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Housing markets take a hit in 2008 ..
Prices drop 11 per cent across Canada -- after scaling a peak of $316,896 in May
Canada's housing market made skeptics proud and put eternal optimists to shame in 2008 as the favour turned quickly to buyers, after years of smug sellers having the upper hand.
The shock was how quickly the tables turned. House prices across Canada have dropped 11 per cent since hitting a peak of $316,896 in May 2008, down to $280,880 in November, according to the latest figures from the Canadian Real Estate Association.
The drop is weighed heavily by cities such as Vancouver, Canada's most expensive housing market, where prices have also fallen almost 13 per cent since May.
Across Canada, prices have dropped 10 per cent since November 2007, when the average home cost $311,485. Sales slipped 42 per cent year-over-year.
Estimates for the Hamilton market call for average home prices to fall about 4 per cent in 2009 after climbing an average of 4 per cent last year. November prices were up 6 per cent compared to the same month in 2007.
With consumer confidence at 25-year lows and the economy in recession, potential home buyers are staying on the sidelines until prospects brighten. Banks are also more reluctant to lend money to finance home purchases in markets where prices have been falling.
"It was back to reality in 2008," said CIBC World Markets economist Benjamin Tal. "The realization was that house prices can fall, and will fall."
Tal said we moved from a seller's market to a buyer's market "in a matter of months."
"This was a transitional year. A reflection of not a subprime-type meltdown, not of a bubble, but rather of recessionary conditions," said Tal.
The puncturing of the real estate bubble in 2008 has happened before. In the early 1990s, property values fell between 10 per cent and 20 per cent in many Canadian markets. In the 1980-81 recession, interest rates of more than 20 per cent in Canada squeezed inflation out of the economy but also caused thousands of homeowners to lose their houses because they couldn't afford their new payments when they refinanced their mortgages.
In both cases, recessions were followed by a runup in house prices when economic recovery came.
Tal expects national house prices to drop about 10 per cent in the next 12 months as the recession deepens. He said prices will drop the most in Western Canada, because that is where they had the biggest run up in the decade-long housing boom.
"The decline is going to be significant, but it's not going to be a freefall," Tal said. "The U.S., minus subprime, equals Canada."
In the United States, housing prices have fallen by 20 per cent since their peak in mid-2006, and up to 40 per cent in some cities.
The market crashed as a result of risky and reckless mortgage practices which led to billions of dollars in defaults, and in turn caused millions of Americans to lose their homes. A second wave of mortgage renewals is expected to hit in 2009.
While many real estate experts say Canada does not have the same problem with risky lending practices, Merrill Lynch Canada economist David Wolf maintains Canada is following the same path as the U.S., but with a two-year lag. He said while mortgage defaults might seem low at 0.29 per cent of about 3.9 million mortgages as of September, it's a 17 per cent year-over-year increase. It's also larger than the 0.18 per cent of defaults in Canada in 1990, "right around the peak in house prices and just after the cyclical trough in unemployment."
He also cited a Bank of Canada study released a year ago that said mortgage default rates would rise to 2.25 per cent under a "very extreme" scenario of a 23 per cent aggregate drop in house prices.
"In sum, the relatively low level of mortgage arrears in Canada is of no comfort to us," said Wolf, who in recent reports has turned bearish on the Canadian housing market.
Gregory Klump, chief economist at the Canadian Real Estate Association, said he has been struck by how quickly sales have dropped in recent months. He said many buyers are nervous about the current economy, but he is also seeing the impact of "very cautious" lenders.
Klump said he is hearing more stories than ever before of people with pre-approved mortgages who don't get the money from the bank when it comes time to close the deal.
Scotiabank economist Adrienne Warren said she too expects the housing market in Canada to soften next year, particularly in the next six months as the recession creates higher unemployment.
January 02, 2009
Brenda Bouw
The Canadian Press
VANCOUVER (Jan 2, 2009