It sounds like this headline is showing up all across Canada. Variations of this headline have been triggered by a new report from the Canadian Centre for Policy Alternatives. In the report they talk about six major centers (two in Alberta!) that are in a precarious position. (links to the reports are at the bottom of the article!)
I was writing an article about this for my weekly Real Estate column at the Chestermere Anchor when I found the following video from Peter Kinch. Peter is one of the top ranked mortgage brokers in Canada, and in the video he presents his view on the subject.
Also of note, he brings up the other report that just came out from the C.D Howe institute report that says there is a low risk of a US style housing burst. Basically the exact opposite of the other report. Also strangely enough, the C.D. Howe report didn’t make much news in the headlines! Anyway here is the video and I will probably have my post about this up some time tomorrow.
**Give the player a couple of seconds to start after you click the arrow!**
Oh, one more quick note, the next Bank of Canada rate announcement is due out on September 8th, if you are keeping track!
In a report by the Real Estate Investment Network (REIN) in early August, Calgary was ranked the number 1 city in Canada for Real estate investments. With the slower and shaky economy, the high price of home ownership, forecasts for a slowdown in housing prices increasing interest rates this has come as a surprise to many people.
So where does this type of report get its basis from? First off, the group is basing its pick of Calgary from now until 2015. So while presently it may seem less glamorous to look at Real Estate as an investment, it’s over time that it shines.
REIN bases their decision on several factors that directly affect the value of property. These key factors are population growth, job growth and increasing average incomes. Whoa, you might say! Isn’t Calgary losing population, hasn’t there been layoffs and how could average income be increasing?
This is where the long term five year view comes into play. As the global energy markets continue to stabilize over the next several years and the US continues to increases its dependency on the “dirty oil” coming directly from the Alberta oil sands, Calgary will see its economic stability ramping up. Of course as the energy industry thrives so does the rest of the provincial economy.
Although we are currently seeing a slowdown in inter provincial migration, as more jobs become available and the economy grows, this will once again turn around. Now we aren’t talking 2005/2006 out of control growth, but definitely stronger than we have seen the last three years.
Now the majority of people first moving here are not likely to be home buyers. They tend to be renters who are initially more intent on getting a good job and less concerned about buying of they are unsure how long they will stay. This is what many people who are disregarding the report are missing.
From a home owner’s standpoint, with an average price of over $450,000 for a property that may not be able to increase much is not be a good investment. On the other hand, a $300,000 suited bungalow in a rental neighbourhood that generates $2,200 a month in gross income versus a $1,070 monthly mortgage payment could be a great investment from a Real Estate investor’s viewpoint.
What are your thoughts? Is Don Campbell going out on a limb or does he have a firm grasp on what’s happening out there?
I don’t understand. I thought I understood it, but I must be missing something. What I’m talking about is the Bank of Canada rate increases. For the second straight time, the prime lending rate has increased. Sure, it was only a quarter of a percent raising the Bank of Canada rate all the way up to .75% %, but it’s quite curious to me. I just don’t believe the current economic situation warranted it.
Especially, when they also release data at the same time they are forecasting economic growth to be slowing, due to household budget cutting. Is this an example of the cart leading the horse or is it chicken/egg syndrome? By increasing the prime lending rate, the cost of borrowing increases which makes mortgage more expensive, pushes rates on credit lines higher, and reduces the amount of cheap capital available to businesses.
This translates into households and businesses becoming more cautious and less likely to grow, to expand or to increase expenditures. All of which are requirements for continued strong economic growth. Now, since it’s not a huge rate increase, it doesn’t mean growth will move to a standstill, it will just slow down a tad. However, once again, is this the best time for that?
Perhaps what is more interesting is that Canada is the only Group of Seven country to raise their prime lending rate since the global recession started. And now it’s been twice in the last several months! What do we know that the other countries don’t? Yes, we came through the global downturn far better than perhaps any other country, but are we possibly shooting ourselves in the foot due to our own prior success?
During the first half of 2010, Canada as a whole saw a tremendous amount of growth and recovery in the housing markets. From Vancouver to Halifax the trend was for property values to increase with Vancouver seeing some huge jumps from the beginning of the year. Much of Canada’s economic growth can be directly pointed back to the growth in the housing market.
From the manufacturing of windows, furnaces, appliances for new homes to the actual construction involving carpenters, electricians, plumbers and more to the lawyers, realtors and banks on the back end, the Real Estate industry as a whole has a significant impact on the Canadian economy. This impact was directly responsible for much of the growth in that first half of 2010, but there are pending and newly introduced factors, such as the rate increase, that will have direct impacts on continued growth.
