Michael Polzler isn’t losing sleep over the Canadian real estate market yet. Sure, crashing housing prices in the United States have the executive vice-president and regional director of Re/Max Ontario–Atlantic Canada worried. But Canada is still pretty safe. Unemployment is near its lowest levels ever, the dollar is near par with the greenback, and our resource-rich economy is doing well by most measures. What would cause him sleepless nights? Polzler thinks a while before answering. “If we started to see an abundance of properties coming onto market and the length of time they were on the market really started to increase,” he says. “That has not happened. Yes, we can see it softening, but you have to remember we’ve been running at 100 miles per hour.”
A slowdown might even be a good thing, especially for anyone who is looking for a first home, who needs to find housing quickly — or who’s looking to invest in property without getting sucked into a multi-bid price war. While Canadians are generally not big buyers for investment purposes, real estate has been one of the safest plays during the past 40 years or so — returning roughly 5% a year, for a real rate of return of just more than 2%. That’s despite several significant market downturns, the most recent of which was in 1994–1995; the last big one was back in 1989–1991.
But there are those — like MP and would-be Nostradamus Garth Turner — who are sure we’re due for another big one. Turner’s latest book, Greater Fool: The Troubled Future of Real Estate, is filled with dire scenarios of Canadians losing just about everything they’ve sunk into their homes. Homeowners, to be sure, have a lot riding on what is the biggest investment most will ever make. Canadians’ net worth in residential real estate rose 4.7% in the fourth quarter of 2007 at an annualized rate, reports National Bank Financial, while it fell 11% for Americans during the same period. And the Canadian wealth effect should only increase. Nearly four of every five Canadian homeowners say they want to pay off their mortgages as fast as possible, according to Canada Mortgage and Housing Corp. Almost 85% make weekly or biweekly payments to speed up amortizations, while a third have made a lump-sum payment against principal. Canadians are pretty averse to carrying debt compared to their American counterparts, but paying it down could backfire if your life savings are plowed into property and the market does tank — even if the hit is only a short-term correction.
Ultimately, Turner’s book will likely find a home next to your Y2K doomsday collection. For one thing, average prices in the U.S. — the putative catalyst for the impending Canadian meltdown — are nowhere near as bad as most people think. (Indeed, last year’s average price of US$219,000 for an existing home is exactly the same as it was in 2005.)
But if predictions like Turner’s do scare you, then get out. Get out now. Real estate investing seems safe over the long term, but it has its ups and downs in the short. Those downs can be real doozies, as anyone who owned property in the late 1980s can attest.
That’s not to suggest the threat of a housing downturn in Canada isn’t real, but it’s unlikely to reach the epic proportions it has in the States. For one thing, the amount of sub-prime lending (to people who do not qualify for market interest rates) is less of an issue in Canada. The States, after all, is the breeding ground of such financial innovations as the “ninja loan” — a term coined by U.S. bank HCL Finance to describe loans to borrowers who had No Income, No Job and no Assets. More than a quarter of all new U.S. mortgages were sub-prime in 2006, compared with 3% in Canada, according to Merrill Lynch Canada economist David Wolf (see page 20) — and all high-ratio mortgages here (those with less than 20% down) are secured by the CMHC or other insurers. No wonder the U.S. deliquency rate was 5.8% at the end of last year, compared with only 0.26% in Canada. There is also some evidence of fraudulent lending and home appraisals in the United States, and of far more speculative activity. “Outside of the issues of sub-prime lending, it’s really an issue of a huge amount of inventory with a lot of investors never having any intention of moving into the property,” says Adrienne Warren, senior economist at Scotiabank. “Now, because there are so many empty units out there, prices will keep going down for some time.”
In stark contrast, prices are still rising in most major Canadian markets, even if the number of sales is dropping. Housing sales in the Top 25 markets fell 5.6% to 38,365 units in February, according to the Canadian Real Estate Association. Nationally, the average sale price rose 6.2% to $313,065, the smallest year-over-year increase since November 2004. Is that the sound of a bubble bursting? More likely it’s a long hiss, as the market loses some of its buoyancy. “It’s still a seller’s market. Price increases should be higher than inflation,” says Warren. “But 2009 will be more of a balanced market — the first time we’ve had one since 1998.”
Predicting a bubble — or even knowing you’re in one — is no easy feat. By some measures, Vancouver’s housing market should have already popped. On average, it now takes 70% of pretax income to service a 25-year mortgage (with 25% down), plus property taxes and utilities, on a two-storey home in the city. That’s pretax income. And yet B.C. has the lowest rate of mortgage arrears in the country.
In Alberta, the average price of a two-storey home in Q4 fell 4.3% from the previous quarter, while bungalow prices dropped 7.3% and condos by 5.3% (that segment’s second straight quarterly drop). The sales-to-new-listing ratio is about 0.4, roughly half the peak recorded over the past two years, according to RBC Economics. “People are talking about Calgary having more product. They do, but they had no product before,” says Polzler. “The fact is, they still have a limited number of listings compared with Florida.”
