The Canadian Real Estate Boom - When will it end

SOURCE: http://buyingamodernhome.blogspot.com

Even banks are admitting that after a decade of unthrottled expansion, Canada's real estate boom may finally be losing steam.
The average price of a home in Canada recently topped $310,000, a gain of 60% in real terms in just nine years. Canadians haven't witnessed a boom like this since just after World War II-and it's clearly not sustainable. If prices continued to rise at their current rate, the average house would fetch $10 million by 2037. Since that doesn't seem plausible, the big question is not whether the current boom will stop, but when.

The answer depends on what city you live in. A recent report from Scotiabank notes that each market has to be evaluated on its own merits.
Toronto, for instance, has seen a big rise in home prices over the past decade, but it's happened fairly gradually, with prices going up by about 4% a year. The steady trend suggests that current prices are sustainable, at least for the short term. In comparison, the increases in Vancouver, Saskatoon, Calgary and Edmonton have been far larger and more sudden. "There is growing evidence of overvaluation in home prices in some parts of the country," writes Adrienne Warren, a senior economist at Scotiabank. She adds that she anticipates a "cooling in both housing demand and price appreciation in the months ahead" across Canada.

In a similar vein, a new report from Royal Bank proclaims that housing affordability has recently "suffered one of its largest and most broadly based quarterly deteriorations" since the mid-1990s. "Conditions from Manitoba eastward are not a cause for concern," writes Derek Holt, RBC assistant chief economist, "but conditions in Saskatchewan, Alberta and British Columbia warrant caution."

William Strange, a professor of urban economics and real estate at the University of Toronto, says the key factor for real estate forecasters to look at is affordability, which measures the percentage of our incomes that we spend on our homes. Affordability is vital, because when residents can no longer afford local homes, prices stop rising.

A lack of affordability led to the 1990 housing bust in Toronto. At that time, the average Torontonian with a detached bungalow was spending just over 60% of his income on housing. Right now, Torontonians are spending about 45% of their incomes on housing. In Vancouver, owners of detached bungalows spend an incredible 71% of their incomes on housing, while in Calgary they spend 45%, and in Edmonton 42%.

Given the dismal track record of real estate prognosticators, Strange is reluctant to offer any predictions, but he does say that Calgary and Vancouver look to be on the most wobbly ground. "In Calgary, there's tons of land that they can build on, so one would think that the price of building new housing would be a ceiling on how high prices can go. That's a market I would worry about."

It's hard to say how the boom will end, but history shows that after a big price run, homes can decline in value for a decade. So how can you protect yourself? Simple, says Strange. Buy a house that you can comfortably afford using a traditional mortgage. "Buy a house you like in a neighbourhood you like and stay there," he says. "Then no matter what the market does, you'll do alright."