New home prices drop for first time in 13 months

Updated: Thu Sep. 09 2010 07:42:39

CTV.ca News

The price of new homes fell 0.1 per cent in July after a 0.1 per cent increase in June -- the first drop in more than a year, according to Statistics Canada's latest report.

The agency's New Housing Price Index released Tuesday lists Vancouver, London and Greater Sudbury and Thunder Bay, Ont., as the top contributors to the decline.
Between June and July, prices decreased most in Greater Sudbury and Thunder Bay, which dropped 1.9 per cent; London, down 1.8 per cent; and Windsor, Ont., which fell 1.5 per cent.

Meanwhile, construction on new housing units fell 3 per cent between July and August, according to the Canada Mortgage and Housing Corporation. The seasonally adjusted rate of housing starts was 183,300 units in August, compared with 188,900 in July, the organization reported Thursday.

"Housing starts moved lower in August, reflecting a decrease in both single and multiple starts," Bob Dugan, chief economist at CMHC's Market Analysis Centre, said in a statement.

Statistics Canada attributes the slump in new home prices in part to the introduction of the Harmonized Sales Tax, which isn't included in the index's calculations.

Prices rose in three of the 21 cities examined. The largest increase occurred in Kitchener-Cambridge-Waterloo, Ont., where they climbed 0.6 per cent as builders raised their prices.

The index was up 2.9 per cent year-over-year in July, following a 3.3 per cent rise in June.

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.

Real estate speculators, immigrants and crooks: Are they just scapegoats?

Much debate results from a lack of data on how the underground economy and other factors influence housing price

By Don Cayo, Vancouver Sun August 23, 2010

What drives Vancouver’s house prices so relentlessly to levels four times higher than Winnipeg’s, and more than half again what Torontonians pay?


Criminals are people, too. As are immigrants, old folks and any other demographic group you can name.
And, yes, these folks all do their bit to drive up the cost of housing in Metro Vancouver.

Because the fact is, the more of us there are, no matter who or how we make our money, the more demand for homes. This, coupled with a housing supply that's limited and skewed by our dramatic but difficult geography, pushes prices sky-high.

But do some of us drive up prices more than others?

Looking at a few specific neighbourhoods, the answer may very well be yes. But region-wide, not so much.
Vancouver's successive waves of wealthy immigrants, for example, no doubt bid up prices of upscale homes in the parts of the city that these newcomers see as choice.

Of course, the same could be said of poorer newcomers, who drive up the rents in basement apartments. After all, if they didn't come here, or if they had more money, half our mortgage-helper suites would be empty and competition for tenants would drive prices down.

Beyond these obvious observations, however, the analysis gets complicated. There's lots of speculation, but no data, on how much money organized (or, for that matter, unorganized) crime injects into the economy, how much spending power immigrants bring with them, or if or how much property flippers influence prices.

B.C.'s underground economy (shady cheats as well as gangland thugs) is likely north of 15 per cent of gross domestic product. This works out to more than -- maybe a lot more than -- $25 billion.

"Ultimately each drug dealer, each gangster, has to buy a Louis Vuitton bag for his girlfriend," says Andy Yan, a planner and researcher at Bing Thom Architects. "The minute this happens, the grey economy hits the real economy."

That's a lot of money, "and no doubt it plays a role," says Jock Finlayson of B.C. Business Council. "But is it an underlying explanation for the price of housing? I don't think so."

My colleague Kim Bolan specializes in crime, not real estate, but she agrees.

Bolan tells me top echelon gangs do invest in real estate and legitimate companies, but "if I think about all the gangsters arrested over the last two years, few had houses. Those who did usually just had one."

Not surprising, perhaps, given that real estate deals attract the attention of the anti-money-laundering FINTRAC system, whereas luxury car purchases and pricey condo rents do not.

But, as with the unknowable amounts in savings and offshore earnings that immigrants bring into B.C., proceeds of crime clearly put a lot of money into circulation. And that can't help but bolster demand beyond the limits suggested by the region's fairly modest level of officially reported income.

Housing supply, apart from the geographical constraints dealt with in Saturday's column, is further restricted by the generous amount of land set aside for parks and other public places, as well as the Agricultural Land Reserve, which becomes an ever-greater factor as housing sprawls farther into the suburbs.

Supply is further choked by the tendency, supported by tax breaks from every level of government, for senior couples or individuals to stay as long as they can in the large homes where they raised families.

Tsur Somerville, an economist who specializes in real estate at UBC's Sauder School of Business, notes that it's hard to say if this will be a bigger or a smaller market factor in the future. On one hand, there's a growing tendency for seniors to sell their big homes and invest the money in condos, which may cost as much but which occupy a lot less land. On the other hand, every year there are more and more seniors, and they're living longer.

Real estate consultant Paul Sullivan of Burgess Cawley Sullivan and Associates notes that even when seniors do sell out, and even when these homes are modest, they often aren't an option for most young buyers, especially in upscale areas.

"Where the one-level, 1,200-square-foot bungalow used to sell for $400,000," he says, "it's been pushed to $800,000, $1 million or $1.2 million as a development site.


"A developer can build a new home for $500,000 or $600,000 and sell it for $1.8 million. So if you want an entry-level home, you're competing with a developer who wants to buy the same house and tear it down."