Tara Perkins
Sun
Canada’s housing boom has turned real estate into juicy bits of conversation around the summer barbecue — but many homeowners are asking whether a price bubble is about to burst.
“It’s a hot topic all across the country,” says Dianne Usher, area manager of Royal LePage in Toronto. “In the last three years, there’s been significant increases in both unit sales and in prices.”
The average price of new homes rose 5.1 per cent in Canada between the first quarter of 2004 and the same period this year.
Usher said she’s telling homeowners the good times are likely to keep rolling along.
“We have a wide variety of reasons why the market is strong, and those reasons aren’t changing,” she said. “We’ve got no indication that interest rates are going to go up, that immigration is going to stop, that migration is going to change, that the economy is vulnerable.”
Benjamin Tal, senior economist at CIBC World Markets, says there are a few key indicators that people can keep their eyes on to forecast a slowdown in the housing market.
A major increase in interest rates would lead to a slowing, Tal said. “It has to be a significant one and it has to be very rapid.”
For example, a rise of 300 to 400 basis points — three to four percentage points — within six months to a year would trigger difficulty in the housing market, Tal said.
“There’s nothing that indicates that in the short term there’s going to be any dramatic change,” said Colum Bastable, CEO of Royal LePage Commercial. “So interest rates could go up even a full 100 basis points or more and not significantly affect the housing market.”
Another sign to look for is a rise in inventory, or the amount of houses for sale that are not being sold. Vacancy rates and new listings on the Multiple Listing Service are the numbers to watch.
“Inventory is starting to rise a little bit, but is still extremely slow,” Tal said.
A third sign is the amount of speculation in the market, marked by people buying houses to “flip” with a quick resale rather than to live in. In the housing bubble of 1989 — which ended with a crash — there was a significant amount, Tal said, with 25 to 30 per cent of home sales being speculative.
The estimate now is less than five per cent.
One indicator to ignore is the employment level, Tal said. “When you see the job level going down, that will be too late.”
“We are likely going to see the housing market cool off over the last year or two,” said Scotiabank economist Adrienne Warren. “We tend to watch construction activity and it appears to have already peaked in the last year.”
Tal said it’s “reasonable to assume that we’re levelling off. We’re starting to see some slowing.”
Housing starts fell five per cent last month. On a year-over-year basis, MLS activity, or house resales, have fallen. And house prices are increasing at a slower rate.
In addition, “there are signs that houses are sitting longer before they’re being sold, which is always a sign that the housing market is levelling off,” Tal said.
Both economists don’t foresee a crash in the current housing market.
“Between 1992 and 1997, nothing happened in the real estate market. It was dead,” Tal said. “So a lot of what we’re doing now is basically catching up.”
He noted that even those who aren’t invested in real estate would be wise to keep an eye on the sector, which is a key driver of the broader economy and jobs.
“You really don’t need a crash in the housing market to slow the economy, all you need is a levelling-off in housing prices to have a notable impact on the Canadian economy in general,” Tal said.
“The housing market has been a major driver of employment, growth, consumption. You look at retail sales today, it is very, very strong. Part of it is because if you buy a house, you also have to buy furniture.”
© The Vancouver Sun 2005