Property market showing 2 of 3 ‘bubble’ signs, report says | #Ottawa #Toronto #realestate #economy
April 28, 2010 3 Comments
Property market showing 2 of 3 ‘bubble’ signs, report says
April 27, 2010 | 18:01
Canada’s real estate market is demonstrating two of the three “bubble” characteristics and Canadians should brace themselves for the possible impact of a housing downturn, investment firm Edward Jones said in a report Tuesday.
“Despite recent economic strength, housing prices have outpaced the overall economy, including unemployment trends and Gross Domestic Product Growth,” the report authored by analysts Kate Warne and Craig Fehr said.
Flickr / Think Panama“As a result, our stance on Canadian housing market risk is becoming increasingly cautious.”
The three conditions of a bubble are, according to the report, overvalued house prices, easily obtainable credit and lax regulation. The first two already exist and the government has taken steps to avoid the third condition, the report said.
The average resale price of a home rose 19.3% in 2009 to $337.410, according to the Canadian Real Estate Association. This average home price is five times the average after-tax income, compared to the long-time average of 3.7 times, Edward Jones said.
Meanwhile, mortgage rates fell to new lows. This poses a risk to consumer spending as a greater number of variable and short-term mortgage holders deal with rising rates in the next few months, it said.
A 3% increase in mortgage rates (on a $87-billion pool of short-term mortgages originating between 2007 and 2009) means mortgage payments for these borrowers could jump by an average of $444 per month for a mortgage of $254,514.
Fewer discretionary dollars in consumer pockets could eventually cut into GDP, Edward Jones said.
But several changes have the potential to dampen demand, side-stepping a housing bust, Edward Jones said.
They include new tighter lending standards, rising interest rates and mortgage costs, a pick up in new supply, consumer deleveraging and harmonized sales taxes in B.C. and Ontario.
“We believe fundamental factors exist that suggest a softening in the housing market in lieu of a crash of the magnitude experienced in the U.S.”
Bank of Canada Governor Mark Carney told a House of Commons finance committee Tuesday he expects Canada’s red-hot housing market to cool in this quarter and to continue into the next few years.
About Tariq Sultan
wow cool story man.
When will the market correct so that home prices are no longer over valued?
@karim kanji: LOL! That’s an excellent question Karim, it’s hard to say, a lot of my clients and industry practitioners I speak to on a daily basis believe that a slow wave of correction has already begun. Based solely on my observation of the news/commentary/trends on the Toronto real estate market, I believe this summer we will see a more balanced market than what we have right now (but of course we have to count to many factors to come to any conclusion – interest rates, people’s attitude towards the market in general, demand/supply, etc). Let’s hope for the best! 🙂