October 25, 2005

Blurb: Home buyers have had it pretty good lately. But there are questions as to how long the party will go on.

Is Canadian real estate still affordable?

By Peter Diekmeyer o Bankrate.com

Canada's real estate market has been on fire for several years now. New home construction, existing home sales and selling prices are all at, or near, historical highs and mortgage rates continue to hover at historical lows. With all this good news, you'd think that now would be a better time than ever to join the party.

The problem is that there are signs that many potential buyers are finding it harder to get into the game. "Affordability is becoming a greater issue for many Canadians, especially first time buyers who have been behind much of the strength in activity in recent years," comments Adrienne Warren, an economist with Scotia Capital.

She's not kidding. Although rising house prices are good for home owners and builders, the faster they rise, the less people there are who can afford them. Worse, for new entrants into the housing market, recent high prices come at a time when the job market, particularly at the low end, is showing signs of strain and when mortgage rates appear to be heading higher.

More homes being built and sold
Almost all the key housing data that have come out during recent weeks look good. A total of 266,114 homes were sold through the Canadian Real Estate Association's Multiple Listing Service (MLS) during the first nine months of 2005, an increase of 4.1 percent compared to the same period last year. In September alone 29,544 homes traded hands.

Not only are lots of houses being sold, but buyers are paying more for them. The average price of a home sold via the MLS rose to a record $271,479, during the month of September. That's a whopping 10.7 percent increase, compared to the same month last year.

Housing starts also shot up during September. According to the Canada Mortgage Housing Corporation, construction began on 20,613 units during the month, up from 18,692 in August. Although the CMHC expects that the number of starts for full-year 2005 will decrease slightly compared to the year before, new home construction hit a 17 year high during 2004.

A tougher job market
Rising housing prices aren't necessarily a big problem to new home buyers, as long as their salaries, particularly their take-home pay, are rising in tandem. However that hasn't happened in recent years.

At first glance Canada's job market looks great. The country's 6.7 percent unemployment rate is at a 30 year low. On top of that, 51% of companies responding to The Bank of Canada's recent Business Outlook Survey reported facing labor shortages. However, according to one expert, the figures don't tell the whole story.

"It appears that beyond the volatility of the monthly (employment) figures, the pace of job creation is in fact worsening," wrote Benjamin Tal, an economist with CIBC World Markets in a recent report. Part of the reason that the unemployment rate is falling is that many people have stopped looking for work. In fact although the Canadian economy has been creating an average of 15,000 new jobs a month since the beginning of the year, that's a drop from the 17,000 a month it created during the same stretch in 2004.

The other problem is that although there seem to be a lot of jobs out there, many of them aren't the kinds of jobs that would qualify the holder for a good mortgage. CIBC World Markets compiles an index of indicators that measure overall employment quality in Canada. These include total compensation, job stability and the ratio of full-time versus part-time jobs. By that measure, during September, overall employment quality actually fell, despite the fact that 20,000 jobs were created.

Household expenses are rising
The other challenge facing Canadian households is that their expenses are rising. The recent upsurge in oil prices is starting to hit their pocket-books hard. Inflation data released earlier this week show that the consumer price index rose by 3.4 percent during the month of September. That's important, because the more families spend on food, transportation, taxes and other household expenses, the less they have available for housing.

Interest rates, one of the most important housing related costs, are also on the upswing. Last week, the Bank of Canada raised its key rate by 25 basis points to 3.0 percent, the second straight month in a row that it has done so. Although mortgage rates don't always follow the central bank directly, there tends to be strong correlation in their movements.

According the Bankrate.ca's mortgage rate calculator,
(http://www.bankrate.com/can/graphs/graph_trend.asp?product=328&prodtype=M&ad=mtg&cc=2), the average cost of a five-year mortgage has taken an upward turn in the past two quarters, jumping from the 5.3 percent mark in July, to 5.56 percent last week.

But there is some good news. According the RBC Financial Group's affordability index, the average Canadian family spends about 35 percent of their disposable income on housing related costs. That's a lot less than during the late 1980s when that number approached 50 percent.

With housing prices rising, inflation up and employment quality down, it's clearly harder to get into the housing market now, than it was six months ago. However on balance, housing remains fairly affordable in historical terms.

Recent Bank of Canada action:
October 18, 2005 + 1/4%, 3.0%
September 7, 2005 + 1/4%, 2 3/4%
July 12, 2005 No change 2 1/2%
May 25, 2005 No change 2 1/2%
April 12, 2005 No change 2 1/2%
March 1, 2005 No change 2 1/2%
January 25, 2005 No change 2 1/2%
December 7th, 2004 No change 2 1/2%
October 19, 2004 +1/4% 2 1/2%

The Bank of Canada's rate announcement schedule for the upcoming year.

December 6, 2005
January 24, 2006
March 7, 2006
April 25, 2006
May 24, 2006
July 11, 2006
September 6, 2006
October 17, 2006
December 5, 2006

Peter Diekmeyer (www.peterdiekmeyer.com) is the Montreal Gazette's management columnist.

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