The London-based research firm Capital Economics Ltd. has added a new spark to Canada’s housing debate with its assessment that the country’s real estate market is a bubble that is about to pop.

The boom in Canadian real estate has “resulted in the largest rises in house prices ever seen in Canada,” the firm says. “And the trigger of an increase in the Bank of Canada’s trendsetting interest rates could result in a 25-per-cent drop in property values.”

The organization released the research earlier this year in a report for its subscribers, and it received new currency with Bank of Canada Governor Mark Carney’s statement earlier this week warning Canadians that they should expect real estate prices to moderate.

However, while Carney did not use the word bubble, Capital markets wasn’t shy about doing so.

“We think [a bubble] exists and we expect a major correction in Canada’s housing market of up to 25 per cent over the next three years,” Capital Economics wrote June 15 in its response to Carney’s remarks. “The decline in prices is likely to be most severe in vancouver.”

Capital Economics’ report hasn’t generated a consensus, but it does add fuel to the discussion about what is likely to happen next, particularly in markets such as high-priced Metro vancouver, which has well-known problems with real estate being unaffordable for many.

Affordability is the crux of Capital Economics’ argument.

It found that housing values rose seven per cent per year on average between 1999 and 2010, triple the rate of income growth over the same period.

By 2010, the average price for a two-storey home on a national basis hit $314,000, which was roughly five times the $58,347 average disposable income per person. That is well above the long-term historical average of prices equalling 3.5 times average disposable income.

The monthly cost of home ownership compared with rent payments for similar properties has also reached the highest level since the peak of Canada’s last housing boom.

With both measures so high, Capital Economics argues prices are “probably unsustainable,” and should lead to a period where housing inflation slows or turns negative.

“In theory, the house-price-to-income ratio could adjust through a long period of stagnant house prices coupled with continued income growth,” Paul Ashworth, a Capital Economics’ economist wrote in a note to The Sun. “But when the ratio gets this out of whack, that’s not how it happens in practice.”

However, some other analysts do not concur that the imbalance of prices to income will necessarily lead to a sudden correction, particularly for a city like Metro vancouver.

Housing markets can diverge from a balance between prices and incomes and remain out of balance for a long time, argues housing economist Tsur Somerville, director of the centre for urban economics and real estate in the Sauder School of Business at the University of B.C.

“The fact they’re out of balance, in an economic sense, doesn’t mean they’re going to get back into balance on anybody’s particular timeline,” Somerville said.

Somerville argues that for Metro vancouver in particular, using the price for a two-storey house — which would be more than double the national average — isn’t indicative of the kinds of housing people are living in and the decisions they make about where they live.

And while Canada and Metro vancouver continue to deal with problems of housing unaffordability, Helmut Pastrick, chief economist for Central 1 Credit Union, argues long-term demographic trends indicate those problems will continue to persist long into the future, and not just in Canada.

“The world population is seven billion, climbing to 10 billion, and the planet isn’t growing,” Pastrick said. “Something has to give,” he added, which is the price of land.

Over the long run, Pastrick said he expects people will have to spend larger portions of their income for shelter in an increasingly crowded world.

Source: Derrick Penner, vancouver Sun

The British Columbia real estate Association forecasts that the average residential price in the province will increase 13 per cent to $571,000 this year, before edging back 2.5 per cent to $557,000 in 2012.

In a news release issued today, the BCREA also predicted a moderate increase in housing this year and next.

“After declining 12 per cent in 2010, residential unit sales through the Multiple Listing Service in B.C. are forecast to rise by five per cent to 78,200 units in 2011 and a further three per cent to 80,700 units in 2012,” the release said.

However, the BCREA also said that home sales will remain below their 10-year average of 87,600 units both this year and next.

“Home sales will post some modest gains over the next two years,” Cameron Muir, BCREA chief economist, said in the release. “However, positive housing fundamentals like job growth, rising wages and an expanding population base will be somewhat offset by higher borrowing costs over the next eighteen months.”

Source: vancouver Sun

Canadian home resale prices rose in April from March, marking the biggest of five straight month-on-month increases and gaining right across the country, a report Wednesday said.

The Teranet-National Bank Composite House Price Index, which measures price changes for repeat sales of single-family homes in six metropolitan areas, showed overall prices were up 1.1% in April from March.

