All indicators point to prices fuelling the fire

Fiona Anderson
Sun

Real estate across northern British Columbia continues to boom, as the hot economy pushes up prices and home sales.

The value of sales covered by the B.C. Northern Real Estate Board, which is most of the province north of 100 Mile House, was up 33 per cent in the first nine months of the year, to $851.3 million from $639.6 million. But the number of properties sold only increased 14 per cent, from 4,934 to 5,647, an indication that price increases are fuelling the fire.

The biggest jump in prices has been in 100 Mile House where the average selling price for a single family home was up 56 per cent to about $200,000 from last September’s price of $128,000. But what’s causing the apparent skyrocketing prices is an increase in the number of higher-end properties that have been sold, and not rising prices generally, said local realtor and board director, Jim Ivens.

A lot of waterfront homes and large homes on acreages are being sold, and those go for more than $500,000, so that pushes up the average price, Ivens said. A modest three-bedroom house has only gone up about 20 per cent over the year, from about $150,000 to $180,000, he said.

Retirees and people looking for recreational property are snapping up the high-priced homes, Ivens said.

“What’s happening is with people selling in the southern part of the province and making big bucks on their houses. They come up here and it just seems like a good deal because they get twice the house for the same price,” Ivens said.

Elsewhere in the region, it’s the economy that is fueling the strong real estate sales, said Ted Shepard, president of the B.C. Northern Real Estate Board.

The hottest areas are probably Fort St. John and Fort Nelson, where oil and gas exploration has been pumping up local economies, Shepard said. Last September, the average price of a single family home in Fort St. John and Fort Nelson combined was $191,000. Prices in Fort St. John are now $260,000, while a house in Fort Nelson costs $227,000.

Bucking the trend, to some extent, is Prince Rupert, where the number of sales fell in the first nine months of the year, as did the value of sales. However, prices still increased year over year to $147,000 from $116,000 .

Prince Rupert is back to the same level of sales it had in 2004, said Shepard who is a realtor in the area. But with the new container terminal expected to be operating next year, bringing with it hundreds of jobs, that’s going to change, he said.

“Anywhere in our board area is a good place to invest, but Prince Rupert is lagging a little bit behind everywhere else,” Shepard said.

“Prince Rupert will boom.”

“[And] as far as quality of life goes, the north is the place to be,” Shepard said. “Because if you have a place in the Lower [Mainland] and you sold it you could move north and buy a place for less money and have money left over.”

© The Vancouver Sun 2006

Housing is not immune to the laws of supply and demand. When people won’t or can’t buy, prices come down

Harvey Enchin
Sun

When the cost of owning a two-storey detached home in Vancouver consumes 78.2 per cent of pre-tax median income, you know something has to crack.

That’s the figure RBC Financial Group assigned to its housing affordability index for the second quarter published late last month. No other city even came close; Toronto registered 50.1 per cent.

According to RBC’s housing affordability report, the expenses of owning a detached bungalow in Vancouver would absorb 68.2 per cent of median income, a standard townhouse 49.7 per cent and a standard condominium 34.2 per cent.

RBC determined that the qualifying income to buy the average home in Vancouver — that is, the minimum annual income used by lenders to measure the ability of a lender to make mortgage payments — was $124,688. Vancouver’s median income is $54,912.

The average monthly mortgage payment in Vancouver was $2,322 in September, the highest in 12 years. The gross debt service ratio as calculated by the Canadian Institute of Mortgage Brokers and Lenders was 50.5 per cent, up from an average of 37.7 per cent over the period 1997-2002.

Derek Holt, RBC’s assistant chief economist, called Vancouver’s housing market “unsustainable,” echoing a sentiment the TD Bank had expressed three weeks earlier. TD’s deputy chief economist Craig Alexander said then that Vancouver was “vulnerable to significant moderation”

Cameron Muir, senior market analyst for Canada Mortgage and Housing Corp., weighed in with his own prediction: “It would not be a surprise to see house prices fall by a few percentage points a year for a number of years until incomes and affordability grow to pick up demand.”

Recent signs of softening may not be surprising but they are welcome relief for beleaguered buyers waiting for a break. Residential sales volume dropped nearly 25 per cent last month to 2,519 units from 3,344 in September 2005 while the number of listings climbed to 5,115 from 4,590, a gain of 11.4 per cent.

