Affects of Housing Downturn on Canada’s Economy and Demography by Ravinder Tulsiani

Affects of Housing Downturn on Canada's Economy and Demography

The growth of housing in general has seen a downfall in recent times in Canada. In the affordable housing segment, in the fourth quarter of the 2007 fiscal year, condos remained the most obvious choice requiring only about 30% of pre-tax household income. This was followed by standard townhouse at 34.5%, detached bungalow at 42.5%, with least affordable housing accorded to standard two-storey home, leveled at 48%.
Taking into account the volatile Alberta market, where housing has seen more down turn than elsewhere in Canada, in the fourth quarter of the2007 fiscal year, the price of standard two-storey home was all down by 4.3%, Bungalow prices slumped by 7.3%, town homes dipped by 4% and finally the condo prices went down by almost 5.3%. The economy showed slump in August 2008 as the real GDP fell by 0.3%. The month showed stable retail activity, with finance, insurance and real estate showing marginal 0.1% growth.

Housing Starts in Canada's Housing Sector
If one sees the housing starts in Canada, it averaged 207,200 in third quarter; certainly a positive growth, but was estimated to be 6% slow as compared to second quarter average rate and 14.9% slow as compared to third quarter of 2007. The housing starts were almost stable if we compare the 217,600 units in September 2008, with that of 217,400 units in August. This trend has been almost constant for the past one and a half year due to steady decline in urban single unit starts has been overturned by increase in urban multiple unit starts. The downward trend of the single-family units is seen, and it fell by 6,200 units which was again masked by an equal increase of 6,400 units in multiple-family dwelling starts.

These figures show that the multiple starts within the urban areas has grown to almost 65% in the month of September, 2008. However, the regional starts were stable, except in Ontario and B.C. Ontario. In Ontario, the housing starts was down by 6.3%, whereas, BC witnessed an appreciable increase of 9.3%.

In generality, with significant falling of Canada's home prices, in particular, in the regions of B.C. and Alberta, the housing starts are likely to come down by almost 15%, if not more.


Canada's Housing Growth and Affordability in Down Market conditions

Down market trend is a part of economical cycle and one does not have to fear from its repercussions. There was a crash seen in the year 1989, but were a people who set the path against the tide and became millionaires in such sluggish market situations. They made the trends, and were actively involved in buying properties at extremely low prices. In the real estate market, the wealth is created when you go and purchase against the tide of slump market.

The housing market in Canada has seen a downfall, after seeing a substantial growth period, wherein, resale home sales hit the highest records, with profits leaping to double-digit figures and the figures of housing starts saw faster run crossing 200,000-unit for six years at a stretch. However, in the recent sub prime crisis, it seen that housing sales and prices have slowed down, but analysis shows that there will be a housing boom in Canada's market, as opposed to US-Style crash.

Though, resale-housing market showed signs of slowing in the second half of last year and decline in second quarter of 2008 Fiscal year, it is still above the average pace of the past two decades, with almost 38,133 units sold in May 2008.

There has also been a slow down in the new house prices from 12.1% in August 2006 to 4.1% in May. Besides, the proportion of household income required financing home ownership (Affordability Index) has dipped by large amounts in 2007 fiscal year, as the affordability levels began weakening in the early 1990s.

Price Gains Adjusted Fairly by Fundamentally Strong Market

The double-digit house sales have provided the impetus inflation-adjusted price of Canadian homes up by a cumulative 46% in the last six and a half years. Considering this percentage increase, International Monetary Fund (IMF) sees Canadian housing market as overvalued, since the price increase in the houses is reasonably justified with the other fundamental factors playing an important role.

The Act Balancing Step

If seen on the supply side, there is high demand for construction activity and it is increasing at faster rate. Figures show that housing starts surpassed 200,000 units each year from 2002 to 2007. The trend continued unabated at 228,000-units during first quarter and second quarter of the fiscal year 2008. As the result, it is seen that the once demanding markets for housing such as Alberta gradually showed the signs of fall, whereas other provincial markets such as Saskatchewan's have began to rise.

Taking the example of Toronto market, the affordability suffered a great down movement in 2008, for bungalows and town homes and stabilized for condos and two-storey.


However, it is estimated that Toronto will see the improving affordability trend due to low new home and resale markets, arising primarily due to substantially lower values of mortgages. Until the present date, the condo market in the region is showing perpetual increase in the house prices, growing @ at a 10% year-over-year. But, with an expected increase in the supply trend in coming two years, the price growth can be thwarted.

The housing affordability in Ontario, there has been substantial rise in house prices, in the late 80's onwards. However, the prices are expected to fall as the result of low mortgage rates, bleak response in price gains and slower economic growth.

This is the reason, why there is less probability of eventuality of real estate bubble in Canada. It is important to understand here that for a bubble to occur, the housing affordability factor should exceed historically tested rates in the marketplace (40%), as shown in the graph to the left.

Summary: There is a least probability to see or expect any bubble arising in Canada's real estate market, though a general slow down cannot be totally ignored. The suggestion at this point of time is to invest in purchases in the areas where the property is totally free from excess saturation and inflated prices. Look for the affordable housing, and you are bound to make some good money in global financial crisis.



About the Author

Ravinder Tulsiani is a published author who has written about personal finance, real estate, self-help and online marketing.