It was the first time in 10 months that prices rose in all cities surveyed. Housing has been a resilient sector of the Canadian economy, rebounding quickly and steadily after a brief slump early in the financial crisis.

Analysts said the higher prices shown in the past few surveys were fuelled by a rush to buy before stricter mortgage rules came into effect in the spring.

“The strong monthly rises of the composite index in the last two months probably come from front-loaded activity preceding the reduction in the maximum amortization period of insured mortgages,” said Marc Pinsonneault, senior economist at National Bank Financial.

“Therefore, it should not be a lasting trend.”

The advance was led by vancouver, up 1.8%, providing more evidence that the already expensive housing market in the Pacific Coast city has been heating up even more, partly because of an influx of foreign investors.

Prices in Toronto rose 0.7%. Big gains were seen in Montreal and Ottawa, up 1% and 1.4%, respectively. Halifax rose 0.8%, while Calgary reported the smallest gain, up 0.6%, its second monthly rise in nine months.

The Teranet figures lag other housing data, such as the closely watched existing home sales report from the Canadian Real Estates Association, which showed a dip in prices in May from April and an continuing shift toward a balanced market.

The Teranet showed overall prices in April were up 4.4% from a year earlier.

The index tracks home prices over time for repeat sales, so properties with at least two sales are required in the calculations. The report did not provide actual prices.

Source: Reuters

Canada’s housing bubble is now close to bursting as housing valuations have “lost touch with fundamentals” and household debt is at a record high, says a report by Capital Economics.

The report says it fears that house prices could fall by as much as 25 per cent over the next three years.

“House prices have been growing rapidly for nearly a decade now and it has reached the point where housing is so overvalued relative to incomes that a downward correction seems unavoidable,” says Capital Economics.

“Relative to disposable income per capita, our calculations suggest that housing is around 25 per cent overvalued, which is approaching the level of excess that the U.S. market reached at its peak in 2006.”

The report says the downturn in the housing sector will severely constrain economic growth over the next couple of years as consumption expands at a more “muted” pace and housing investment “shrinks.”

“We also anticipate that the end of the housing boom will lead to a marked decline in housing-related activity and employment,” it says.

Capital Economics says signs of over-building are evident as unoccupied housing units are at historically high levels, similar to 1994-95 when housing construction was last mired in a slump.

“Another sign of over-building, or perhaps over-consumption, is the sharp increases in the home ownership rate over the last 10 years,” it says. “This run-up has coincided with a housing price boom fuelled by rising financial leverage.

“Our concern is that these excesses will eventually lead to a house price correction, which would greatly impact household wealth, consumer confidence and the economic recovery.”

Source: Mario Tonneguzzi, Calgary Herald

Even after the Stanley Cup rioters gave vancouver a nasty black eye (and perhaps a few chipped teeth) earlier this month, the B.C. metropolis still easily topped the rankings in a nationwide survey that asked Canadians to name the country’s “nicest” city.

In fact, despite the cruiser-torching, window-smashing, shop-looting rampage that followed the Canucks’ disappointing defeat in Game 7 of the NHL finals, vancouver’s own residents helped lift the city to a solid first-place finish in the poll with their unwavering admiration for the place that they live.

The survey of more than 1,500 Canadians, commissioned by the Montreal-based Association for Canadian Studies and carried out during the week of June 21, presented respondents with a list of nine major cities from coast to coast and asked them to name their first and second choice for “nicest city in Canada.”

Twenty-five per cent of all Canadians picked vancouver as No. 1. Quebec City drew the second most votes as Canada’s nicest city, with 20 per cent of respondents nationally — and a strong majority of Quebecers — giving the provincial capital the nod.

The percentage of Canadians choosing other cities as nicest were: Ottawa (12 per cent), Montreal (nine per cent), Toronto (nine), Halifax (six), Calgary (four), Edmonton (three) and Winnipeg (two).

Another 11 per cent of those surveyed selected some other unnamed city as the nicest in Canada.

The overall results, noted association executive director Jack Jedwab, partly reflect the fact that vancouver residents themselves overwhelmingly named their own city the nicest — with 94.7 per cent of those living there convinced there’s nowhere better in Canada.

He said such “hometown patriotism,” while evident to some degree among residents from each of the cities offered as choices, was strongest in vancouver.

And people from other parts of the country — while less convinced than Vancouverites themselves about the merits of that city — were still more likely to put vancouver at the top of the heap than other contenders.

