July Price Drop Reflects Decreased Mortgage Affordability
The Canadian Real Estate Association reported yesterday that average house sale prices pulled back 3.6% from the record-levels set in July 2007. This, according to analysts, is likely the inevitable correction to last year’s record-setting markets, particularly in Western Canada, that challenged mortgage affordability for new entrants. While new entrants sit on the sidelines, current homeowners are being advised to examine their refinancing options while consolidating existing debt and working to improve their existing home equity position until the current excess of housing works itself out in the medium term.
The national housing price retreat was heavily skewed by sharp declines in the formerly white-hot Alberta markets according to the CREA’s figures. Overall sales in Calgary were down 13.7% from last July, while average home prices slipped 7.8% year-over-year. In Edmonton, year-over-year house
prices fell 5.3%.
The national decline in house prices, led by Alberta, impacted a number of regional markets in centers across the country – although none to the extent felt in the center of the oil boom. Nonetheless, in
Saskatchewan, the market chugged along and, despite declining numbers of sales, showed a whopping 19.3% price increase in July. In Ontario, meanwhile, price gains year-over-year were moderated by the high number of houses on the market, despite a reported decline in construction announced recently
by the Canadian Mortgage and Housing Corporation. Toronto registered a very modest pricing increase of 1.5%, Ottawa’s prices increased 5.6%, while for the first time in this business cycle Vancouver – the most expensive market in the country – slipped into negative territory posting a 1 per cent decline.
“So far, the drop in average home values has mainly radiated from Calgary and Edmonton,” reports today’s Globe and Mail, “where July prices fell by 7.8 and 5.3 per cent respectively from the first year.” In comments to the Globe, CIBC World Markets’ senior economist, Benjamin Tal calls for a “slump by as much as 20 per cent in the near term in a correction of markets that got ahead of themselves”, particularly in Alberta and Saskatchewan. “Other than people who bought last year thinking prices would keep doubling over breakfast, most people [in Western Canada] should still end ahead,” Mr. Tal notes. Of more concern to Mr. Tal is the situation in Ontario, where house prices did not necessarily overshoot targets, but are more likely suffering from a slowdown in Ontario’s economy. “While I would expect a more modest drop in prices of about 5 per cent in Ontario and the GTA,” says the CIBC economist, “prices have not risen as much here and the decline would be more painful.”
“The steady drum-beat of double-digit sales declines this year is beginning to weigh more heavily on prices,” writes BMO Nesbitt Burns senior economist, Doug Porter, (“Canadian Housing: Out of the Medals“). The “bottom line”, according to Mr. Porter, is that “Canada’s housing market is running into some seriously foul weather amid the weakest affordability in nearly two decades.”
No markets where year-over-year price increases have outstripped affordability is likely to be immune, says Bryan Jaskolka, vice-president of Canadian Mortgages Inc.. a brokerage company with extensive experience operating in all markets across Canada. ” No market is likely to be immune . . . where affordability is low the prices will drop to correct back in line with comparable market rates.” “Its time in this cycle for howeowners who already own to hunker down, reinvest and build their existing home equity, and clear up their debt problems,” says Mr. Jaskolka.”
“Those who hold onto their homes, refinancing wisely and reinvesting in their home equity,” Mr. Jaskolka advises, “will find values eventually come back in the medium term.” However, he cautions that now is the time to take the initiative in terms of refinancing and financing the home equity (or sweat equity) improvements to solidify gains from past markets. His concern is for those homeowners who determine solely to wait out the market. “For those that start to slip behind and don’t act to refinance fast,” says Mr. Jaskolka, “they will find even tighter credit and lower LTVs [loan-to-value ratios] being offered in the coming 6 months as the insurance companies pull back to avoid negative equity situations.”
Homeowers who are hunkering down and tightening their belts to ride through the storm should be investigating their refinancing options and looking to the medium term solutions that will lock in their home values. Meanwhile, with the markets in most regions having swung clearly from the seller’s to buyer’s advantage . . . opportunities for value buying will likely be available from motivated sellers in areas and regions where price run ups were not that sustained and where local market strength is persistent.