According the Multiple Listing Service, the average price for a single family home in Greater Vancouver was $741,644 in September, a drop of just one percentage point from the average August price. But that statistic doesn’t capture the decline in asking prices, as sellers come to the realization that they have missed the peak and the tide is turning in favour of the buy side.

Housing is not immune to the laws of supply and demand. If prices rise to the point that people won’t or can’t buy, prices come down.

Of course, there is little reason to doubt that Vancouver will continue to be the most expensive real estate market in the country and even less to assume that prices will return to the levels of five or 10 years ago. As long as interest rates remain at historically low levels, jobs are plentiful and the population grows, there will be a demand for housing.

At the end of September, Royal Lepage Real Estate Services was still citing “frenzied levels of activity and double-digit price gains” with year-over-year price increases of 17.2 per cent for the average bungalow, 13.8 per cent for the standard two-storey house and 13.3 per cent for the average condo.

But, in the third quarter, the numbers told a different story. The price of a two-storey house rose only 0.2 per cent, the price for detached bungalows slipped 0.5 per cent and condos were down 0.7 per cent.

Deflation of the housing bubble in the United States has fuelled speculation that Canada would follow suit, but the dynamics of each market are quite distinct. U.S. homebuyers tend to be more highly leveraged than Canadians and use the equity in their homes to finance consumer spending to a greater extent than do Canadian homeowners. To bet on similar price behaviour in both countries would be a long shot.

Although some analysts argue that the housing market in Vancouver is a bubble that will burst, more see a moderate correction that will bring incomes and prices back to equilibrium and restrain future increases to something closer to the rate of inflation.

Whether this is good or bad depends on which side of the market you’re on. In the meantime, a typical two-storey house on Vancouver’s west side will still set you back a cool $1 million.

© The Vancouver Sun 2006

Province

TORONTO — High-risk mortgages are spreading like wildfire in Canada, new data show, but the country is not in danger of a U.S.-style overexposure — at least not yet.

Non-conventional mortgages — loans at high rates to homeowners who do not qualify for standard mortgages — are growing by about 50 per cent a year, research by CIBC World Markets shows.

That’s almost five times faster than the growth of traditional mortgages, and this is a sign of things to come.

In the last year, about 85,000 Canadian households have taken on non-standard mortgages, CIBC estimates.

They are most popular in rural and Atlantic Canada.

“Over the next five to 10 years, innovation in the mortgage market will accelerate at a pace not seen before in Canada,” says CIBC economist Benjamin Tal. “The genie is out of the bottle.” But that doesn’t mean that Canada’s homeowners are drowning in debt or about to be seriously sideswiped by a slowing economy, like many economists are projecting for the U.S., Tal argues.

For now, Canada’s mortgage market is a far cry from its U.S. counterpart, where non-conventional mortgages make up about 20 per cent of the market. In Canada, it’s about five per cent, Tal estimates.

As well, Canada’s big banks have not fully embraced the non-conventional mortgage market the way U.S. players have, and Canada does not have the proliferation of mortgage brokers that are a driving force in pushing riskier mortgages in the U.S., he adds.

© The Vancouver Province 2006

City’s price index is up 7.9% year over year, Statistics Canada reports

Sun

The market for new houses remains strong in Vancouver, with Statistics Canada’s new housing price index rising 2.5 per cent from July to August and 7.9 per cent year over year.

Victoria, however, showed much smaller gains. The July-August index gain in the provincial capital was just 0.7 per cent, while the year-over year increase was 1.7 per cent.

Nationally, however, prices for new homes are rising at their fastest pace since the late 1980s housing boom, which some analysts warn will stoke inflation concerns at the Bank of Canada.

The August increase, largely driven by gains in Western Canada, especially Alberta and B.C., was also greater than analysts had expected, noted BMO Capital Markets economist Michael Gregory.

The 1.5-per-cent national surge in prices during the month left them 12.1 per cent above their year earlier.

The Bank of Canada only last month warned surging home prices pose the main inflation risk, Gregory noted.

Prices in Calgary were up a whopping 60.6 per cent from a year ago, and in Edmonton by 37.8, Statistics Canada said.

