A new reports says fears about a bubble in Canada’s housing market are greatly exaggerated.
In fact, the Canadian housing market will experience a slight decline this year, according to the Conference Board of Canada’s initial Housing Briefing: Bubble Fears Overblown.
“Mortgage costs, not just house prices, are the principal deciding factor for potential home buyers,” said Robin Wiebe, the conference board’s senior economist for the Centre for Municipal Studies. “Mortgage rates are expected to rise this year, but not dramatically, because the Canadian economy remains in a slow-growth mode.
“The housing market may be undergoing a correction in some regions and market segments, but it is more likely to be a soft landing than a bubble bursting,” added Wiebe.
The report found:
• Mortgage costs remain relatively low, which maintains affordability for home buyers.
• Resale markets in major Canadian cities are generally balanced.
Fears of a housing bubble hinge on the ratio of house prices to apartment rents and house prices to incomes. The conference board’s view is that while these ratios are high, they are also misleading.
Better indicators of affordability are the ratio of mortgage payments to rents and mortgage payments to incomes, and neither presents much cause for alarm about a housing bubble.
In addition, Canadian employment continues to increase, albeit modestly, and the national population is growing.
In general, housing starts are in line with demographic requirements, and markets do not appear to be overbuilt. Total housing starts in Canadian cities with at least 10,000 residents ended 2013 at just below 170,000 units. Although down from nearly 194,000 starts in 2012, this is in line with Canada’s 25-year average.
Furthermore, a low proportion of Canadian mortgages are in arrears. As a result, a market downturn in Canada would not be amplified by a wave of “distressed” home sales, as occurred in the United States in the 2000s.
Over the medium-term, a modest market correction, particularly in market segments in Ontario and Quebec as projected rising interest rates potentially crimp affordability, could produce a moderate decline in the national average housing price.
According to WinnipegREALTORS®, the local real estate market is among the nation’s most affordable, so there is no fear here of a housing bubble.
“With the balance market, buyers should be able to find a home that meets their needs in the area they want to live in at a fair price,” said David Powell, president of WinnipegREALTORS®.
But one segment of the local population who may find it more difficult to purchase a house in 2014 are first-time home buyers due to rising home prices and the land transfer tax (see article on page 10).
According to a recent BMO Financial Group report, conducted by Pollara, first-time home buyers have had to increase their budgets to buy a home due to price increases across Canada.
In Manitoba, the average price paid by first-time buyers to purchase a home is now $226,100, while it was just $115,000 a decade ago.
But this average spent to purchase a house pales in comparison to the national average of $316,000, and $408,300 in Toronto, $363,400 in Calgary and $506,500 in Vancouver.
Still, first-time home buyers are not being priced out of the market, according to the BMO Home Buying Report.
On average, one-third of first-time home buyers expect their parents or family to provide assistance. Six-in-10, according to the BMO report, have delayed their purchase, with 39 per cent saying they are holding back due to rising real estate prices. Another 61 per cent are cutting back on their lifestyle spending in order to save up to buy their first home.
“Among the many considerations for those trying to get a foot in the door of the real estate market for the first time,” said Laura Parsons, the BMO mortgage expert, “the most important of all is building a substantial down payment ...
“It’s crucial that those planning to buy are well prepared and have considered all options available to them,” she added.