For example, 28 per cent of Alberta residents picked vancouver as Canada’s nicest city, even ahead of Edmonton (18 per cent) and Calgary (16 per cent).

vancouver also led the results in Ontario with 21 per cent of the first-place votes, more than Ontario’s own Toronto (19 per cent) and Ottawa (17 per cent).

“I think it may have gotten a big boost from the Olympics — that extra pride in vancouver. But it may also be from the Stanley Cup, despite the riots,” Jedwab said. “I think that’s creating a lot of unanimity around vancouver being Canada’s nicest city.”

He said he expects the responses captured a blend of respondents’ feelings about each city’s urban amenities and natural features (including climate), as well as general impressions about the nature of the people who live there.

On vancouver Island, just 35 per cent of respondents said vancouver was Canada’s nicest city. More than 50 per cent chose the unidentified “other” option, suggesting the island’s residents favoured their own Victoria over any other Canadian city.

Source: Randy Boswell, Postmedia News

Let’s just say it pays to shop around. So why don’t more people do it?

There is a perception that it’s difficult to switch banks, plus it will cost you some money to switch. Yes, it’s a hassle but for $5,000-plus, count me in. As for the costs, the bank you are switching to will often cover your legal costs. Even if it doesn’t or say you face a discharge fee of $300, that’s small price to pay upfront.

Mr. McLister says if you change the terms of your mortgage and refinance, it could cost you as much $700 to switch, something you would have to do if you have a home-equity line of credit or have a collateral charge on your mortgage.

Farhaneh Haque, regional manager of mobile mortgage specialists with Toronto-Dominion Bank, says her bank starts calling customers as much as 120 days before renewal to discuss options.

“This all about relationships, they are not going to up and leave for a five-basis-point difference,” Ms. Haque says.

She’s right. A 0.05 percentage point is not a great reason to sever your relationship. But renewal time is a great time to test your relationship with your bank and get it to show you some love — or a better rate.

Source: Garry Marr, Financial Post

An increasing number of China’s rich are snapping up properties overseas in the expectation that domestic inflation will continue to rise after the consumer price index reached a 34-month high in May.

According to Colliers International, a real estate service provider, the proportion of Chinese buyers in vancouver’s property market is on the rise. At the end of the first quarter this year, it increased to 29 percent of all homebuyers.

In the past six months, Chinese spent 1.3 billion yuan ($200 million) through Colliers’ international property department, with Canada, the UK and Australia topping the buying list.

“We are expecting a clear increase in the extent of mainland buyers’ purchases of overseas properties this year because of the government’s rigorous restraint on the number of homes a family can buy in key cities,” said Alan Liu, managing director of Colliers International (North Asia).

Due to the latest financial push from China, the average price of a home in Greater vancouver rose 12 percent in 2010 and is expected to rise another 3 percent this year, according to the Canada Mortgage and Housing Corporation.

Demand from mainland immigrants now accounts for 29 percent of all new homes in vancouver.

The situation in London is similar. Last year, overseas nationals purchased 28 percent of all resale properties across all prime London sites and 54 percent by value in the prime central London area in the more than 5 million pound ($8 million) price bracket, according to a recent report by Savills research.

“If the money from China were to start flowing into London at the same rate it does from billionaires in other countries, we would expect the value of ultra-prime London properties to grow by as much as 15 per cent,” said Yolande Barnes, head of Savills residential research. “The issue at present is that Chinese buyers aren’t taking, or can’t take, their money out of China.”

The biggest increase in global billionaires since 2007 has occurred in China and the Commonwealth of Independent States (CIS). While CIS buying activity has been strong, accounting for 15 percent of prime central London purchases by value, Chinese billionaires have yet to have a real impact, accounting for just 3 percent of prime central London resale purchases by value.

But more Chinese from the mainland are seeking various ways to manage their wealth globally.

“An increasing number of people from the Chinese mainland came to us and put their money into a property trust unit in Jersey to save VAT and avoid heritage tax as well as capital gains tax when trading again,” said Geoff Cook, chief executive of Jersey Finance, situated on the British island which is a noted offshore financial center.

“Purchasing properties is necessary for the super-rich to allocate their resources globally, but it might not be a good choice for domestic investors from the middle class because it implies that you are betting on the depreciation of the renminbi,” said an industry expert helping people purchase properties overseas who declined to be named. “Meanwhile, property prices in mature markets are usually steady, without too much room for price appreciation.”