Another fact in investors’ favour — at least when selling — is that it’s still a seller’s or balanced market in the largest 20 cities in the country. Part of the reason is that there simply isn’t as much speculative activity in this country as there is in the United States. “The impact of the secondary investment market on residential housing prices is marginal,” says Phil Soper, CEO of Brookfield Real Estate Services, the industry giant that owns realtor Royal LePage. “Even in typical times, it’s half the rate of what it is in the United States. Speculation on residential housing really hasn’t been a factor since the 1989 housing bust.”
Of course, hot markets such as Vancouver, Saskatoon and even Sudbury, Ont., will attract entrepreneurial-minded investors, which drives up local prices. Ultimately, though, the decision to invest must be made based on whether economic fundamentals can support long-term growth. Some questions Don Campbell — president of Calgary-based Real Estate Investment Network, whose members own more than $1 billion worth of property — likes to ask include: Is the area’s average income increasing faster than the provincial average? Is its population growing faster than the provincial average? Is there a major transportation improvement occurring nearby? Is the area attractive to baby boomers? If the answer to any of those questions is no, then look elsewhere — an income trust, say, or a privately owned real estate asset pool.
Being responsible for someone’s temporary home isn’t for the faint-of-heart. You’ll either be a landlord or have to hire a property manager and be an employer. Either way carries its own set of issues. Owning real estate is fun because it’s a tangible asset that you can touch and control, but it’s not likely to make you rich very quickly.
Vancouver
Year after year, Vancouver continues to post average to above-average increases in property values. A two-storey home is already nearing $650,000 — 35% above the average price of a comparable home in Toronto and almost twice as expensive as the national average this year. That’s good if you already own a rental property, but not so good if you’re looking to enter the market as either a landlord or a homeowner. Still, Vancouver continues to be a strong seller’s market, with solid employment growth last year backing it up. RBC is predicting a 7% gain in home prices this year.
Edmonton
Once a scorching seller’s market, Edmonton is expected to come off the boil this year. Affordability is one issue, but there are now also more listings, which should continue to cool prices. In January, the average house cost 11% more than the previous year, a nice hike but well off the pace of recent increases. The city’s economic fundamentals are sound as long as oil continues to boom, so it should be a safe move in the long term if you can find suitable rental housing to buy.
Calgary
Like Edmonton, Canada’s third-most-expensive market should be more balanced this year, making it a bit easier to find homes. There’s already some softness, with prices in January just 8% higher than the previous year. Housing starts were down 11% in the same period, and the average price of a two-storey home fell by 4.3% last quarter from the previous one. Still, it’s too early to get too concerned.
Saskatoon
Despite the massive jump in housing prices last year, Saskatoon is still relatively affordable, but residents should brace for another jump, albeit a smaller one. For the past two years, Saskatoon has been soaring — it’s up for debate whether that’s the result of a strong economy, a $320,000 government campaign last summer to bring people “home” from Alberta and Southern Ontario or, as some suspect, spillover investment money from Alberta. The province is now leading the way in housing starts, price increases, residential building permits and resale activity. In fact, RBC believes Saskatchewan will be the only province to post an increase in housing starts this year.
Winnipeg
Another surprise winner last year for investors, as it was in the previous two years as well. Household incomes in the province are growing at a healthy 5% clip — third-fastest in the country — so affordability still isn’t a major issue despite recent price increases. Re/Max is forecasting another solid price hike, although the total number of housing sales is expected to rise nominally.
Sudbury
The Nickel City is the smallest of the 10 cities here, but it’s the only one other than Saskatoon that has decent demand, affordability and a healthy sales-to-new-listings ratio, according to Scotiabank research. That should keep the number of units sold and prices moving upward, although Re/Max’s 2008 pricing forecast has already been surpassed. Sudbury is a bit removed from the main action, but that might help if there is a correction in the short term.
Toronto
Roughly half a million people have moved into the Toronto area this decade, with many settling in the suburbs where housing is cheaper. Nevertheless, 56 of the 62 Toronto Real Estate Board Districts reported an increase in the average price of a single detached home in the first half of 2007, according to Re/Max. Supply in the core Toronto area should continue to be tight, reports RBC, and the condo market should stabilize as a glut of new supply comes onto the market in the next two years.Ottawa
A steady climber with recent year-over-year price increases of about 5% — right about the national average for the past few decades — Ottawa has pretty much been a balanced market since 2003. Affordability isn’t an issue, and should only improve as mortgage rates decline and housing demand moderates. Already, new-home construction seems to be tapering off, reports RBC.
Montreal
Sales-to-new-listings remain well-balanced — a sign that this city has been less affected by the housing boom than others. But 2,167 new dwellings were started in February, a 72% increase over the 1,262 started a year ago. That upswing was led largely by multiple housing units. Things weren’t quite as rosy in Quebec City, Sherbrooke and Gatineau, which all saw declines. However, CMHC forecasts a slight decline in new-home starts for the year in Montreal, and a flat resale market after a record 2007.
Halifax
Many of the bigger cities in the Maritimes have benefited from stronger economies, as well as a bit of a grassroots movement to keep younger people around and entice expats to come home. Halifax is no exception. First-time home buyers drove the market to record sales activity last year, and there should be another solid gain this year. Halifax is also a good market for buyers, as multiple bids are rare. The best investment play is for single-family detached homes.
