we might be looking for a slightly bigger home
I agree with Mike – it is an interesting read (especially the articles from around the world) but it’s also to sell newspapers.
An illustration of what the prices have done over the last 3 years would be more telling. Vegas is the poster child with over 20% drop in the last year, but I’m sure I’ve read they were up 50% in 2005 and 30% in 2006. Most articles don’t mention how much was gained in the run up. So, if you bought a $100,000 house (for easy figuring) in 2005:
2005 : 100,000
2006 : 150,000
2007 : 195,000
2008 : 156,000
Unless you bought in 2007, it’s no big deal. And a longer timeframe would make it even smoother (I think the average home ownership is something like 7 years).
It’s the same as listening to the radio on the way home from work and the newsreader breathlessly talking about the TSX being down 100 points on the day. It’s not even 1%!! But they have to try to make it interesting….
Chris
A funny thing
Our local newspaper just ran a front page article about how the average home price has dropped by $20,000. Then, the next day I got a letter from the city tax acessor saying that they are willing to drop my tax base by $3,000.
Chris: It’s true that the news media that only a few years back cheered rising prices (Time magazine put out a cover story: Home, $weet Home) and is now breathlessly covering falling prices. But, the analysts who reckon that the pain is just beginning might have a point (not that I put any store in predictions).
For people who wanted that condo in Florida, the time might be right to start researching. Our dollar is high, property prices are falling and it takes months to find a suitable property…
[...] Global Housing Bust. so when’s the other shoe gonna drop in canada? [...]
CBC ran in exact piece on this last night, not only buyers, but Canadian agents going down to arizona:
http://www.cbc.ca/video/popup_nlp.html?http://www.cbc.ca/mrl3/8752/news/features/petricic-landrush080429.wmv
A couple of questions have come up in my circle regarding the effects of potential housing deflation and mortgage refinancing. Can anyone here answer these questions:
What happens with mortgage refinancing if your home is worth less than the balance of you mortgage? If I bought my place for 100k in 2005 and in 2010 it’s worth 90k do I have to make up the difference at refinancing?
The other thing that will come out of housing deflation are stricter lending standards (witness the US right now). If banks go back to traditional lending standards will you be approved for refinancing? Do the banks use the same standards in refinancing as they do when your mortgage is originated? If I bought with 0 down and have no equity at the time of refinancing could the bank require a down payment?
Thanks!
Something else I’d like to add, this idea of Home Price Perception. Compare other capital properties with investments. Investments we see a value assigned to them regularly if not daily, so everyone Ooo’s and Awww’s over stock prices, bonds, etc…. Yet, there’s no big ticker board outside out car, home, cottage telling us what the theoretical value is at any given time. It’s only determined when sold – IF there’s a buyer. I think for the heck of it I’ll be installing a number generator on my doorstep so people know how much to offer me.
I hear a lot of people talking about real estate going bust, but I personally just don’t see it. I’ve been semi-active in looking to upgrade to a bigger condo or townhouse but the prices have NOT been falling in Toronto, from what I’ve seen. It might be falling in some less desirable neighbourhoods (where I haven’t been shopping for homes), but all along the subway line or along the lakeshore, the prices are simply NOT falling and in fact they still seem to transact fairly quickly.
I’d also been considering getting into rental properties, but the same problem applies. I simply can’t find a property with a cap rate that is worth my while – the house prices are way too high to justify the potential rental income. If I can make the same rate of return from a GIC than I can from the cap rate of a rental property, you can sure as heck bet I’m not going to go through the trouble of buying, renovating and finding renters for that property!
I personnaly hope that residential real estate prices will go down during the next years for the prices to become more affordable when I will buy a piece of real estate.
This is a personal bias I suppose!
Jon: Thanks for the link to the fascinating CBC story. Personally, we don’t want to own any vacation property at this stage of our lives in Arizona or Florida.
Tony: I believe an appraisal is done and loan-to-value determined each time a mortgage is renewed. So, if a home owner is upside down, they’ll have to come up with the difference. One more reason to be careful about taking a loan against the home to invest…
Phil: I totally agree with you on the cap rate is very low now and has been that way for many years. While real estate sales are down, prices are still firm here.
… and if the housing correction brings us from insanity to historical valuations why is this such a bad thing?
Thanks for the answer CC, I fear for many of my friends who have bought in the last few years with 0 down!
I simply can’t find a property with a cap rate that is worth my while – the house prices are way too high to justify the potential rental income.
That means house prices are too high and will fall, the same conditions existed in the US, GB, Aus and India where prices are taking a nose dive.
Thanks
[...] Global Housing Bust by Canadian [...]
The collapse of the housing market in the States has exposed the vulnerable balance sheets of many Americans. They are debt rich and asset poor. You can talk favorable demographics all you like. But the fundamental question for any housing decision is whether a borrower can make his mortgage payment. That’s getting to be an expensive proposition here in Canada.
There hasn’t been a house price crash here, like the ones unfolding in America and Britain……YET! But affordability in the Canadian housing market is clearly a problem. Of 227 cities surveyed, found 9 Canadian cities in the top 50 of “least affordable” in the world. “There are no affordable [housing] markets in Canada and there are no moderately unaffordable markets. Five of the nine markets are rated severely unaffordable.”
“All of the large capital cities (Vancouver, Victoria, Calgary, Edmonton, and Toronto) are rated severely unaffordable”. Vancouver rated 8th out of 227 cities surveyed with a marginal difference between 1st and 8th place. The best ratings are seriously unaffordable in four smaller markets Saskatoon, Regina, Winnipeg, and Halifax.
Existing home sales across Canada have plunged by more than 60,000 units in the first six months of 2009, according to figures released Thursday by the Canadian Real Estate Association (CREA).
The report showed that as of the end of June, 142,899 homes were sold nationwide through the multiple listing service (MLS) compared with 233,213 in the same period last year – a drop of 43%.
New listings continued to outpace sales in June, with the number of properties coming on to the market rising 8.8% from the prior month to a record 98,878, while sales declined month-over-month by 8.2% to 48,133 units. Compared with May of 2008, the number of sales dropped 35.9%.
The sooner we accept the Canadian housing market has been overcooked and needs to adjust, the better, not least because mapping out the future requires an understanding of what has happened. Canadian politicians need to accept the bursting of the property bubble as an economic coming of age and play their part in adjusting downwards expectations of wealth, wage and inflation. They must begin to focus on where we would like to be in 10 years, and not just in 10 months. The biggest mistake policymakers and politicians could make at this stage is to continue propping up the asset bubble in the property market. (30, 35, 40 year mortgages/No money down mortgages/ridiculously low interest rates/etc….) And don’t believe the housing market in Canada has improved at all. That’s just realtors and realestate related machines trying to create false hope and predictions for the future. Affordability index spells it out loud and clear. Canadians can not afford housing any more and prices will crash. That’s a fact!
Er, to all those hurling invective at the dumb saps who are still buying homes, you do realize that those are the folks who are keeping this economy from completely tanking. If everyone suddenly stopped buying real estate, home values would plummet to near zero, and this gossamer thin recovery would turn into a depression the likes from which we may never recover. So, to all those generous, kind-hearted dummies loading up on overpriced real-estate–bless you. You’re the reason I still I have a job, an internet connection and a sliver of hope.