Nov 11, 2015 Romana King for MoneySense.ca
In the market for a new home this year? Then you must be quaking in your snow boots after the news agencies reported the recent catastrophic predictions of Duetsche Bank.
According to the international Bank’s chief international economist, Torsten Slok, Canadian homes are 63% overvalued—the single largest prediction of doom for this country’s housing market.
The Duetsche Bank predictions came supported with charts and statements that show Canada’s housing market is valued 35% higher than the median house price (when compared to median household income) and 91% when compared to average rental rates.
As a potential home buyer, I won’t blame you if all you want to do is stick your head in the sand (on some sunny, non-Canadian beach somewhere) and hide. But don’t. And, as trite as it sounds, please don’t worry. Despite the latest grand predictions, the housing market in Canada really isn’t going to crash.
Now, I’m not an economist. I don’t spend my days or nights analyzing reams of data and finding patterns or anomalies in numbers. I am, however, a journalist, and I’ve spent the last few months talking to analysts and economists from across Canada about the possibility of a housing market crash in Canada. These experts have stated that, despite what catchy headlines predict, a crash just isn’t likely. And they’ve stayed up nights analyzing reams of data and finding patterns and anomalies in numbers.
“We’re expecting a soft landing for Canada’s housing market in 2015,” explains Marc Pinsonneault, senior economist at National Bank of Canada. “There won’t be a profound correction in housing prices.”
While Pinsonneault and his colleagues do believe house prices will decline in 2015 and 2016, they’re convinced it will be s slow cooling, not a crash. (Cooling is a term used to describe a housing market that slowly depreciates in terms of price and number of sales. A cooling market means there is no sudden, large drop in prices, sales or new builds, which are indicators of a market crash.)
The first reason Pinsonneault predicts a cooling and not a crash is that mortgage rates aren’t going to escalate rapidly over 2015 and into 2016. “We’re going to see increases, but not 100 basis points at a time,” says Pinsonneault.
Pinsonneault is also convinced there won’t be a crash because demand really is keeping up with supply. According to his research, building starts and absorption rates—the number of newly built condos and homes that were actually sold—are on par with historical averages. “The ratio is not far off the long-term average of 1.03,” he says. This means the claims of overbuilding—which further fuel this idea of a housing market crash—are unfounded in cities like Toronto, Calgary and, potentially, Vancouver.
Senior economist with Capital Economics, David Madani, is critical of this analysis. He’s also seen the numbers and concedes that supply really does appear to be keeping up with demand—at least from a statistical perspective—but he cautions there still could be problems. “There are too many one-bedroom condo units being built when demand shows a need for family accomodation,” says Madani. It’s a concern that was highlighted in the Duetsche Bank report; they reported that building starts for detached, single family homes was stagnant over the last decade, while building starts for condos and townhomes had increased dramatically over the last 10 years.
But Pinsonneault believes these numbers just support the growing notion that land, and scarcity of this limited commodity particularly in downtown, urban centres, is what is pushing up housing prices, not over-valuation.
So what’s a regular home buyer to do? If you’re ready to jump in and buy, and you can afford a house in your local market, then do it. Don’t wait for house prices to fall.
“Timing the market is never wise,” explains Ted Rechtshaffen, president and CEO of TriDelta Financial. He explains that when buying a home, “it’s not about the home price, but the mortgage rate.” If you can afford to pay the mortgage now—and you can still afford to pay the mortgage five years from now after rates have risen, then you can afford to buy. For today’s home buyer that means calculating whether or not you can afford monthly payments for your dream home at rates of 4% or 5%.
It also means deciding whether or not you can stomach a drop in home values. Even if the housing market doesn’t crash and lose 60% value, most economists are predicting some sort of cooling in the nation’s housing market. Predictions range from 10% to 30%, with the top-end of the correction occurring in the country’s hottest markets, such as Vancouver.
To put this in perspective: on a $450,000 home a 20% drop in value is a loss of $90,000. It would take a decade for you to recover that lost value (assuming your home appreciated at the historic norm of 2% in value per year).
Calculating whether or not you can afford a home and stomach a price drop is even more important if you’re putting down less than 20% as a down payment. If you only put 5% down on a $450,000 home and prices dropped by 20%, your home would be worth less than the amount you owed on the bank—and this could spell trouble when it came time to renew your mortgage. The key is make sure you put a large enough down payment into the home to ensure that you’ve got equity in the property, even if prices do drop. The reason? You need to own more than you owe in order to qualify for a mortgage.
If you decided to take the plunge, ignore the doomsayers, and buy a home in one of Canada’s real estate markets then the decision you’ll be faced with is whether to choose a fixed or variable-rate mortgage.
In the past, those who opted for variable ended up paying less. But these days the difference between fixed and variable is so small it’s not worth the uncertainty, says Rechtshaffen. “Don’t get greedy. Just take the fixed-rate mortgage that’s under 3% and be thrilled.”