Carney warns of trouble in overheated housing market once interest rates rise

Keven Drews, The Canadian Press


VANCOUVER - Canada's housing market is entering overheated territory and many Canadians could be financially hurt once interest rates begin to rise, Bank of Canada governor Mark Carney is warning.

The central banker on took his case for moderation on Wednesday to Vancouver, the epicentre of Canada's hot housing market where he says home prices are now on par with Hong Kong and Sydney, Australia, as they relate to average incomes.

And some sectors of the market, like condos in big cities, could overshoot because of speculation from foreign investors.

The housing market is still expected to moderate, he said, but recent signals have been mixed.

Carney has been cautioning Canadians for about two year against getting overextended on mortgage borrowing, but Wednesday's speech to the Vancouver Board of Trade suggested some frustration that his words have mostly fallen on deaf ears.

The governor said he has been expecting the housing market to slow, but besides some stuttering signals, it has picked up again of late along with borrowing and mortgage credit.

Once again, Carney repeated his warning to Canadians about becoming overextended.

"It is important that it's emphasized, because it can be forgotten, that we are living in extraordinary times with interest rates that are unusually low, that the outlook for the Canadian economy, the strength of the Canadian economy, the expectations both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels," he said told a later news conference.

"And so Canadians in taking on debt, or Vancouverites, more specifically, in taking on debt, need to...ensure that they can continue to service those debts comfortably in a higher-rate environment."

Carney' speech came on the day the Canadian Real Estate Association released new data showing that average resale home prices rose 8.6 per cent in May from a year ago, and that in Vancouver prices were up 25.7 per cent to $831,555.

At those levels, Carney said Vancouverites are paying 11 times family household income for a home, a multiple similar to global housing hot spots Hong Kong and Sydney, Australia.

When asked if he had any advice to young people who hope to buy a house in Vancouver, Carney responded, "Well, get a good job. That would probably be a good one. Study hard, stay in school and get a good job. How's that?"

The situation is not as dramatic in the rest of the country, but it's bad enough, he said.

He noted that it took nearly 12 years for real estate investment to regain its peak after the 1990s recession. It has taken a year and a half this time and, in fact, average home prices are now 13 per cent higher than where they stood before the 2008-2009 slump.

Carney takes some of the blame for the unprecedented run-up in prices, since the key difference between the two eras is that he drove interest rates down to historic lows in order to salvage the economy. The policy succeeded, but at a cost of driving investment from more productive outlets of the economy to housing.

But he also lays some blame on home buyers, who he implies should know better. He said some Canadians are taking on mortgages as if they believe current ultra-low rates will last forever. They won't, he warns.

"Rates will not remain at their current levels forever," he said. "(And) the impact of eventual increases is likely to be greater than in previous cycles."

A four per cent real mortgage interest rate would see home affordability in Canada fall to the worst level in 16 years, he said. The current real mortgage interest rate, which excludes inflation, is about 2.4 per cent.

Other than issuing a general alert, Carney gave few hints what he can do about it and implied that the ball is in the federal government's court to tighten borrowing requirements again if necessary.

Carney refused to comment when asked whether the government should restrict home ownership to those with Canadian citizenship.

"Obviously, if one restricts demand and takes an important element of marginal demand out of the equation there's going to be an adjustment to price," he said.

"But those type of decisions are decisions for communities to make, and they're complex decisions, and nothing should be read into our commentary about the current environment and housing, whether it’s in Vancouver or across the country."

"We're not weighing into that issue at all."

Finance Minister Jim Flaherty this week also expressed concern with household debt — now amounting to a record $1.5 trillion in the aggregate — and noted he has tightened mortgage requirements three times in the past three years.

Carney suggested in his speech that he will use monetary policy, or interest rate setting, to impact the inflation rate and not exclusively the housing market. Read More..

Recreational property markets bouncing back

OTTAWA — Canada’s recreational property market appears to be bouncing back from a recessionary lull as buyers seek to capitalize on equity and stock-market gains, Re/Max says in a report Monday.



