Perhaps it’s best to start with the good news. The sudden slowdown in Canada’s housing market in recent months could simply turn out to be a hiccup. The carnage racking real estate markets around the world might yet spare this country similar pain. And tighter lending standards affecting first-time homebuyers might not knock the foundation out from beneath Canadian house prices. Or maybe, after living through one of the wildest housing booms this country has ever seen, the whole bonanza could be about to completely unravel. For nervous homeowners sitting on a lot of pricey real estate, it’s increasingly difficult to tell if the glass is half full, or completely empty.
Until very recently, Canada’s real estate sector looked like it would weather the current economic storm and emerge more or less intact. The boom certainly rewarded homeowners, at least on paper. Double-digit annual growth in the value of the average home over the last six years meant that, at their peak in the spring, residential properties in Central Canada were worth 74 per cent more than at the start of the decade, while in the West home prices jumped by more than 130 per cent. There was plenty of talk about a slowdown. But thanks to our relatively strong economy, most economists predicted house prices would hold up.
Few were quite prepared for what happened next. In June, the average price of existing homes in Canada’s major markets dipped 0.4 per cent from the year before—a tiny slip, but the first decline in nine years, and quite possibly the first major crack in the edifice of Canada’s real estate market. Then, like a series of bad sequels to a horror movie, the market continued to fall in July, and then August. As of last week, when the Canadian Real Estate Association reported the average price of homes in major markets was $316,052, prices were already down 7.3 per cent from where they were in June. At the same time sales volume has tumbled, leaving many city streets cluttered with “For Sale” signs for the first time in years. In western markets such as North Vancouver, the inventory of homes for sale on the Multiple Listing Service website has doubled in the last six months. And in Edmonton, where prices in July fell 5.3 per cent from a year ago, the city’s real estate board felt compelled to urge calm. “Edmonton’s resale housing market is not ‘plunging,’ ” the board said in a terse statement. “There is no cause for concern.” Of course, when you issue a press release insisting there’s no reason to panic, that’s often a reason to panic.
Those who share the realtors’ optimistic outlook are a shrinking bunch. Merrill Lynch economist David Wolf recently published a biting analysis of the housing market that predicted not just a slowdown, but significant price declines in many cities, particularly in the West. On a national basis, Wolf says houses are 9.2 per cent overvalued, while markets in Vancouver and Victoria are inflated by as much as 35 per cent. As for Regina and Saskatoon, a doubling in house prices over the last two years has put those cities into the “extreme zone,” says Wolf. His findings were echoed late last month in a report by researchers at the University of British Columbia’s Sauder School of Business, which found housing markets in many Canadian cities are seriously out of balance when compared to rental rates. While housing markets in Toronto and Edmonton appear sound when compared to rents, in cities such as Halifax, Montreal, Ottawa, Regina and Winnipeg prices must drop at least 25 per cent in order to be in balance. “Nobody likes to see their property values go down, but those values are inevitably tethered to economic reality,” Wolf told Maclean’s. “The reality is that after a wonderful few years, we’ve finally reached the end.”
For now, Wolf and others like him are in the minority. The warnings stand in stark contrast to the repeated assurances of realtors and bullish economists, and the ubiquitous armchair experts you tend to meet at dinner parties. The two most common and reassuring explanations for this have been echoed a lot lately. First of all, the argument goes, Canada will not experience a U.S.-style housing crisis because our mortgage industry was more conservative and restrained. Secondly, even if the current slump continues, it won’t be as severe as downturns that happened in the late 1980s, because interest rates are expected to remain low. Both statements have been repeated so often they’re regarded as absolute fact. But a closer look at the realities of Canada’s recent housing boom, say experts, shows holes in both arguments. It’s becoming painfully clear that the party has ended. The question is how bad will the housing hangover get, and how long could it last?
