Where does truth lie?

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Experts split over future housing prices in Canada

Mon. Mar. 24 2008, CTV.ca News Staff

ctv.jpg With housing prices collapsing in parts of the United States, many Canadians are wondering if the same fate awaits the real estate market here.

Housing experts themselves are divided on that question.

Ted Tsiakopoulos, Ontario regional economist for the Canada Mortgage and Housing Corporation, laid out the optimistic case.

“We don’t see a U.S.-style housing market meltdown in Canada for three very important reasons,” he told Canada AM on Monday.

  • Canadian housing prices have grown in a “steady, sustainable way”
  • Mortgage arrears are at a low level, which suggests financial institutions have been prudent in their lending practices
  • Canada’s overall economic fundamentals remain healthy

In mid-March, however, the Royal Bank reported that home ownership costs have risen to the highest point since 1990.

That year marked the “peak of the housing bubble,” it said.

However, the bank was optimistic the current situation should ease. “Going forward, falling mortgage rates, cooler forecast house price gains and decent income growth should all lead to improved affordability across most markets,” it said.

Tsiakopoulos said the CMHC sees moderate price growth continuing. But Ontario MP Garth Turner has a different view.

The author of a new book, “The Greater Fool: The Troubled Future of Real Estate,” Turner thinks the pieces are in place for a real estate collapse in this country.

The U.S. financial sector has been rocked by subprime mortgages, which essentially provided a way into real estate for people who wouldn’t qualify for conventional mortgages. But Turner told CTV.ca the real story is that housing prices in the U.S. got more expensive than Americans could afford.

In Canada, real estate prices have essentially doubled in five years. Turner said he didn’t think that was a “reasonable” increase.

Over that period, household incomes have stayed essentially flat, he added.

Mortgages in Canada?

“What’s been the Canadian response? Well, guess what? We’ve brought in a new kind of mortgage — 40-year amortizations,” Turner said.

You can also get a home for virtually no money down, Turner said. “You tell me what the difference between subprimes and a 40-year, no-down-payment loans in Canada is. The net effect is exactly the same. People buy houses who otherwise couldn’t buy them.”

In the biggest markets, people are unquestionably house-poor, he said.

The RBC’s affordability measure for a detached bungalow in Vancouver is about 74 per cent and more than 47 per cent in Toronto.

Places like Calgary and Edmonton come closer to the national average of 41 per cent.

The affordability measure is the proportion of median pre-tax household income required to service the cost of mortgage payments (principal and interest), property taxes and utilities.

The measure has traditionally been around 30 per cent, Turner said. “We’ve got a very screwed-up personal financial situation right now, and I see some dangers in that,” he added.

RBC’s Amy Goldbloom told CTV.ca that in 1990, the affordability index hit 46 per cent. But in 2002, it per cent of disposable income versus about 79 per cent in Canada. Total household debt was also much was 32 per cent.

The RBC study finds that for 2007, the U.S. situation was worse than here. Mortgage debt there was 119 per cent of disposable income versus about 79 per cent in Canada. Total household debt was also much higher in the U.S. than Canada. “Americans are more indebted and more leveraged,” she said.

Goldboom said the RBC’s analysis and prediction of moderate price increases took into account a slowing U.S. economy’s effect on Canada. “We aren’t forecasting outright declines in prices as we’re seeing state-side,” she said.

But Turner rolled off some troubling statistics, such as sales activity of resale homes in Canada falling six per cent in February – although some critics have argued that blip could be due to stormy winter weather.

In his own riding of Halton west of Toronto, houses are staying on the market for up to 12 months and are falling in price, he said.

“Why you would want to be a new purchaser of real estate right now is beyond me,” he said, adding that many young people have only known real estate to go up in value.

If you still want to buy a home, Turner makes the following recommendations:

  • Don’t take out a 40-year mortgage
  • Aim for a 20 per cent down payment
  • Don’t make monthly payments – accelerate if possible
  • Consider what future homeowners will want to purchase (i.e., don’t buy a huge, energy-hogging suburban home)

But if you don’t own real estate right now, consider remaining a renter for the short term.

“We’re into the most incredible renter’s market coming up. If you simply want to make money and secure your finances, you’re going to rent, because renting is far, far less than the cost of owning right now,” Turner said. “And it will remain that way for the next couple of years.”

7 comments ↓

#1 Dane Caldwell on 03.24.08 at 4:00 pm

Is it just me or does Ted Tsiakopoulos’ comments put him in a position of ‘conflict of interest’?

CMHC makes billions every year by insuring those low/no down payment mortgages…of course he’s going to be optimistic!

Garth, you must be the hottest topic of debate around the CMHC’s water coolers!

#2 Dsve on 03.24.08 at 7:23 pm

Hi. I picked up your book over the weekend and could not put it down. It’s freaky that the issues that you raise in the book are now front page news in the Saturday edition of the Toronto Star.

We had hoped to move up to detached home from our semi-detached home (a very small amount left owing on the mortgage), but I think we will wait and ride the storm out.

Great book and thanks for sharing your opinions.

Thanks
Dave

#3 awum on 03.25.08 at 1:55 pm

Mr. Tsiakopoulos is in more than just a conflict of interest. An admission of a downside to housing prices would be tantamount to an admission that CMHC’s policies and practices have either a) failed or b) contributed to this mess [or c) both of the above]. It’s like asking the manufacturer of a faulty product their opinion of the safety of that product.

#4 Jeff Riverdale on 03.25.08 at 6:59 pm

I can’t believe how weak Ted T’s justification for the housing bubble is:

1)House prices up in sustainable way. NO. As per comments already mentioned.
2)Mortgage arrears are low. MAYBE for the moment. But once people leave the denial stage and realize that house prices are going flat or down that is when the real write offs start. Eg. Washington Mutual’s 2005 annual report (before the bubble burst) they mention they are ‘the 3rd largest originator of mortgages & loans in the US.’ Also ‘We know Real Estate’ and ‘We know lending’. REALLY!!? Since mid 2005 their stock (WM-NYSE) is off about 75% and have had to cut their dividend 70%. By the way, for 2005 their loan losses as a % of assets was 0.57%. In 2007 TD Bank’s (Canada only) was 0.39%.
3)CDN fundamentals Healthy: The Federal Conservatives are attacking the Ontario Liberals (rightly or wrongly) because they know their economy is in the tank and going into an election want to place the blame on the province so they don’t pay a price in the election. And just today Desjardins announced that Ontario is in a recession now.

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#6 John Stevens on 02.12.09 at 11:45 pm

I have used CMHCs housing analysis in the past and they are no question the most accurate forecasters over the past decade. What respondents on this blog fail to realize is that Canada got caught up in this economic downturn and given trade linkages and the cylicality of real estate we cannot completely insulate ourselves from what has gone on. Canada”s mortgage insurance system is the envy of countries around the world – end of story

#7 Tony on 03.25.09 at 7:06 am

I just bought a 2 bedroom apartment in the west end of Edmonton over the weekend. I intend to make several dozen more purchases of bargain properties in the west and south west areas of Edmonton, Alberta in the coming months. Now for the people who think prices will keep on falling there keep on dropping your prices and i will keep on buying. Garth put me on record as saying this year Calgary and Edmonton will both bottom out this October 2009. I buy the distress listings first then wait until October this year for the people who couldn’t sell during the June to September period of time.