However, year-over-year price increases in several other western cities were also nearly into double-digits, including those in Regina, Saskatoon, Winnipeg and Vancouver.

“This hints that pressures might be rippling from the Alberta epicentre,” Gregory said.

Ted Carmichael, economist at J.P. Morgan, said the surge in home prices will also eventually spill over into other price increases.

“The rise in new house prices will gradually feed into the consumer price index for shelter, putting steady upward pressure on core services inflation,” Carmichael said.

The news of the continuing gains in housing in prices, while exaggerated by the surge in Alberta and to a lesser extent other western cities, was surprising in that analysts have long been anticipating the housing market to cool, and the report followed news earlier this week of a greater-than-expected 2.4-per-cent fall in the pace of housing construction starts last month.

“One may suspect speculative churning if prices and mortgage activity are picking up even though starts are falling,” said Carl Weinberg, head of High Frequency Economics, a U.S.-based economic think-tank. “As demand cools in the housing sector so should prices.”

However, most analysts here doubt that there will be any major retreat in housing prices in Canada, as has happened in the U.S., where there are still concerns the bursting of the housing bubble could result in serious economic slowdown or even recession.

“The contrast between the busting U.S. housing market and the solid Canadian one grows sharper by the day,” said Merrill Lynch economist David Wolf, calculating that even excluding the increases in Alberta, new housing prices are still rising at a smart annual clip of more than 6.3 per cent.

“The contrast in new house price trends lines up with divergences in the resale home market and residential construction activity to demonstrate that Canada’s housing market is on a very different path than the U.S.” Wolf said. “We expect that Canada’s resiliency here will translate ahead to more visible divergences in consumer spending and overall economic growth.” News Service; with files from Vancouver Sun

© The Vancouver Sun 2006

Genworth Financial to make ownership more affordable

Michael Kane
Sun

Genworth Financial announced on Tuesday that it will be insuring 40-year mortgages in an effort to help more Canadians afford a home while expanding their choices.

The extended repayment time could shave $300 from the monthly cost of a typical $300,000 loan in Vancouver. However, if borrowers make those payments for 40 years, the final cost of their loan will be $741,681, or $187,941 more than if they used the standard 25-year payment schedule.

The 40-year option is designed to provide lower monthly payments for the initial years of ownership, said Peter Vukanovich, president of Genworth Financial Canada. As household income climbs, buyers can increase payments to reduce the life of their mortgage.

“This isn’t for somebody who doesn’t see any growth in their income,” Vukanovich said in an interview. “The reality is that this will add to the cost of the mortgage if you let it go for 40 years, so you want people to take advantage of the pre-payment privileges that lenders offer.”

Since Genworth pioneered 35-year mortgages earlier this year, they have been chosen by more than 20 per cent of buyers with less than a 25-per-cent down payment, according to Invis mortgage brokers.

“I have been surprised how much this does seem to fit our customers’ needs,” said Andrew Moor, Invis president and CEO. “Real estate prices are so high in certain urban areas that young people need these kinds of improvements to be able to afford to carry a mortgage.”

Wells Fargo Financial Corp. Canada launched the first 40-year mortgage available across the country this past June. GE Money had already offered a 40-year mortgage in just B.C., Alberta and Ontario.

In Vancouver, Invis broker Rob Regan-Pollock is seeing increasing demand for extended mortgages from young professionals who expect career and income growth.

He also has clients who have chosen a longer mortgage to get the home they want rather than settle for something smaller or move to a more affordable neighbourhood. They expect to shorten the life of their mortgage by increasing payments as household income improves.

An extended mortgage might also be considered by single-income families where a stay-at-home spouse plans to return to work when children start school.

Regan-Pollock cautioned that the lower monthly payment must be balanced against higher Genworth insurance costs, higher interest payments and the fact that home equity will build more slowly.

Like government-owned Canada Mortgage and Housing Corp., publicly traded Genworth makes low down payment loans possible by insuring banks, credit unions and other mortgage lenders against the risk of borrower default.

The homeowner pays the insurance premium, which includes a 0.20-per-cent surcharge for every five years of amortization beyond the traditional 25-year period.

Someone putting five per cent down and borrowing $300,000 over 25 years would pay $8,250 — added up front to the total loan — for Genworth insurance. For a 40-year loan, the premium would be $10,050.

