What would happen if…
What would happen if the Canadian real estate market followed a similar path to the U.S. housing market, and what would that look like a year down the road?
The Financial Post answered that question in an article titled, “How low can they go? If Canadian prices follow U.S. trends, certain cities will experience a major slide in house prices.”
Using a calculation based on the rise and fall of U.S. housing prices, and applying those same numbers to prices in Canada the Financial Post determined it would “…mean that most Canadian cities are headed for a fall in housing prices, especially those out west.”
Using their formula, the average price of a Saskatoon home would fall to just shy of $170,000 by October 2009 from it’s peak of $310,386 in June of 2008.
Is this method of comparing markets reasonable, or is it more like asking, “What would happen if we all suffered from cancer symptoms?”
You decide, and please let me know what you think.
Thanks to George for the heads up on this story.
Read the Financial Post story here.
I’m always happy to answer your Saskatoon real estate questions. All of my contact info is here. Please feel free to call or email.
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Norm Fisher
Royal LePage Saskatoon Real Estate
There's 29 Comments So Far
April 23rd, 2009 at 9:49 am
It’s definitely an interesting article. If their numbers pan out, though, this means a 54.6% loss in the equity (value) for the average homeowner by 2009, or a 70.4% reduction in any appreciation (gain) since 1999! Even a drop to the $200,000-$225,000 range (while more realistic) would still leave everyone who bought a home in the past few years drastically ‘underwater’. That number could even be larger when one factors in home equity lines of credit (on average, $40,000).
……….
Canada is going to experience our own wave of “sub-prime” resets (this has already started) when the majority of privately-insured (AIG, etc.) 0%/40-year ARM’s have to be refinanced and are subsequently unable to qualify with the new requirements, ie: higher credit score, minimum 5% down and 35-year max term. And even for those that may qualify, the ability to secure a mortgage from a financial institution is far from guaranteed if the bank is unable or unwilling to loan. This is going to lead to numerous additional foreclosures being ‘dumped’ on the market in-turn leading to substantially more inventory and further reductions in prices.
April 23rd, 2009 at 9:49 am
I’ve posted a lot on this site about historical averages and fundamentals in housing, but I have a hard time getting too excited about this article. I think we can expect to hear bearish views swing to just as an extreme level as the bullish views we heard a couple of years ago, when everyone was sure housing values would go up forever and everyone who flipped a property was ensured of becoming a millionaire. No matter what the basis for anyone’s assessment of “how high/low it’s going to go”, in the end, we’re all speculating. No one has a crystal ball- all we can do is look at where the market has been, where it is now, and where we believe the market should be based upon those historical averages fundamentals and the like. Most of us also factor in the current state of the economy, credit and financial markets, etc. to arrive at what we believe to be a logical future value for real estate, but in the end, it’s just a guess.
My WAG about peak-to-trough declines is more bearish than it was 6 months ago, but this has more to do with the general state of the economy and probable unemployment numbers than anything. My call, which I reserve the right to change as information changes, is a trough average price of $210K. If there are vast amounts of defaults from previous low/no down payment people, or unemployment rages higher, it could get worse before it gets better. It could also get better sooner than I’m expecting, I suppose. Anything’s possible.
I have to say, though, that I’m not getting all the comparisons of real estate values falling by x% with various health disasters/cancer, etc. I received a cancer diagnosis in 1995 at the ripe old age of 24, and went through around 4 months of chemotherapy. I’m not going to go into detail here, but it was pretty damned bad. Now, I’ve never “lost” tens of thousands of dollars plus either temporarily or permanently, but I have a hard time believing it would come close to that scenario. While a big percentage drop would certainly be bad for flippers, people who bought at the peak and people who wagered that their house would be a big part of their retirement plan, it would be wonderful news for the many young people and newcomers who have been priced out for years.
As an aside, I’m including this youtube clip of Fred Thompson (US senator and previous actor on Law & Order) and his take on the economy, because it’s the best chuckle I’ve had in awhile:
http://tinyurl.com/9t2w6z
Keep warm, and enjoy.