July brought the Harmonized Sales Tax to Ontario and BC. This tax meant to simplify some of the confusion brought about by separate Government Sales Tax (GST) and Provincial Sales Tax (PST) is directly adding thousands of dollars to home purchases. Since many consumers were aware of these pending increased costs, it helped fuel an even busier first six months of 2010. Most likely it will also lead to an even slower second half of 2010.
We’ve already seen Canada wide home pricing start to stall and even slide in some areas. Now with this new increase in rates, will it cause it to slide even further or will it just be able to maintain it’s flatness? The argument is that over the next year business and trade will provide the impetus for growth in Canada and consumer confidence will be less of a driver for economic growth, but doesn’t it go hand in hand? Happy consumers help boost business success leading to everything growing? While the rest of 2010 will once again be quite interesting, I’m just getting tired of constantly peering ahead to see what will happen and I’m really starting to yearn some consistency with the world!
Here it comes again! It seems as if every street you drive down lately has another house listed for sale with the big shiny Real Estate companies sign out front. Aren’t we supposed to be recovering and home prices were set to rebound? Isn’t the recession over?
Instead, here we are approaching inventory levels we haven’t seen since spring of 2008! That’s when we peaked at around 15,000 listings in Calgary and area. This overstock of properties for sale ultimately led to values decreasing even more and causing a further slowdown in a weak market as properties were everywhere and buyers had little competition.
So where are we sitting now? Well as we hit the end of June, we were sitting with a numbing 14,066 listings on the MLS. That is almost 5,000 listings higher than the same time frame last year! To make this even more frightening, sales are down by over 900 properties from June in 2009. So, once again, does this mean it’s time to panic?
If you are prone to panic, I guess now is as good a time as any, although I believe this will be short term and you might be getting anxious over headlines only. The bad news is prices are going to get pushed down marginally as the extra competition among sellers mounts; the good news is that homes are still selling if they are priced right and my Pollyanna crystal ball still shows considerable upside for the fall.
I’m not expecting prices to plummet a huge percentage; they will most likely come down only 2 or 3% short term as the market once again stabilize and buyers take advantage of frantic sellers. Based on average home prices this should be around $8,000 to $12,000 on a property, which shouldn’t be cataclysmic, unless you were close to 100% financed. Also, by short term, I am not expecting this to last much longer than the summer and then to see another surge of increasing prices again this fall.
You might ask at this point, why I am expecting it to rebound so quickly. My thoughts are that the market slowdown is more directly related to the huge surge in the markets earlier in the year rather than anything else that’s currently taking place.
If you look back to February, March and April this year, there was significant uncertainty how the new mortgage rules would affect home buyers and there was a strong feeling interest rates would be increasing very shortly. This pushed a larger than normal amount of buyers into purchasing sooner than they planned in order to take advantage of low interest rates and easier qualifying.
With this large portion of both first time buyers and home owners being suddenly removed from the market it was bound to slow down as buyers disappeared. Then to top it off, we added in the small increase in interest rates and it managed to push even more buyers to the side as they re-evaluated whether to purchase or wait. Is it any wonder then that fewer homes are selling?
So, here we are in July and people’s thoughts have moved to enjoying the few beautiful days we have during our summertime and less to a new home. However, by the end of summer, this will all change. We should see further stabilization in the economy, allowing more people to contemplate purchasing a new home without the uncertainty of potential job loss, prices will have decreased, making it more attractive and affordable, interest rates should remain steady and the overall mood of the Canadian economy will be once more optimistic. This should plant the seeds for some steady growth during the fall and a great time for the market!
Or at least that’s how I currently see it, anyone else have some alternative viewpoints?
The Royal Bank of Canada just released their latest affordability report covering the first quarter of 2010 and strangely enough, Alberta was the only province to actually show an increase in affordability throughout Canada. Every other province and region actually became slightly less affordable.
Just to clarify, we weren’t talking about double digit increases or decreases, but rather moderate changes, still though great news for Alberta. There really wasn’t to much out of the ordinary in the report, although they did point out that they believe we won’t see any excessive “unaffordability” coming up in the near future. This is due to a projected cooling of the Real Estate market across Canada after an unusually active first quarter.
