October 24th, 2007

 

Blurb: Not only is Canada facing a housing supply shortfall, existing properties are increasingly out of reach to new home buyers.

 

Is Canada facing a housing crisis?

 

By Peter Diekmeyer • Bankrate.com

 

As one of the world’s richest countries, Canada shouldn’t have too much trouble meeting United Stations standards. These standards are generally set low, so that the governments of its 200 or so members, many of which are poor, stand at least a chance of meeting them. So when a U.N. official recently said that he was “disturbed” by the lack of adequate housing here, it came as a bit of a surprise.

 

Miloon Kothari, the official in question, is currently on a two-week tour of several major Canadian cities and rural areas and from his brief time here, he has already concluded that Canada is not meeting its obligations under the International Covenant on Economic, Social and Cultural rights. Things here have been on a downward slide that was in part sparked by government budget cuts made over a decade ago, a move that exacerbated growing income inequality in the country says Kothari.

 

Kothari’s conclusions, though stark, are roughly in line with those of a recent report by RBC, which claims that Canadians’ ability to finance their housing costs has fallen off sharply. “In the second quarter, housing affordability experienced one of the largest and most broadly-based quarterly deteriorations since the mid-1990s,” says Derek Holt, an assistant chief economist at RBC. “Higher house prices, mortgage rates, utilities and property taxes, all combined to drive the country-wide deterioration.”

 

Housing prices are increasing

One thing is for sure, if you owned real estate during the past year, particularly in some of Canada’s faster growing metropolitan areas, you are more than likely to think that things are going just fine thank you. According to the Canadian Real Estate Association, the average price of a home sold via its Multiple Listing Service during the third quarter of this year shot up by a stunning 11.9 percent compared to the same quarter last year to $329,113. Furthermore the average price of homes sold reached the highest quarterly level on record in cities such as Vancouver, Calgary, Regina, Saskatoon, Sudbury, Windsor, St. Catharines, Kitchener-Waterloo, Quebec City and St.John’s.

 

Longer-term property holders have also done quite well. During the past ten years, the average Canadian home has more than doubled in value, far outpacing core inflation, which has only increased by between 2 and 3 percent each year.

 

That strong demand for new homes has kept builders pretty happy. According to the Canada Mortgage and Housing Corporation, housing starts increased by 19.6 percent in September, compared to August, to a seasonally adjusted level of 278,200 units. On a year-to-date basis, starts in rural and urban areas combined were up by a more moderate 0.2 percent compared to the same period past year, though 2006 was an exceptionally strong year in itself.

 

Furthermore, although the CMHC has been predicting that housing starts would begin to slow for some time, that does not look likely to happen during the coming months. According to Statistics Canada, the value of building permits issued during August, surpassed the $6 billion mark for the fourth straight month, and contrary to the U.S., the residential sector remained “clearly healthy” here.

 

A greater proportion of take home pay devoted to housing

Those stronger housing prices are coming at a time when mortgage interest costs are also creeping upwards. According to the RBC Affordability report, the upshot is that Canadian homeowners are setting aside a greater percentage of their income just to meet their housing costs. Owners of standard condominiums now devote 29 percent of their income to meet such costs as mortgage payments, taxes and so on. For owners of standard townhouses, that figure is 33 percent, for detached bungalows 41 percent and for standard two-story bungalows, a prohibitive 46 percent.

 

Rising housing costs are particularly challenging for younger Canadians, many of whom are struggling to get their foot in the workforce and have yet get out of entry-level pay-grades. But even those that do have good jobs are facing challenges. One tactic that some are using to get into the property market is to seek out homes in the rural areas and small towns. According to Statistics Canada, the percentage of Canadians between the ages of 25 and 39 that own their own homes is far greater in these areas than it is in the country’s three largest cities.

 

So is Canada facing a housing crisis?

The bottom line is that your views regarding whether Canada is facing a housing crisis will likely depend on your current situation. If you are a young Canadian, a recent immigrant or a renter that is struggling to get into your first property, you’ll probably agree with the U.N.’s Kothari, who has recommended that the Canadian government include a five- to 10-year renewal its national housing strategy, key elements of which are due to expire this year.

 

But if you are an older Canadian who has been a long-term property holder, you are likely sitting on some substantial unrealized capital gains, none of which are taxable under current fiscal legislation, and are likely thus wondering what all the fuss is about.

 

Peter Diekmeyer (www.peterdiekmeyer.com) is a freelance business and economics writer.

 

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