Housing bubble threatens in six cities: Report

By STEFANIA MORETTI, QMI Agency

Last Updated: August 31, 2010 12:21pm

A perfect storm has created a housing bubble in Canada that could lead to a drop in property value of nearly 40% in some markets, according to a report by the Canadian Centre for Policy Alternatives.

For the first time in 30 years, house price increases have climbed faster than historic comfort levels in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa, the think-tank said.

In the past, inflation-adjusted home price in these “red-hot” markets have held steady at between $150,000 and $220,000 in today’s dollar. But current average price tags in all six cities are now and well over $300,000.

"The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen," said the report's author, David Macdonald, in a release Tuesday.

Benjamin Tal, a senior economist and real estate expert at CIBC World Markets, said he wouldn’t use the word “bubble” to describe the present situation but did say prices are definitely “overshooting” and will go down.

But Canada’s big six markets are less stable than a generation ago, especially after the steep price increases between 2002-07, the report said.

Ten years ago, prices tended to hover around three to four times the provincial annual median income. Today, prices are pushing anywhere between 4.7 to 11.3 times annual median income.

As prices rise, mortgage holders are more and more vulnerable to rate changes, Macdonald said. As interest rates come off near-zero levels, variable rate holders may struggle to make rising monthly payments.

“Rate-setters at the big banks are in the driver's seat now as mortgage rates inch up. They need to hit the brakes lightly."

Either way, Canada’s real estate markets could be in for a correction at best or, at worst, a bubble burst, Macdonald said.

Using the 2006 housing market collapse in the U.S. as a model and simulating current market conditions, the Centre for Policy Alternatives predicts homeowners in Edmonton and Montreal could be hardest hit, losing 38% to 34% of their property value respectively in less than three years, in a worst-case scenario.

In terms of dollar value, Vancouverites would be worst hit and stand to lose nearly $200,000 on the average home.

“I really don’t see what would trigger this kind of sharp decline,” Tal said.

His forecasts are far less grim because as he sees it, the market fundamentals are still strong. Tal sees price drops to the tune of 10% on average and by 15% only in select cities.

“I’m not in this camp that sees disaster happening,” Tal said.

Canada has seen three housing bubbles burst, twice in Vancouver and once in Toronto, the report said.