From my perspective, the market may behave slightly differently in Alberta as we tend to be behind the curve. We didn’t experience the significant surge many of the other provinces did in sales and values during the first quarter, although it wasn’t all that bad here. We are still dealing with concerns about oil prices, the contining saga of low gas prices and the uncertainty in various areas of the energy industry.
As we meander through the rest of 2010, I can still see some real opportunity during the last half of the year for employment stability and easing of pressure on our energy industries. This should lead to more reactionary purchasing to take advantage of interest rates while they are still at low points. Eventually this could contribute to not only values increasing, but also an additional surge in the economy as stability continues to take hold.
The Economist magazine just released another article about an upcoming second dip in the pricing of homes in the US. I had previously explained a bit about the new round of Adjustable Rate Mortgages (ARM’s) coming up and bringing with it a new round of foreclosures in a previous posting, but this article also goes into details about some of the federal programs coming to an end.
These programs helped to artificially stabilize the housing market and now that they are set to expire, interest rates are set to rise and the US labor market continues to be so soft it is setting the stage for another substantial drop in values. Consider this another warning for you if you are looking at potentially purchasing an “investment” property in the US due to current low prices. These investments are actually much more speculative and will require much longer time frames to turn into wealth building opportunities.
Another aspect to consider regarding this is the Canadian market is still significantly different than the US market, the next wave of price drops South of the border do not translate into the same occuring here. As evidenced with the global recession while pricing did move downward in Canada, it was no where near as significant as it was in the US. We have already had our government change some of the qualifying and mortgage rules in anticipation of potential future problems. Whether that will be enough only time will tell.
You’ve seen the stats, you’ve read the news, and you are likely aware home prices are continuing the trend of increasing in Calgary and area. What they aren’t telling you is that it’s not every area of the city!
The numbers that get released are an average price and when you look at averages this means some areas are growing more, while others grow less. No less than three individuals whom I have talked to in the last month have all been getting excited that prices are going up and have automatically assumed their property values have as well, but this isn’t always the case.
As we have been working on streamlining some of our portfolio and reducing some of the properties we own, I have been looking closer and closer at trends in a couple of areas and these areas have been completely flat or worse. They have shown either no growth or crept downwards a bit in price.
To add to this, inventory levels are continuing to increase around the city and with the upcoming mortgage rule changes, we have the dual problem of more product and fewer buyers. Now before you start to think I am predicting pending price drops, just realize this is something to be aware of, not meant to cause a panic. It may result in a temporary hiccup in sales and prices, but nothing long term.
There is nothing new about inventory increasing in the spring. This quite common occurrence usually starts in March and runs into June and brings not only additional inventory, but additional sales as well. Spring fever tends to be a huge factor with Real Estate every year.
As for the mortgage qualifying changes, this will only have a short term affect on buyers. Yes, it will reduce the number of qualified purchasers, but the purchasers getting pushed out would potentially be setting themselves up for a foreclosure in the future as rates increase. By reducing future foreclosure properties, these new rules will actually help keep prices stable and over time gradually increasing. Within a couple months, these changes will be forgotten.
Now, let’s get back to my original point about not all home prices increasing equally. Since average sales price is based on averages, don’t automatically assume since the average price increased by 3%, your property automatically increased as well. I’m seeing this mistake being made by both home owners and Realtors right now and new listings are coming on board for way too much.
In the one area I am looking at, when you compare the new listings to other properties listed all seems fine, but everything that has actually sold is all about 5% less than these currently listed prices. If you have a property a buyer absolutely loves, you might be able to get away with this as you have the leverage of emotion winning out over logic. However if you either don’t have the time to wait for that person to show up or you just want to sell your property most efficiently you need to have a firm grasp of what properties are actually selling for.
You really need all the facts when evaluating a property you are about to sell, or even a property you are about to purchase. Don’t fall prey to the headlines, make sure you find out what is really happening and as Don Campbell says, “Look behind the curtain!”
If you missed it, Garth Turner was in Calgary recently forecasting for Calgary’s bubble to burst another 20% in the near future. As always he had a loyal following turnout, but it appears he managed to hit a couple of nerves with some Realtors and other folks in the Real Estate industry.
So just for some perspective about why things may not be as bad as he is projecting check out this article from the Herald by Marty Hope,
As a side note, anytime anyone seems to post anything bad about Garth his supporters bash the individuals soundly, it will be interesting to see if Marty gets some backlash.
With the recent headlines about the new mortgage rules you may have thought there were going to be some sweeping changes, fortunately these changes have only resulted in minor tightening.
