Is Canada’s housing market at a point where affordability issues just don’t make it sustainable without a significant correction?
In a segment last month on BNN, Bradley Safalow, founder and chief executive officer of PAA Research, rang the alarm bells about a serious credit and housing affordability issue facing this country.
Consumers continue to lever their debt to the breaking point at a time of historically low interest rates. In many markets, it’s a struggle to buy any house at all.
Is this now a question of when, not if, the bubble will burst? The housing industry is extremely important to the overall economy, but any hard turn of the market will be felt by the developers who are heavily vested in residential construction, be it single-family homes, or condo units in the urban core.
It’s not like this is virgin territory. Markets always are the master, and price stability depends on a balance of supply and demand.
The largest communities in Canada are experiencing the greatest demand with the VECTOM group (Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal) showing higher prices and more stability than Small Town Canada. Many smaller communities have become no-growth areas – my brother’s mother-in-law finally found a buyer for her house in the small town where she lives, but at a price well below $100,000.
What will be the source of continued housing demand?
No one tied to the Canadian market, from the homeowner to the lender to the builder, should be unaware of the consequences of softened demand. We had a ringside seat to the U.S. market correction and subsequent mortgage industry collapse that helped usher in the 2008 recession.
But with the naysaying that is out there, what is really going on?
Prices in the larger markets continue to hold and in some areas, notably Vancouver, continue to increase, but market participants need to be ever-vigilant on where next year’s demand will come from.
Immigration is considered by some to be the source of new demand. But some immigrants, even those who are well-educated, can face years of uphill struggle to earn a decent income and obtain employment worthy of their qualifications.
There are, however, neighbourhoods in the VECTOM cities where recent immigrant families are living in new and large houses – the multi-generational income factor may be at play.
In some immigrant communities, two or more wage-earning generations live together. As what happened when two-income households could qualify for mortgages, two-family households can provide a significant boost to demand. A recent news article from B.C. reported that in some instances in the lower mainland, unrelated families are living together and giving that market a demand increase.
But immigrant or not, is housing in the major markets in Canada simply become unaffordable for many?
Is the market as a whole still affordable?
The cracks may be showing in some markets.
In January, StatsCan reported the New Housing Price Index, which tracks increases in the selling prices of newly built homes, slipped at the national level for the first time since 2010 as builders offered promotions to stimulate sales and settled for lower negotiated prices.
The Canadian Real Estate Board last month revised its forecast for 2015 home sales downward, due largely to the impact rock-bottom oil prices are having on the Alberta and Saskatchewan economies. The net affect will be a year-over-year decline in total number of units sold of 1.1 per cent.
CREA’s expectation is a weaker Canadian dollar, lower mortgage rates and a stronger U.S. economy will give the other provinces a helpful nudge and offset the impact of cheap oil.
Even so, only Ontario and B.C. are expected to experience average price gains in resales that surpass the rate of inflation. Elsewhere it will be “relatively stable” (read “flat”) year-over-year as local markets try to absorb an over-abundance of supply.
The real imbalance is for the half of the population with household incomes below the average required to purchase a home in their local markets.
People in this category are an essential part of the workforce, but what they face can only be described as discouraging: building standards/regulation-creep is increasing builders’ costs, demand for housing near centres of employment is driving up asking prices, and Small Town Canada is suffering from diminished employment opportunities, which is undermining those local real estate markets.
For those living in any of the major markets, adaptation is key. If many home buyers have changed their expectations about how they will live, it is those with lower incomes that will, as always, have to adapt.
Next Week: Part 2 – The numbers do not add up in some cities
To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.