April 23rd, 2009 at 9:50 am
Jason,
Interesting indeed. Even more interesting, I can’t think of a single “expert” who has actually made this “prediction.” David Wolf from Merrill Lynch and Douglas Porter from RBC have both suggested that there are similarities in the ways in which the two major markets are unfolding but both economists went out of their way to stress major differences and doubts about whether it would occur here.
Anyone actually able to turn up such a “prediction” for the Canadian housing market?
On the issue of Canadian “sub-primes” I thought this other Financial Post article was interesting.
http://tinyurl.com/4y2c93
April 23rd, 2009 at 9:50 am
Crikey,
To be clear, I wasn’t implying that losing home equity is as serious as battling cancer. In hindsight, it was probably a poor choice of words. I think I was trying to say that both questions are equally ridiculous. Apologies if I’ve offended you. I was expressing concerns about affordablity to the media before 2007 wrapped up and I understand the benefits of affordable housing for everyone.
April 23rd, 2009 at 9:50 am
Norm, David Wolf’s (Merrill Lynch) numbers (up to a 50% overvaluation in Saskatoon) are reasonable, and a slightly better scenario than those proposed in the Financial Post.
I believe that all economic and financial models are being heavily influenced in unpredictable ways by world markets, and as a result, I think this makes it extremely difficult to make accurate predictions.
After all, wasn’t Canada supposed to narrowly avoid a recession next year…? Ultimately, I think a lot of these “theories” are (unfortunately) going to turn into hard and fast predictions after the fact.
April 23rd, 2009 at 9:51 am
Norm, PS. You meant “2008″, yes? How are the numbers looking for Saskatoon this week, btw?
April 23rd, 2009 at 9:58 am
Jason,
“Norm, David Wolf’s (Merrill Lynch) numbers (up to a 50% overvaluation in Saskatoon) are reasonable, and a slightly better scenario than those proposed in the Financial Post.”
Sorry, I seem to be having some trouble communicating today.
When I said I wasn’t aware of anyone actually making this “prediction” I was thinking more of Canada following the U.S. as suggested in this article. I am aware of David Wolf’s “50% overvalued” assessment for Saskatoon.
“I believe that all economic and financial models are being heavily influenced in unpredictable ways by world markets, and as a result, I think this makes it extremely difficult to make accurate predictions.”
This is certain. While I have a hard time imagining that the average might come down $110K in a year, I would never say that it’s not possible. As Bookrat pointed out in another thread nobody would have believed house prices would spike the way they did here if you’d have suggested it back in 2006. I am completely open to theories that predict western economies could crumble completely. I think we’re probably far more screwed than most of us realize.
“You meant “2008″, yes?”
No, I meant 2007. I’m pretty sure that I was quoted in the SP expressing concerns about deteriorating affordability by summer of 2007. I certainly published a number of “affordability” posts here during 2007.
April 23rd, 2009 at 9:58 am
Jason,
Didn’t mean to to totally ignore your last question, but I’m definitely going to skirt it.
Week in review will be posted before noon tomorrow. It was not the week I thought it might be.
April 23rd, 2009 at 9:58 am
Norm, other than Garth Turner, I can’t think of anyone else publicly on record. In terms of being screwed, I think the lack of financial restraint is best illustrated here.
http://www.theglobeandmail.com/servlet/story/RTGAM.20081205.reMays1205/BNStory/
A reader poll on housing predictions for 2009 might be interesting…
April 23rd, 2009 at 9:59 am
Norm, you’re leaving us in suspense! (will eagerly look forward to your update tomorrow) In speaking with a realtor friend in BC this week, he indicated it was “cold”. Like -50°C, nothing moving, dead cold. And not in the weather kind of way.
April 23rd, 2009 at 9:59 am
Jason,
“I think the lack of financial restraint is best illustrated here.”
That is too funny. Looks like a better house than mine. Definitely worth more.