If you haven’t been paying attention, here are the changes the Finance Minister has implemented. The biggest change will be that consumers will need to qualify for five year fixed rates even if applying for a lower interest variable rate or lower shorter term rate. This is an effort to protect consumers from rising interest rates, although from recent statistics, it appears 76% of Canadians who acquired mortgages in the last six months are currently locking in 5 year rates already. So this will have relatively little impact.
Another change of note, when refinancing consumers will now only be able to refinance up to 90% of the homes current value versus the former 95%. This is meant to protect ourselves from turning our homes into ATM’s which occurred heavily in the US where homeowners were using equity in their homes to finance their lifestyle, trips and vehicles. This is a wise move as it will protect some consumers from potential financial disaster.
The last major change is non-owner-occupied properties will require a minimum 20% down payment. This ranges from rental properties to properties which are intended to be flipped. For the majority of investors who purchase rentals, this will be nothing new as typically anything financed higher than 80% results in properties that don’t properly cash flow anyway. Its main intent though is to reduce speculators who purchase property with the only goal being appreciation from overheating the markets. In my opinion, this could have the most affect on prices over the next couple of years in several cities. Notably those with very active condo markets.
Previously there had been talk of increasing the minimum down payment required for purchasers and even a shortening of the amortization period of a mortgage, but neither of these came true. This is most likely the biggest positive for prospective new homeowners. They will still only require a 5% down payment, but with the tighter qualifying, they now have to be able to afford potentially higher five year term payments.
If the new changes had included an increased down payment amount this would have blocked out a significant number of potential homebuyers from entering the market as they would have to wait until their saving essentially doubled. The double whammy would have been shortening amortization periods from the current maximum of 35 years back down to 25 years.
This would have pushed affordability completely out of the window for a much larger group of individuals and would have led to a much longer term stagnation in the housing markets. Wisely this time, the government only implemented a couple of measures to curb the market versus completely stifling it.
Our current economic recovery depends largely on the housing markets to continue to grow as Real Estate creates everything from service jobs to construction jobs which help continue to stimulate the economy. The housing market is so tightly tied into economic recovery that anything to aggressive could have easily led us back into a recession, so thankfully with these minor changes we should continue to see our continued economic recovery and continued growth in residential values.
With today’s update on the changes to mortgages for homeowners this is plenty of questions forming about what is happening in the Real Estate markets. Is the current situation the start of a bubble? Are we getting into danger where housing prices will reset again?
What we all have to remember is there is no right answer to this. Canada is a very large country and the market in Vancouver is entirely different than the markets in Hamilton or Windsor. Unfortunately the headlines cover the averages or the markets in the larger centers such as Toronto, or Vancouver.
These averages tend to be exaggerated by the size of the larger markets as well so when Toronto increases it weighs much more in the stats than when Windsor prices decrease. As an investor, or a homeowner, you have to consider where you are in the country and what is happening in your area over the next five years.
Real Estate is a longer term play and this is why it can be so important to pick an area with a better long term outlook like Alberta. Below is a great interview wih Don Campbell talking about the “housing bubble”.
One great point he makes are about the amount of five year mortgages that have been signed over the last six months and how these folks will be protected by any interest rate hikes coming in the near future, at least for now!
I originally wrote about some possible pending changes coming to the current MLS system for my Chestermere Anchor Real Estate column back in December and suddenly other folks are starting to get on the bandwagon. I am including it below, along with another Don Campbell interview where he talks a bit more about what is going on. You need Flash installed to listen to the video, enjoy!
Do you think realtor’s commissions are excessive? Well a pending settlement between the Canadian Real Estate Association (CREA) and the Competition Bureau of Canada may change all of that.
Currently under CREA’s rules, a realtor licensed to work under their umbrella acts as the sales agent for the seller during the entire period of the listing contract on the Multiple Listing Service (MLS) system and will receive and present all offers that come in to the seller. For this service they are able to charge a commission which is usually 7% of the first $100,000 of the sale and 3% of everything above that price. The Competition Bureau finds this to be a rather restrictive model for consumers and limits the scope of alternative business models. In essence, they are saying that the MLS is a monopoly and consumers don’t have any other real options.
So what does this mean for someone selling his or her home in the near future? The settlement is still being worked on, but it appears the biggest upcoming change is the potential buyer’s agent will be able to negotiate directly with the homeowner and bypass the listing realtor. Since the listing realtor may be in the position of only posting the property on the service and not being required to provide any additional services, this could open up a whole bevy of new discount realtors and additional charges for add on services.