Demand rose 78% in the 46 markets across the country covered by the realtor’s Recreational Property Report, while sales had risen or were on par in 41% of those centres.

“Buyers who held off during the recession are back in recreational property markets from coast-to-coast,” says Pamela Alexander, chief executive of Re/Max for Ontario-Atlantic Canada. “Their patience has been rewarded with more affordable recreational values and greater inventory levels.”


While prices have remained stable in many markets, values could be found for higher-end properties, pushing luxury sales higher in almost half of the markets examined, Re/Max said in its report.


Opportunities were also to be found in Western Canada.


“Prices are down as much as 20% from peak levels reported in 2006-2007, bringing ownership within reach to many potential purchasers,” said Elton Ash, regional executive vice-president of Re/Max in Western Canada.


On British Columbia’s Salt Spring Island, for example, starting prices for oceanfront properties have fallen to $669,000 today from $1.3-million in 2008.


In the North Okanagan Valley, a three-bedroom, winterized recreational property on a standard-sized waterfront lot — the common measures used in Re/Max’s report — that sold for $1.5-million in 2008 now sells for $995,000.


Starting prices for similar properties on Alberta’s Sylvan Lake are now at $800,000 from $1.25-million previously and in the Rocky Mountain resort town of Canmore, a two-bedroom condo has fallen to $229,000 from $320,000.


“The strengthening oil sector has . . . brought Albertans back into mix, driving demand for both local and coastal B.C. properties,” Ash said.


Another factor influencing the recreational property market has been that Americans who bought when the Canadian dollar was at 65 U.S. cents are now cashing out, boosting inventories.


The report found that there has been some tightening for entry-level properties in about one-third of the markets covered. As well, it noted, the supply of properties has tightened considerably at the lower end in Ontario, Quebec and Atlantic Canada.


It also noted that recreational properties are moving more toward year-round homes, with fewer traditional cottages available for sale.


“These waterfront properties are disappearing from the landscape. Meanwhile, today’s average recreational getaways are truly earning the distinction as the “home away from home,” with many of the bells, whistles and comforts of their residential counterparts. Read More

Would this happen in Canada?

Are you House Poor?


The great American Dream has always revolved around owning a home. Sure, having the 2.3 kids, the cushy corporate job and the stylish car to drive to work everyday are part of the myth, too, but nothing quite summed up Americana quite like the white picket fence. But if recent economic numbers are any clue, this dream is becoming a nightmare for many in the US.

According to date released by the United States Census Bureau, an increasing number of homeowners are spending a larger and larger amount of their incomes on housing than in previous years. People in 49 out of 50 states reported an increase. The only state that didn’t, Alaska, spent the same amount. The report showed that people are spending around 21 percent on their housing needs, up from 19 percent in 1999.

This is a huge problem for first-time buyers who may now be priced out of housing markets all across the country. Economists point to rises in home prices in the last 7 years, as well as higher interest rates, coupled with stagnant wages over the same period.

While everyone seems to be in agreement that the housing “bubble” is either bursting, or getting ready to burst depending on where you live, housing prices are still up a remarkable 32 percent since the beginning of the decade.

Household incomes, on the other hand, haven’t done a very good job of keeping up. The same Census report showed that income has actually dropped, not risen, over the past 7 years, down 2.8 percent.

Maybe the worst news in the report was the percent of people who allot more than 30% of their income for housing. The numbers are up almost 8%. National guidelines suggest that more than 30% of household income for housing is excessive and not financially healthy.

What does this mean in the long run?

Most experts agree that until income can catch up to housing, the real estate market will remain lifeless. And since real estate is one of the biggest drivers to the overall economy, a weak real estate market means a weak economy.

Things appear to be the worst in California. Not only do they have the most expensive real estate in the nation, 48 percent of California homeowners spend more than 30% of their income on housing related costs.

Until income can begin to grow as quickly as the real estate market, this trend shows no signs of slowing down. Which could mean that the upcoming real estate slump could last much longer than anyone predicted.

Need to know what your home is worth? Call me for a no obligation valuation of your home.