Today I was reading HoweStreet.com, and discovered their upcoming Money Expo, which features the following video of Garth Turner discussing the state of Canadian real estate:
People may not be aware of this (at least I wasn’t), but Garth is the author of a book entitled “Greater Fool“, and has an associated weblog, greaterfool.ca. In his most recent post on Greater Fool, Garth discusses the perfect storm of factors hitting Calgary’s real estate market, particularly the inconvenient truth that Calgary’s median home selling price has dropped $43000 dollars since this time last year. However, last July’s data were skewed by a rather large glut of million-dollar homes being sold that month.
“Early July saw a large number of properties sell over the million dollar mark and this has caused average prices to climb for the month, however the median price has declined by 1 per cent, going from $439,000 in June to $435,000 in July, showing the stability in the market place.”
We’ve seen house prices come down $43000 in one year, and they may fall even more this fall. In October, CMHC will be eliminating the 40-year, zero down option for homebuyers, in favor of a 35-year, 5% down option. Canadian Mortgage Trends Blog has this to say about it:
# The median Canadian family makes $66,343 a year according to the last census. Other things being equal, that’s enough to qualify that family for a roughly $328,300 house–if they choose a 40-year amortization. (assuming prime rate and $3,000 a year for property taxes and heat)
# If, however, the family can now access a 35-year mortgage at most, the maximum they can qualify for drops to $312,615.
# The moral is, if you need a 40-year amortization or $0-down loan, buy soon. 5-6 lenders have already pulled 40-years and $0-down mortgages from the shelves, and the other lenders could do so at any time as well (even before the October 15 transition).
# Don’t be surprised if a lot of people start thinking this way. In fact, it could actually create a small rush to buy in the short-term.
# In the medium-term, the changes could potentially have a slight negative effect on house prices for the reasons alluded to above. (i.e. people on the fringe can’t qualify, or qualify for as much)
Calgary’s house prices have come down since last year, but it’s based on data resulting from a few outliers. The turnover of multi-million dollar homes last year heavily skewed the data upwards, so this $43,000 drop is partially illusory for the average buyer.
Based on some studies I have done on Edmonton and Calgary, income growth in Edmonton will likely out pace Calgary’s, even though Calgary’s absolute level of income is considerably higher. In 2006, Calgary’s median household income stood at $90,700, or $7,600 per month (Statscan).
Using CMHC’s Mortgage Affordability Calculator, assuming zero debt, zero taxes and zero heating costs, zero down and a 40-year amortization at an optimistic lending rate of 5.5%, the median Calgarian household needs roughly $7,600 per month to afford a median house price of $455,861, well above the area’s actual median house price of $411,000. However, this is grossly optimistic, as everyone pays property taxes, most pay heating bills and many pay debt service.
What if we assume the following?
* Average credit card debt is $20,000, roughly equal to $300/month in interest alone.
* Utilities are $300.
* Property taxes are $100/month.
The 40 year/0% down scenario drops to : $397,217
The 35 year/5% down drops to: $381,266
This is slightly below Calgary’s $411,000 median house price. Either people are putting far more money down on their homes, or the market price can fall slightly to allow all the inventory to clear.
