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Major cities in Saskatchewan, Alberta and B.C. are overvalued by 10 per cent, economists say as key construction indicator tumbles

TAVIA GRANT
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As Canada‘s housing market shows fresh signs it has exited the boom phase, Merrill Lynch economists are cautioning homeowners to expect a “sustained downturn” in prices.

Nearly every major city in the West makes the list of most vulnerable markets, in addition to Montreal and Sudbury, according to a pair of Toronto-based economists at the bank.

Soaring prices over much of the past decade have made the country’s homeowners substantially richer. The big question is whether a selloff could echo the wrenching downturn in the United States, where prices in Miami and Los Angeles have fallen as much as 28 per cent from the peak and average national prices are down 18 per cent in the past two years.

The Merrill Lynch Canada study, which predicts a retrenchment, but not of the same magnitude as in the U.S., concludes the country’s housing market is now the most expensive since 1991.

Markets in Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury and Montreal are all more than 10 per cent overvalued, as calculated by economists David Wolf and Carolyn Kwan.

Their analysis, which calculates fair value by using variables such as current prices, affordability and long-term average valuations, landed on the same day Statistics Canada said both residential and commercial construction intentions tumbled in June.

In sifting through recent data, the Merrill economists believe the country’s housing market will suffer from excess supply and reduced demand as higher prices deter new buyers. They expect house price appreciation will stall, with western markets “most vulnerable to outright declines.” Other markets exposed to downward pressure include urban condos and suburbs where commuters face higher transportation costs due to rising fuel prices.

This retrenchment won’t be nearly as severe as in the U.S. though, Mr. Wolf emphasized.

“Are prices going to fall 20 per cent the way they did in the U.S.? Probably not,” he said. “But it’s pretty clear that things are weakening and they’re going to continue weakening for some time.”

Credit is the main difference between the two countries. Looser credit conditions south of the border fuelled easy lending, which in turn created excessive demand.

“We never had that kind of credit excess in Canada,” Mr. Wolf said. Plus, much of this country’s boom has been making up for lacklustre activity throughout the 1990s.

Now, after years of ever-pricier homes and aggressive building, scales may have tipped.

The Merrill economists are most concerned about Saskatchewan, where the doubling of house prices in Regina and Saskatoon over the past two years means, they estimate, these markets are almost 50 per cent overvalued.

In B.C., Vancouver’s and Victoria’s housing markets are now as much as 35 per cent overvalued, they believe. Markets in Alberta, meantime, have become slightly less overvalued in the past year.

The rest of the country looks “better balanced,” they said, with housing in Toronto essentially at fair value.

Slowing activity and moderating prices would have broad economic ripples. Mr. Wolf sees cooling residential investment dampening inflation and knocking 0.6 percentage points off real gross domestic product next year.

Builders are already more cautious, with Statscan’s report Thursday showing building permits fell 5.3 per cent in June – the steepest drop this year. Last week, a Canadian Real Estate Association report showed sales activity slumped 13.1 per cent in the first half of the year. National house prices, though, have so far held steady.

The head of construction powerhouse EllisDon is “very concerned” about where the Canadian economy is heading, and what it might mean for building activity.

“I am worried right across the country that things are tightening up and that a year from now we are going to see a drop-off,” said Geoff Smith, the company’s president and CEO.

Nowhere has the market been more wild in the past year than Saskatoon, which has bubbled with stories of bidding wars and frenzied speculators.

Yet soaring house prices may finally be deterring buyers.

“It’s quiet on the buyers’ side. Listings are up, sales are down,” said Ken Glauser, associate broker at Henry Moulin Realty Inc. “Surprisingly, the overall average price isn’t down though.”

He expects a slight cooling-off in prices, but says a strong local economy means they won’t fall much. And he’s rather relieved the market is losing some of its fevered pitch.

Nowadays, “people can go home and think about their bids overnight,” Mr. Glauser said. “Last year, they could hardly get back to their car to think about it.”

© The Globe and Mail

 

Derrick Penner
Sun

The value of building permits issued to contractors in British Columbia dropped by almost 22 per cent over the first half of 2008 compared to the same period last year, according to figures released Thursday by Statistics Canada.

It is a story of a slowing in residential construction planning compared with 2007, and also reflects how the industry overheated last year.

Contractors booked almost $5.2 billion in permits during the first six months of 2008 compared with $6.7 billion over the first half of 2007.

A 23-per-cent drop in residential permits, at almost $3.4 billion over the first half of 2008 compared with $4.4 billion in 2007, was the main factor for the decline.

Last year was “a very high watermark [for construction activity], that’s part of it,” said David Hobden, an economist with Credit Union Central B.C., in an interview.

“The other thing is that housing inventories have risen dramatically [during 2008], both on the new and resale side.”

Hobden added that the result of all that inventory is a halt to rising house prices, and “a market adjustment is underway [in construction], mainly in the housing sector.”

Hobden said that the non-residential construction sector is still going strong, though building-permit values for the first half of 2008, at almost $1.8 billion, are down 18.5 per cent from 2007.

Hobden said the non-residential sector, for buildings such as hospitals, schools, stores and offices, hit a lull around the turn of the year, but have rebounded to strong levels over the past few months.

“The [Credit Union Central] forecast this year is for non-residential construction to be close to last year’s level by the end of the year,” Hobden said.