April 23rd, 2009 at 10:00 am
Norm, my last observation was not directed at you, and I’m not offended at all. My comment was just that the comparison between being underwater, even quite underwater, and any sort of life and/or health-threatening event is a bit extreme. Now that we’re seeing the effects of this rapid disconnect of prices and affordability swing the other way, many people seem surprised by the outcome. I’m still surprised that people are so surprised.
“I was expressing concerns about affordablity to the media before 2007 wrapped up and I understand the benefits of affordable housing for everyone.”
Yes, you’re absolutely right- in fact, way before 2007 wrapped up. Here’s a Star-Phoenix article from the spring 2007 with you talking about the impact of the rapid run-up in prices affecting affordability.
http://tinyurl.com/7og9w8
As far as that recent FP article goes, there has been quite a bit of information out there as early as 2002-2003 that a housing bust in most industrialized countries was in the works, but not much in terms of predictions that Canada was going to specifically track a U.S.-style housing bust. There’s Schiller, but this was reported in early October of this year, so I’m not sure how “predictive” it actually was. The writing was clearly on the wall by this point:
http://tinyurl.com/74bbs3
April 23rd, 2009 at 10:03 am
That article is ridiculous. It applies the same broad brush to every market, based on an aggregate of every market in the states.
April 23rd, 2009 at 10:04 am
Crikey,
Thanks for digging that up. Fun times debating affordability with the Premier. Oh well, we all know who still has his job.
April 23rd, 2009 at 10:05 am
As unbelievable as an average price of $170,000 seems, it is still up from the around $150,000 average about 4 years ago, when the market locally and nationally was stronger. 4 years ago when inventory was lower. 4 years ago when Potash Corp, Agrium, and Viterra weren’t combining for nearly 1,500 in lay offs.
$20,000 or $5,000 a year (of $150,000) is about a 3% annual increase in prices. Really, ignoring the speculation driven “boom” with similar (worse) fundamentals and looking at the starting point, maybe not so unreasonable after all?
April 23rd, 2009 at 1:52 pm
Courtesy of George on another post
“Saskatoon
Start date (Oct. 1999): $110,195
Peak: (June 2008): $310,386
Current: (Oct. 2008): $285,310
Predicted: (Oct. 2009): $169,480
”
1999 = $110,000
2009 = $170,000?
Could be, actually still a respectable increase in value considering the low sales volume, high inventory, economic uncertainty, plummeting oil prices and commodities all on the way down.
To put it another way, if you told some one in Saskatoon in 1999 that their then $110,000 house would be worth $170,000 in 2009, despite a global economic down turn, and big lay off at Cameco and Potash Corp, and a whack load of housing inventory, I think most people would be happy with the $60,000 gain.
April 23rd, 2009 at 1:54 pm
As well, despite all this “growth” talk we hear about, recent news that at 1,020,000 people, Saskatchewan has now equalled its 1989 population. I think that puts all our “success” in perspective
Hard to call that a “boom” and surprising housing construction couldn’t keep up with a net increase of Zero over 20 years…
April 23rd, 2009 at 1:56 pm
Nick, I couldn’t agree with you more (on all points). It’s really unfortunate that this housing bubble shifted from a long-term investment to build up equity for retirement to a short term, unsustainable speculative crash and burn.
April 23rd, 2009 at 1:57 pm
I guess you guys would have to ask a few homeowners what they expect to do. Hmm let me see what I would do suddenly sell my house on a whim and move to Alberta or the USA. It is crazy the theories behind all of this and Peter Lynch wrote about the same thing happening in the 80’s. Up down up down up down thats all life and the economy are gonna be and if ur gonna sell ur house or ur stocks trying to time it ur gonna be homeless and broke. Best advice is spend only what u could afford some say I cant afford my house on my income but then again its the same kind of experts that are clueless to what is going to happen next. About reference to Garth Turner isn’t he the same “fool” that tried to convince every1 the leverage their home to buy tech stocks before the tech bubble crash? Clearly there is alot of greater fools that would follow him and everything he says…..