The majority of the top realtors these days have complete marketing programs to help increase exposure and traffic to the properties they have available for sale. This is all included in their commissions and is why they have become so successful. Unfortunately, many less successful realtors have very little knowledge in how to properly market properties and depend more on just getting the property listed so other realtors can bring buyers in.
With the potential changes, this could cut out many realtors from the full commissions they are accustomed to and depend on to operate. The most likely change is a new fixed fee just to list the property on the MLS and additional fees attached depending on the marketing and services attached by the listing realtor. How and what levels these services will be set at could open up an entirely new arena of competition for realtors.
We could see homeowners having to choose between full marketing plans, to partial marketing plans and everything in between. It may even lend itself to perhaps a la carte programs where someone could get charged per open house or per showing by the listing realtor. These of course are on the far end of the spectrum and by the time everything is settled between the two groups there may be agreed upon levels of performance that must be met or some type of tiered service program.
In whatever manner it eventually plays out it will definitely change the landscape for homeowners and buyers in the marketplace. More options, more potential pitfalls for inexperienced sellers or buyers and a new setting for increased competition amongst realtors.
The Winnipeg based Frontier Centre released it’s report on housing affordability recently and proclaimed Calgary was ranked 23rd out of the 28 cities in their affordability index. The number one cities for affordability were Windsor and Thunder Bay.
Can anyone read between the lines here? At first glance this would suggest Calgary wouldn’t be the place to move to, but if you are looking for work, don’t you want to go where the jobs are? Perhaps there is a reason Windsor is so affordable, everyone is leaving as all the automaker jobs are drying up, so all the values are dropping. The future for Thunder Bay isn’t to glittering either.
Calgary, although unemployment is way up, still has significantly better opportunities for the people vacating other economically depressed areas. Even more importantly, the jobs also pay considerably more here, we have no PST and over all aren’t we just nicer people?
The study actually covered 272 cities worldwide and not surprisingly Vancouver topped the list as the least affordable.
The link to the full story is available here, Frontier Center – How Affordable is Your Housing?. Just remember, affordability doesn’t directly relate to desirability to live there. There are always additional economic and emotional reasons for certain locations to be more costly to live and these can be incredibly difficult to measure.
In previous articles, I have mentioned it is too early to jump into the US housing market unless you have a very long term plan. This latest article in Business Week seems to concur with my thoughts.
2009 was a record year for foreclosures in the US with an increase in the number of foreclosures of 21% versus 2008 and they believe 2010 will be worse. The majority of this is all related to the adjustable rate mortgages resetting to higher interest rates causing payments to increase on many properties by double or more.
With any equity in the property wiped out, it doesn’t make sense for many homeowners to continue to make payments on a house they owe $100,000 or more above its actual value. With the ability in the US for mortgage holders to just walk away from this loss without the lender being able to come after them, it is exactly what they are doing.
So what does this mean to potential buyers? Well, as more of these foreclosed properties hit the market it will continue to drag prices downward, or at the very least leave prices very flat until all the inventory burns through and demand ramps up. So while that four bedroom home just outside Phoenix with the pool sounds like a bargain now at $200,000, in six months it may be more of a bargain.
I just received my copy of REIN’s Top Investment Towns in Alberta for 2010 and Calgary has been tagged as the Top Town in the province over the next 3-5 years. How exciting! Except that I am selling some of our properties, but in that case how exciting for the lucky purchasers!
Now to help clarify this a bit more. Investing in Real Estate is only a get rich quick plan on TV shows. In reality it is a slow and steady race (think Tortoise and The Hare) where persistence and a long term plan work in harmony.
What Don Campbell’s report shows is that after Calgary’s predictable correction of the last couple years we are at a point now where we have more affordable housing conditions, a stabilized economy and renewed optimism. This all bodes well for the next three plus years for Calgary to see above average growth in property values, in-migration and general happiness for Real Estate investors.
So if you are currently investing, planning on investing or are considering investing this is some great news. Oh for Edmonton readers you are in position two this year after multiple years of being top dog!
As a REIN member and an investor I am a big fan of Don Campbell and here is a clip for an excellent interview Don just had regarding Real Estate and what is coming up for 2010.
Don has some great points in here about investors starting to spread investments from just stocks and into more Real Estate investments. He also talks about viewing Real Estate as a longer term investment, not a get rich quick scenario. What are your thoughts on the interview? Did he make sense to you?
