The decade-long boom in Canadian markets is over,says Tsur Somerville, the study's lead author and Sauder's Real Estate Foundation of B.C. Professor in Real Estate Finance.
Titled Are Canadian Housing Markets Overpriced?, the study observes that housing affordability is a severe problem in some Canadian cities, limiting the ability of markets to continue to rise.
House prices can correct through rapid declines, through longer and slower declines, or by staying essentially flat for a long period, says Somerville, in the release.
Canada's more conservative lending practices have prevented the speculative excess and severe downturn experienced in U.S. markets. However, the study warns that the potential for price declines is greatest in cities that have a large supply of unsold inventory or a mismatch between the number of units and the number of households ready to occupy them. Recent data suggests that Vancouver is the most at risk in this regard.
To analyze whether housing prices are overvalued, the researchers looked at current house prices in nine major Canadian cities. They compared these prices to their equilibrium or balanced market levels, which is derived from the relationship between house prices and rents in a market when compared with cost of investing in housing. The study finds:
- Only in Toronto are prices in balance with rents
- In Halifax, Montreal, Ottawa, Regina and Winnipeg prices would need to drop by at least 20 per cent to be in balance
- Equilibrium in Calgary and Vancouver requires a 7 to 11 per cent drop in prices
- In Edmonton prices are actually below equilibrium, by 8 per cent..
The housing industry basically relies on the mortgage industry, especially as home prices have soared to never-before-seen highs. If people are not applying for mortgages, they are not buying homes, unless that mattress is full of thousand dollar bills.
The article, “Home loan demand drops despite decline in mortgage interest rates," posted February 7, 2007 on USA Today.com, explains how investors and economists may have reason to worry as a housing rebound probably is not in the near future.
Last year interest rates soared until it peaked at 6.88 percent in late June. Then they fell to under 6.2 percent and forecasters across the country began warning buyers to buy now because the market was rebounding from its correction.
The first month of the new year, you know the year things were supposed to begin heading in the right direction, has produced interesting results about what the immediate future of the overall real estate market will look like.
“The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and purchasing loans, dipped 0.2% the week ended Feb. 2 to 630.1." That doesn’t sound like a big deal but considering the market is struggling to head in the right direction, any mortgage origination decline carries extra weight. “Phillip Neuhart, economic analyst at Wachovia in Charlotte, N.C., said the housing market is going through a ‘rocky stabilization’ right now." “‘The weather was certainly a factor in December, particularly housing starts, but that artificially inflated activity,’ he said. ‘Also, builder incentives were helping sales.’"
The real reason the declining mortgage originations is depressing is due to the fact interest rates also dropped last week, which would ideally result in an increase in mortgage originations.
“Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.23% in the latest week, down 0.06 percentage point from the previous week and the first drop since early January." “‘Housing seems to have the wind at its back with long-term interest rates, which were already in the low- to mid-sixes, falling slightly after last week's Fed announcement, so it's surprising to see that purchase activity actually tapered in the last week,’ said Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Livonia, Mich."
It has also recently been reported in numerous publications that interest rates are expected to rise to about 6.5 percent by summertime. If mortgage originations are down while interest rates are low and even declined, what will happen once rates shoot up another 0.3 percent?
“‘Folks with adjustable-rate mortgages see the opportunity, however, and are refinancing into fixed-rate mortgages before their existing mortgages reset to interest rates that are higher than current long-term rates,’ said Walters."
If you plan on refinancing you should do so now before rates rise. The one thing that is important to keep in mind though is that even though rates will rise during the summer that is also the time when home buyers tend to come out of their shells and become more active.
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