Source: Hu Yuanyuan, China Daily

Metro vancouver’s luxury homes appear to be more popular than ever.

A survey by Macdonald Realty has concluded that Metro vancouver is set to break all records for a fourth consecutive year, with a projected 792 sales this year of homes valued at more than $3 million -up from the 550 luxury sales predicted earlier this year.

The 792 sales would be more than double the 375 sold in 2010 -itself a record -and nearly four times the 2009 sales number of 209.

The 2010 total has already been surpassed, with 384 homes over the $3-million price point sold so far in 2011, according to Macdonald Realty.

There have also been 66 homes over $5 million sold so far, and a predicted 132 over $5 million by the end of the year.

A total of 40 condos over $3 million have so far been sold, including seven over $5 million.

However, the trend partly reflects price increases that have pushed previously cheaper homes over the $3-million luxury home threshold.

“Price points are moving up,” Macdonald Realty vice-president, strategy, Dan Scarrow said in an interview Monday. “Last year, [many] weren’t classified as luxury. They sold for $2.5 million, but now sell for $3.5 million.”

The most expensive home sold so far this year, according to Macdonald Realty, is a Point Grey house at 4791 Belmont that went for $16.8 million, the third most expensive home ever sold in the region.

Scarrow said that while average prices across the region have not risen sharply over last year, that’s not the case for areas greatly impacted by sales of luxury homes, citing richmond‘s 25-per-cent increase over last year.

He said sales of luxury homes are largely driven by Chinese immigrants and investors with plenty of money.

Scarrow said a rapid runup in prices has some experts warning that it may be unsustainable.

“Historically, price growth has been driven by a combination of higher wages and lower interest rates, but rates are already at historic lows and wage growth is relatively stagnant,” Scarrow said.

He said a new dynamic might be at play, with the luxury market trend looking more like that in Hong Kong or Shanghai, than Toronto or Seattle.

Scarrow said the trend is most obvious in the sharp rise in condo prices, noting that 10 years ago not a single condo sold for over $3 million. This year, the number is projected to rise to 80.

Source: Brian Morton, vancouver Sun

You better buy a house in this market before it’s too late.

How many times have you heard those words? The panic thinking is driven partially by prices continuing to rise to record levels but also by the sense that near-record-low interest rates could rise at any moment.

“There’s six left on the shelf, nope, it’s down to five,” jokes certified financial planner Ted Rechtshaffen, president of TriDelta Financial. “It’s an interesting phrase.”

Mr. Rechtshaffen says his clients are not uttering panic words but you have to wonder whether Mark Carney, governor of the Bank of Canada, might have been hearing them before making a speech to the vancouver Chamber of Commerce this month.

“One cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand,” Mr. Carney said. “The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear -greed among speculators and investors -and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

It’s hard to measure desperation, but a recent survey from Toronto-Dominion Bank on first-time homebuyers might imply there is some urgency in the marketplace.

The survey found 45% of Canadians are willing to buy their home independently without a co-signer. Traditionally people wait until they are married to buy that first home but now they want to establish equity early so they can get their foot in the market.

More worrisome out of the TD report was the statistic that buyers are doing less research before jumping in. The bank said mortgage pre-approvals are down to 72% from 84% a year ago and home inspections have dropped from 85% to 67% during the same period. The report also shows declining percentages for buyers researching issues like electricity and closing costs.

It all sounds like somebody in a hurry to buy or at least in a bit more of a rush.

“I think people see affordability is still there. The employment numbers are strong and rates are relatively still low,” says Farhaneh Haque, regional manager of mobile mortgage specialists with TD Canada Trust. “In part there is a sense or urgency because they are worried about rates and unsure of what the markets will do.”

Benjamin Tal, deputy chief economist at CIBC World Markets, says the Bank of Canada is partly to blame for some of the urgency in the market because of the uncertainty over rates.

“People feel the window is closing,” Mr. Tal says. “People have been talking about the Bank of Canada raising rates. They look and say rates will be one or 1.5% [percentages points higher] next year. There is some logic to it.”

He adds that if you look at trends over the past 20 years on what happens before rate announcements, you see an acceleration of activity before the announcement.

Source: Garry Marr, Financial Post