April 23rd, 2009 at 1:58 pm
Hmmm, why do they think Toronto will escape unscathed?
April 23rd, 2009 at 1:58 pm
Heather,
“Hmmm, why do they think Toronto will escape unscathed?”
Because the people who write these things own homes in Toronto.
In fact, Toronto is taking one of the more brutal beatings. I believe their units are down better than 50% for a few months now. Does seem a little optimistic to think that prices may actually increase there next year.
April 23rd, 2009 at 1:59 pm
Nobody knows what will happen and basing everything on the US Housing Crash is foolish in my view. We may follow them exactly, we may end up much better off, or we could be in for a far worse experience. We don’t know and you can not base all of this on history alone as these situations always happen differently and in their own ways.
What we do know is that the US is working like crazy to fix this economic mess and if they succeed, we will see another 20-30 years of “progress” that will only be limited by the scarcity of resources and political instability in other distant lands.
It is possible that the US may come out of this recession in 2010, making the Canadian version short and thus not disrupting RE prices as much because commodities will rebound and the Sask Economy will remain strong and thus attracting people into the province, which keeps home demand from collapsing.
On the flip side, if the US fails, we are headed for a depression and prices will probably collapse and most people on this forum will be unemployed and will not care much about RE prices.
Either way, the best place to be in the world in my view is right here in Saskatchewan. At least you will not starve to death here
April 23rd, 2009 at 1:59 pm
“At least you will not starve to death here”
Yes, but you might very well freeze!
April 23rd, 2009 at 1:59 pm
armoth, I know you love to bash Garth Turner and you repeat yourself constantly with the same thing about the tech stocks. okay we get it. you are not a fan. no one is right 100 percent of the time .although judging by your “I am a homeowner so respect what I say” attitude I am sure you think you are the smartest guy in the room because you got a bank to give you a mortgage. well fortunately for a lot of people who read Garth Turner’s book and sold when they did, they saved themselves from financial ruin. not only has his predictions come true this time around, they are worse than what he predicted.an interesting read http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b122015A
April 23rd, 2009 at 1:59 pm
Interesting thing on the website about Saskatchewan’s population breaking even from 1989 to 2008 @ 1,020,000.
Between 1990 and 2008 Alberta’s population grew by 1,000,000 +, basically the same as the entire current population of Saskatchewan.
1990 2.5 Million
2008 3.5 Million
So, with similar house prices, and Alberta with bigger wage AND job gains, which province is really “boom”ing?
The one that gained One Million?
Or the one that has held steady at One Million for 20 years… and has hundreds of vacant properties for sale … maybe suggesting Saskatoon, not growing so much, just a lot of renters got kicked out and prices got jacked up for a year and a half.
Seems funny that Alberta with wages that much higher, taxes that much lower, and growth equal to our entire population justifies a house price the same as Saskatoon…
thebench.ca
April 23rd, 2009 at 2:02 pm
Believe me–I hope this scenario happens.
April 23rd, 2009 at 2:02 pm
Slim Jim,
So he makes thousands lose their homes leveraging all their eggs in one basket but he saved the 10 people he just barely didnt get destroyed by his advice their homes 8 years later. Wow he must be the greatest guy ever im gonna go buy his book right now!!11!1!
April 23rd, 2009 at 2:03 pm
Hey Norm
Ease up on that “especially those out west” thing!
We’ve already got enough blood on the streets to keep the Red Cross fixed for years.
Never mind the house prices tanking. Think of all the extra tax we’ll be paying for the Olympics. Together this makes for a big “ouch”.
You did say you were buying extra tickets just to help your western buddies out a jamb. Weren’t you giving them away as prizes to your readers. Thanks for helping out. We’re on our way becoming a have not province. “Buddy – got a buck for a Bucks?” :>))
April 23rd, 2009 at 2:04 pm
I think Saskatchewan is also considered “out west” and I imagine that we’re in for something similar Larry, except that we don’t have nearly as far to fall, and yes, we don’t have that nasty “Olympics” thing hanging over our heads.
Good luck buddy!