A snow covered 'For Sale' sign stands on a tree-lined street in downtown Toronto. It's been there since the summer months--another sign that the once hot Canadian real estate market is beginning to ice over.
As American homeowners continue to watch the value of their houses get burned away in the credit meltdown, recent government data suggests that Canadian home prices--once thought to be safe--may soon follow.
The Canadian government reported that the national new housing price index increased year-over-year by 1.5 per cent in October--down from the 2.1 per cent recorded in September, and its smallest annual gain in nine years. Prices fell by 0.4 per cent between September and October of this year, marking the first monthly decrease at the national level in more than ten years.
This parallels news that the average price of a home in the Greater Toronto Area (GTA) fell to $368,582 in November--a sharp reduction from $393,747 at the same time last year. Nationally the decline is even more dramatic, with the average cost of single family detached home dropping more than 17 per cent from $341,096 in June to $281,133 in October.
Part of the problem lies in the increasing number of homes on the market and longer selling times--forcing homeowners to ask for a lower price as buyers simply have more leverage than last year. According to the Toronto Real Estate Board (TREB), the average number of days a home is sitting on the market is 41--up from 32 days last November.
The number of sales completed is also off last year's mark, with 3,640 transactions finalized in November. That's nearly half as many as the 7,313 posted in the same month in 2007.
The Royal Bank of Canada says that areas like the GTA have "undoubtedly entered a phase of consolidation." Part of that consolidation will be a drastic pull back in the number of housing starts over the next year, as both a shrinking consumer demand and the deepening credit crisis push homebuilders to scale back operations. The Canada Mortgage and Housing Corporation (CMCH) says new home building in Toronto fell 29 percent in November from last month. And it's not looking much better across the country, as the seasonally adjusted annual rate of housing starts was 172,000 units in November--a sharp 19 per cent decline from 211,000 units in October.
It's likely to get even worse, as homeowners and investors around the country steer clear of the housing market. The CMCH is predicting a pullback in the number of housing starts in the next year. "Over the last few years...excess demand gradually decreased and our forecast for 2008 and 2009 reflects this new reality with housing starts, more aligned with long run demographic demand," said Bob Dugan, Chief Economist at CMHC's Market Analysis Centre.
But not everyone agrees. A number of analysts say comparing statistics from 2008 and 2007 offers home buyers a distorted perception of both the Canadian and Toronto real estate markets. 2007 was an outstanding year for the real estate industry, with existing home sales hitting a new record of 520,199 transactions. Increases in the average time on the market and a pull back in housing starts are simply reactions to what's really hurting the Canadian economy: jobs.
"Housing has everything to do with jobs," says Willard Dunning, chief economist with the Canadian Association of Accredited Mortgage Professionals. Canada joined the U.S. economy in shedding a near record number of jobs. Government statistics report that Canadian payrolls in November were cut by 71,000 or four-tenths of a percentage point. The national unemployment rate now sits at 6.3 per cent
Making the threat of a lost job even worse is the increase in the amount of monthly income required to own a home. In 2007, the percent of household income taken up by homeownership costs soared to more than 60 percent for a two story home in Toronto--not far below levels last seen during the housing boom of the early 90s. The amount of monthly income that Canadians spend just on their monthly mortgage payment has increased to 37 percent, up from 32 percent in 2006.
Many analysts predict that the rise in homeowner debt won't equate to a U.S.-style housing crash across the country.
"Canadians have totally different behaviour than home buyers in the U.S.. In Canada, most home owners are people capable of repaying mortgages" says Dunning. He emphasizes that "in Canada, for the most part, only the people capable of repaying mortgages got one." He thinks this will help insulate the Canadian real estate sector from experiencing the huge reductions seen in the U.S.
Though there is certainly a trend for Canadian homeowners to pile more of their incomes into mortgage payments, housing affordability remains at the same average it was between 1980 and 2007.
The recent slate of negative government statistics comes after years of steadily climbing prices and 2007's stunning performance. From 2001, the average home price in Canada has about doubled, and only recently begun to level off or decline. But unlike the U.S., the steady climb in home prices in Canada wasn't built on the foundation of subprime borrowers. Mortgage arrears in Canada continue to stay low, with just 0.26 per cent of households falling three or more months behind in mortgage payments--the lowest rate since the last housing bust in 1990.
Adding to the pain of dwindling home prices is the meltdown facing the country's stock market, which has shed nearly 40 per cent of its value over the past year. The pullback comes after years of healthy returns on the back of strong commodity prices. Dunning predicts that "the wealth effect from the stock market pullback will contribute to a housing downturn."
For homeowners facing shrinking stock portfolios and falling home values, the upcoming winter months are looking particularly cold.
Brady Yauch is a freelance journalist based in Toronto.