House prices to keep falling

December 09, 2008

Tony Wong

Business Reporter

The real estate market may be cooling, but the upside is that Canadian homes are getting more affordable even as the nation "no longer appears to be immune to a generalized housing downturn," says a report.

"The souring of economic conditions, eroding consumer confidence and, in several instances, past excesses are creating a glacial downdraft that the majority of Canada's housing markets will be hard-pressed to resist," RBC senior economist Robert Hogue stated in the report released yesterday.

Housing start figures also released yesterday support the bank's view.

The seasonally adjusted rate of starts was a much weaker than expected 172,000 units in November, down 19 per cent from the 211,800 units recorded in October and the slowest pace of residential construction activity since 2001.

The Toronto market took the biggest hit, with starts down by almost 30 per cent from a month earlier, mostly due to the volatile condominium building sector. This may be a taste of things to come: the condo market has seemed particularly vulnerable to the downturn as developers shy away from starting new projects while trying to complete current developments in a falling market.

Year-to-date starts are actually up by 24 per cent compared with last year, as foundations are poured on projects that were sold last year. But analysts expect next year to be less buoyant as sales start to fade.

TORONTO STAR GRAPHIC

"With sales falling, credit conditions tight and fading support from condos, a correction is now upon us," BMO Capital Markets economist Robert Kavcic said.

A cooling market coupled with pressure to lower interest rates at the Bank of Canada – including a decision today that is expected to lower key rates by another 50 basis points – means homes are becoming modestly more affordable.

In the third quarter of 2008, it took 53.3 per cent of pre-tax income to afford a $436,400 bungalow in Toronto, compared with 54.3 per cent in the second quarter.

While that's a step in the right direction for those looking to buy a home, it's still a steep price of entry for many, since most financial institutions use 32 per cent of pre-tax income as a guide in determining whether someone can afford to buy a home. That figure would include mortgage expenses, property taxes, heating costs and other maintenance.

Still, results should be more dramatic in the fourth quarter, with prices in the Toronto market falling further, along with interest rates.

"For Toronto, market sentiment turned on a dime this fall," Hogue said. "Until the end of the summer, the feeling was that local housing markets were successfully negotiating landing to a slower, more sustainable pace of activity. However, notable declines in home prices and activity in many communities suddenly raised eyebrows and heightened concerns."

Hogue cautioned that "while there is no cause to panic at this stage, the GTA market has undoubtedly entered a period of consolidation. The area's economy is facing serious headwinds."

Hogue stressed the economy is in better shape in Canada than in other countries because of a host of mitigating factors, including a subprime mortgage market that was far more subdued than in the U.S. Canadian banks are also stable and still lending, while households are generally not as stretched financially, Hogue said. Also, speculative buying has not been as rampant in the Canadian market.

"These factors should provide enough of a foundation to prevent housing markets from spiralling down even as the Canadian economy slips into recession."

The Toronto area's affordability issues also appear a lot better when compared with places such as Vancouver, where it takes 74.8 per cent of pre-tax income to afford a bungalow – making it the most unaffordable city in Canada.

The good news is that's down from 78.8 per cent in the second quarter.