Someone borrowing the same amount after 20 per cent down would see their premiums reduced to $3,000 on a 25-year loan or $4,800 on a 40-year loan.

Long-term borrowers are subject to standard credit rules which include using no more than 40 per cent of income to service debt, Vukanovich said.

CMHC matched Genworth’s 35-year mortgage earlier this year but a spokeswoman for the government agency Tuesday said there are currently no plans to insure 40-year loans.

© The Vancouver Sun 2006

Vancouver region faced a 35-per-cent drop in September

Fiona Anderson
Sun

Housing starts in the Vancouver region fell 35 per cent in September, the second month in a row that starts have dropped, according to the Canada Mortgage and Housing Corp.

The biggest decline was in multiple units, which plummeted 45 per cent, while starts for single-family homes in the area were down just six per cent.

“In spite of low new home inventories, builders and developers are hard-pressed to continue increasing the number of housing starts,” CMHC’s senior market analyst Cameron Muir said Tuesday. “A limited supply of developable land, the trend toward more complicated mixed-use developments, and competition for skilled trade workers are significant constraints to producing more than 21,000 housing starts per year.”

For the first nine months of the year, housing starts in Greater Vancouver are up six per cent to almost 15,000 units, compared to the same period in 2005. Single detached homes lead the surge with a 22-per-cent increase, while multiple starts have remained constant.

In the province as a whole, housing starts in urban centres are down 16 per cent for September compared to the same month in 2005. Year-to-date housing starts are up 7.5 per cent.

Peter Simpson, CEO of the Greater Vancouver Home Builders’ Association, said the fall in housing starts is not surprising.

“When we started the year we expected this to be a year of moderation,” Simpson said in an interview. “We didn’t expect any sharp increases in starts, nor did we expect a dramatic drop. And the early successes through the spring surprised us.

“So now we’re starting to get back to levels where we thought we would end up.”

Nationally, housing starts unexpectedly dropped to 211,300 units in September, down slightly from 216,600 in August, but the new-home market continues to fare better in Canada than in the United States.

Economists said that while last month’s decline was a disappointment, it was attributable to the volatile multiple-starts segment — consisting of condominiums, rental apartments and townhouses — which fell to their lowest level since July 2004.

That stood in sharp contrast to single-family units, a more stable housing measure, which edged upward in September for the fourth straight month, reflecting fundamental strength in the housing market, the CMHC report shows.

“Certainly, the [single-family homes] suggest the game isn’t over yet,” said Bart Melek, senior economist with BMO Capital Markets. “At the end of the day, anything over 200,000 [units] in Canada is indicative of a very strong housing market.”

And despite the backslide, Canada’s housing market continues to be more resilient than its American counterpart, with housing starts dipping 6.6 per cent year-over-year in the third quarter, versus a much steeper 20-per-cent drop in the U.S.

That softer slump is indicative of robust job creation north of the border, especially in resource-driven western provinces like B.C. and Alberta, and relatively tame mortgage rates.

“At the same time, we’re getting fiscal stimulus from lower taxes from the Feds,” Melek said.

“We’ve just posted a huge [$13-billion] surplus in Canada, and I suspect that much of that will translate into lower taxes for corporations and individuals as the year unfolds. So the Canadian consumer should do fairly well.”

In its report, CMHC said the annual rate of urban starts fell 2.9 per cent to 176,900 units in September, with urban multiples declining seven per cent to 81,200 units and singles inching up 0.8 per cent to 95,700.

“In the U.S., starts are down in every region,” TD economist Sebastien Lavoie said in a note to clients. “Slicing starts by housing type reveals a similar story. Both starts of multiple and single units are cooling off rapidly in the United States.”

Looking ahead, Canadian housing activity is expected to cool further for the rest of this year and next due to crumbling affordability, a rise in home construction costs and a forecast increase in multiple-unit supplies.

“There’s also more competition for home builders coming from the existing home market, which should cool things off as well,” said Adrienne Warren, senior economist with Scotiabank, who pointed to a rise in the number of resale listings.

“But I would say you’re still looking at relatively buoyant conditions in most parts of the country, and still very buoyant out in the West.”

© The Vancouver Sun 2006