Canada's Housing Bubble

Garth Turner

Mar 31, 2010 Mario Toneguzzi Calgary Herald

Home prices in Calgary are overvalued by 15 to 20 per cent, "seriously unaffordable," and set to start falling, says a nationally known economic and housing market commentator.

Garth Turner, who is in Calgary tonight to speak about his views, said the residential real estate market is at the top of its curve.

"We're at the moment of crisis. In other words, the moment when the market will turn from being essentially a sellers' market into one that's flat and then eventually into one that's a buyers' market," said Turner, who is appearing at the Airport Radisson at 7 p.m.

"We've got several markets that are very expensive. Obviously, Toronto, Calgary and Vancouver are there at the top. In Toronto and Calgary, for example, we've got more than five times the average income to buy the average home."

On Monday, the Conference Board of Canada sounded a similar warning in a report, saying 20 per cent of Canadian households struggle to afford their homes.

"The unaffordability tends to affect cities more than rural areas. So anybody that lives in a city is probably at higher risk, especially in cities with buoyant housing markets like Calgary, Vancouver and Toronto," said Mike Grant, an economist with the conference board.

"The rate (of unaffordability) in Calgary is somewhat higher than the rate for Canada. It's one in five for Canada, about 20 per cent, but more like 25 per cent for Calgary."

The overall data include renters, homeowners with mortgages and homeowners without a mortgage.

Compared with a year ago, Calgary's resale housing market has seen prices jump. According to the website of Mike Fotiou of First Place Realty, so far this month, up to Monday, the average MLS sale price for a singlefamily home was $471,245, up from $420,354 in March 2009, while condos have averaged $296,468 this month, up from the $284,056 a year ago.

If the prices hold for the rest of this month, they will be at the highest monthly level since June 2008. Average MLS sale prices for singlefamily homes peaked in July 2007 at $505,920 and for condos in May 2007 at $332,237.

"People today are buying homes at probably the top of the curve, at least in this particular cycle, and those people buying with small amounts of money down, five per cent down, I think are at considerable risk because the market will turn," said Turner.

Why? Banks are starting to increase mortgage rates. A point has been reached where the average family can no longer afford the average home unless it's willing to commit a huge amount of its income.

"So the question is how long will it take to get rid of that 15 to 20 per cent. That depends where the Bank of Canada starts to raise its interest rates in June or July," said Turner. "That's really the pivotal point. If the Bank of Canada decides to be aggressive and raise rates by half to three quarters of a point, we're going to see 15 per cent shaved off by Christmas. If it's slower, it's going to take us into the spring.

"The one thing we don't know is if we're going to get into the nightmare scenario or not of what happened in the States. And that is after the initial 15 per cent drop, it kept going."

Canada Mortgage and Housing Corp. has forecast MLS average sale prices this year in the Calgary census metropolitan area to rise by 5.5 per cent and increase by another 3.9 per cent next year. The Calgary Real Estate Board has forecast singlefamily home prices to jump by six per cent this year and condos to rise by 4.3 per cent.

However, Turner said his advice to people who have recently bought a home with five per cent down is that they had better be ready to be in a negative equity situation by Christmas.

For people thinking about selling, Turner's advice is: "You're probably not in your lifetime going to find prices at this level. So be realistic and go on the market."