Activity, he added, is being driven by high demand for commercial space, particularly retail stores and offices.

Keith Sashaw, president of the Vancouver Regional Construction Association, said the falloff in residential permits was expected given that “we are very long into the [housing] cycle.”

However, in talking to his members, “their order books are full.”

“There’s no doubt permits are off from last year,” Sashaw added, “but last year was just extraordinarily busy. Frankly, it was unsustainable at those levels.”

Philip Hochstein, president of the Independent Contractors and Business Association of B.C., added that the sector is still healthy, although not isolated from what is happening elsewhere.

“The building permit numbers show that B.C. is not immune from what is happening in North America,” Hochstein said in a written statement.

“Building permits are an indicator of people’s feelings about the future, and there is greater caution today, particularly with the economic troubles in the U.S.“

Hobden added that “the boom is definitely off the construction sector. But even so, it was at such high levels that though the peak has been reached, there is still a fair amount of [construction] output.”

B.C. was one of six provinces to record a decline in the value of building permits issued in June compared with May, which drove values on a national basis down by a seasonally adjusted 5.3 per cent, according to the Statistics Canada report.

David Wolf, an economist at Merrill Lynch Canada, said the country’s housing market seems to have entered a “sustained downturn” that could be hampered by a decline in commodity prices.

“It does look like Canadian houses finally got too expensive, and builders too aggressive, for the underlying demand environment,” Wolf added.

He estimated that markets with the strongest price growth in recent years, such as Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury, Ont., and Montreal, were all more than 10-per-cent overvalued. On a national basis, Wolf predicts house price growth to remain flat.

Merrill Lynch expects commodity prices to moderate over the medium term, a scenario that would aid in the housing market downturn, but not cause an outright bust.

© The Vancouver Sun 2008

 

Mary Frances Hill
Sun

VANCOUVER – The city has purchased an old auto shop at 1700 Kingsway with an eye to developing it into 70 social housing units, Mayor Sam Sullivan announced Thursday.

The site, bought for $1.3 million, doesn’t yet have a construction start-date attached to it, he said. The city will have to secure funding partnerships with either the private sector or the federal and provincial governments before the building, which will include social services and retail outlets, will be developed.

“This is the golden age of investment in social housing right now,” said Sullivan.

Laura Track, a lawyer with Downtown Pivot Legal Society, which acts as an advocate for people in the Downtown Eastside, said the new project is welcome, particularly since it stands outside the poverty-stricken neighbourhood.

But 70 new units won’t come close to fixing the problem of homelessness, she said. “It’s a drop in the bucket.”

Homeless count figures put the number of people living on the streets at 1,547.

© The Vancouver Sun 2008

 

City-by-city comparison ‘fairly ugly’

Province

OTTAWA — The value of building permits in Canada plunged 5.3 per cent to $6.3 billion in June, as plans for both residential and non-residential projects declined from the month before, Statistics Canada reported yesterday.

The most significant decrease occurred in Ontario, where the value of building permits — a key indicator of construction activity — fell 7.9 per cent to $2.3 billion. Six provinces saw declines in their numbers.

Nationally, the residential sector experienced a 4.4-per-cent drop to $3.6 billion, generated by lower values in multi-family permits in all provinces except Saskatchewan.

In non-residential building, permits fell 6.6 per cent to $2.8 billion due to declines in commercial and industrial intentions, the federal agency said.

The 5.3-per-cent drop was much worse than the one-per-cent monthly drop markets had been expecting, and the biggest monthly change since November of last year, according to TD Securities economics strategist Millan Mulraine.

June’s sharp drop places the value of permits 9.1 per cent lower than in the corresponding period last year, Mulraine said.

“On a city-by-city comparison, the report was fairly ugly,” Mulraine said, “with Montreal [down 12.1 per cent], Calgary [down 15.2 per cent], Vancouver [down 13.4 per cent] and Saskatoon [down 16.7 per cent] all posting double-digit declines.

“On the whole, it is now becoming clear that the Canadian housing market is continuing to cool, as the level of activity moderates to more sustainable levels. And we expect this correction to continue at a measured and orderly pace,” Mulraine said.

Municipalities were hurt by a 13.8-per-cent drop, to $1.3 billion, in multi-family housing in June, the second-consecutive monthly decrease, with most of them occurring in Ontario and Alberta.

Single-family permits edged up 1.8 per cent to $2.3 billion.

The non-residential sector declined after two consecutive months of gains with advances in institutional permits, up 17.4 per cent to $765 million, unable to offset sharp declines in industrial and commercial permits.

Industrial permits fell 31.1 per cent to $389 million after a 70.3-per-cent jump in May. Commercial permits fell 7.7 per cent to $1.6 billion due to lower construction intentions for hotels and recreation buildings.

Saskatchewan was the only western province to post gains, up five per cent to $192 million. Alberta posted a 7.5-per-cent decline to $1.193 billion thanks to a 19.6-per-cent decrease in the residential component, Statistics Canada said.

B.C. was off 6.1 per cent to $1.065 billion. Manitoba was down 11.6 per cent to $121.2 million, while Alberta fell 7.5 per cent to $1.193 billion.

Quebec was up 3.5 per cent to $1.147 billion.

© The Vancouver Province 2008