Homes overpriced, bank reports say

Tuesday, May 25, 2010

Above ‘fair’ value

Garry Marr,  Financial Post

http://a123.g.akamai.net/f/123/12465/1d/www.financialpost.com/0526house.jpg Tyler Anderson / National Post

A new report from one of the country’s major banks says house prices in Canada are sitting 14% over their “fair” value.

The report from Canadian Imperial Bank of Commerce says the average price of a home has risen 23% since reaching its cyclical low in January 2009.

British Columbia and Alberta homes are the most overpriced, with about one in four above their fair value. CIBC establishes what it calls fair value from market fundamentals that include income, rent and demographic changes.

“This doesn’t mean that house prices are going to crash tomorrow,” said Benjamin Tal, senior economist with the bank. “I’m saying they probably will go down by 5% or 10%.”

The CIBC survey came out the same day as a new report from Royal Bank of Canada that shows affordability eroded in the first quarter.

“Looking ahead, further erosion in affordability is likely to take place in Canada in the coming 12 to 18 months,” said the report, written by Robert Hogue, senior economist with the bank.

The index measures the percentage of household income needed to carry a home and is based on a 25% down payment, 25-year amortization at the five-year closed fixed rate.

Royal Bank said that during the first quarter, 46.8% of household income was needed to carry a standard two-storey house. At the peak of this cycle in 2008, 52% of household income was needed to carry a home, but that was still below the record high of 57% in the early 1990s.

“Affordability will decline, but it will come just short of the most recent peak,” Mr. Hogue said. “What has driven home ownership costs in the past year has been higher prices, but going forward we expect prices are going to start moderating and going flat at some point. But higher interest rates will drive up [costs].”

Mr. Tal at CIBC said Canadians spend about 15.6% of their average gross personal income on mortgage payments, about the same level as a decade ago.

But he found there was a significant difference in affordability based on income class. “The vast majority of homeowners in Canada, regardless of their age, have not experienced any worsening in affordability despite the rapid increase in prices,” Mr. Tal said. “The only sub-group of households that have seen some deterioration in their affordability position is older Canadians with average income of less than $50,000.”

In that category, the CIBC study found the group was spending an average of 60% of their gross income on mortgage payments, property taxes and electricity costs.

This group makes up only 13% of all mortgages in Canada, down from 19% five years ago.

The good news for anyone thinking about jumping into the market is that CIBC believes a correction, albeit a slow-moving one, is already underway.

The report said the supply of new listings is on the rise, with the current pace of monthly increases in new units the fastest since early 1990. Sales are also falling on a month-over-month basis.

One person not buying the decline in the housing market is Don Lawby, chief executive of Century 21 Canada.

“If people stop buying, prices will react. But you have people who can afford to make the payments on their mortgage and the default and delinquency mortgages [market] is very small, especially compared with the United States,” Mr. Lawby said. “I just don’t see where the big fall is going to come from.”

Financial Post

gmarr@nationalpost.com