Canada's Housing Bubble

May 25, 2010 Sharon Singleton QMI Agency torontosun.com

Toronto - About 1.5 million homes in Canada may now be overvalued after prices rebounded following the recession with home ownership costs rising for the third straight quarter, according to separate reports.

Prices in Alberta and British Colombia have overshot their fair value by the widest margin, with one-in-four properties in these markets overvalued, according to CIBC's Home Ownership Affordability Index.

"While the booming housing market is starting to come back to Earth, the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow," CIBC senior economist Benjamin Tal said, adding that prices are likely to drop between 5% and 10% over the next year or two.

Despite the high valuations, the bank said owning a home is still affordable for most Canadians apart from the older generation with an income of less than $50,000.

The average family spends about 22% of their gross income on housing costs, including hydro bills and taxes. That figure rises to as high 60% for lower income, older Canadians, CIBC said.

RBC said its Housing Affordability Index has declined in the first quarter and is likely to continue falling this year and next as interest rates begin to rise.

RBC's Housing Affordability Index measures the amount of pre-tax income needed to service the cost of owning a home.

In the first quarter, the cost of owning a detached bungalow increased by 0.9 percentage point to 41.1%, a standard two storey home rose 0.6 of a point to 46.8% and the cost of a standard condominium was up by half a point to 28.2%.

The biggest declines in affordability were in B.C., Saskatchewan and Manitoba, with the index in Vancouver rising 4.8 points to 73.4% from the previous quarter.

Affordability levels in B.C. are now close to their all-time peak in 2008 and that may weigh on the housing market in the province in the short term, RBC said.

Affordability also dropped in Quebec, Ontario and Atlantic Canada, but at a more moderate pace, it said.

In Toronto, the index rose 0.4 of a point to 49.1%, and in Montreal the gain was 0.9 to 39.7%.

Although affordability will decline, it's unlikely to return to peak levels seen prior to the recession in 2008, RBC said.

"We believe that the spectacular rally in housing prices over the past year will soon end, as rock-bottom mortgage rates increase," said RBC senior economist Robert Hogue.

"Sustained economic growth over the next year and the ensuing rise in job creation and household income should keep home affordability from spiralling out of control."

The Bank of Canada is expected to raise rates from historic lows as early as next month to stop inflation from rising too quickly. The central bank predicts the feverish levels of activity in the property market will slow in the second half as rates rise and the balance between supply of houses and demand returns.