TORONTO – Homes in Vancouver have become so expensive you might have to win the lottery to afford one, says a prominent economist — and with prices that sky-high, odds are the city is ripe for a big drop.
Overpriced homes in some Canadian cities, along with elevated household debt, suggest the real estate market is vulnerable to a correction — especially in Vancouver, senior economist Sal Guatieri said in a Bank of Montreal report released Tuesday.
“Riding a wave of wealthy immigrants, Vancouver’s house prices have nearly tripled in the past decade, spiralling beyond the reach of most first-time buyers or non-lottery winners,” Guatieri said.
Homes in that Pacific Coast city now cost 11.2 times median family incomes — a ratio that measures the median home price to median annual household disposable income. That’s more than double the current Canadian average of 5.1 times income.
Chinese demand for houses in Vancouver has been strong, on the back of looser travel restrictions, as well as stricter buying rules and lofty prices in China. A recent survey by Demographia rated Vancouver the third least affordable city in the world, behind Hong Kong and Sydney, two other cities influenced by Chinese demand, he said.
“While land-use restrictions and high quality-of-life rankings can justify elevated prices, current steep valuations could prove unsustainable if foreign investment ebbs or interest rates climb,” Guatieri said.
Past housing corrections have seen Vancouver home values fall an average of 21 per cent. But prices in the city are even higher today, averaging $815,000 in April, pushing the market further toward the brink of a housing bubble.
However, if interest rates stay low and foreign investment continues, the price correction could stabilize sooner than in the past, Guatieri said.
Even excluding Vancouver, average home prices have more than doubled in the past 10 years to a historically high level.
“Due to ultra-low interest rates, affordability isn’t a major issue yet, with first-time buyers allocating about one-third of their disposable income for mortgage payments, as is the norm,” Guatieri said.
“But high valuations suggest that even a moderate increase in interest rates will slow the market in coming years.”
Some triggers that could set off a broader collapse include a rapid rise in interest rates, a sharp increase in unemployment or a slowing of foreign investment.
High home prices in Toronto also mean the country’s biggest city is likely poised for softer prices in the near term, fuelled by a rising supply of condos that could soon outstrip demand, leaving a glut on the market.
Housing costs in the city eat up 6.7 times family income, comparable to costs in the late 1980s before prices slid 25 per cent. However, mortgage rates now are under four per cent, compared to 14 per cent in the earlier decade.
“That said, while high valuations might be sustainable in an ultra-low rate climate, they could come under pressure in a more normal rate environment,” Guatieri said.
Meanwhile, the report said energy-rich Calgary could see home prices rise in coming years. It is one of the few Canadian cities, along with Edmonton, where prices have not returned to pre-recession peaks, reflecting the fallout of overbuilding during the oil boom before the financial crisis hit. http://ca.finance.yahoo.com/news/Vancouver-home-prices-poised-capress-3105641674.html;_ylt=An.OF7eUa_4f1tw3uhpAmong2ppG;_ylu=X3oDMTFkaGliYW1yBHBvcwMxBHNlYwNuZXdzSHViQXJ0aWNsZUxpc3QEc2xrA3ZhbmNvdXZlcmhvbQ–?x=0
Top 8 House-Hunting Mistakes
Buying a home is a very emotional process, but if you allow those emotions to get the best of you, you may fall prey to a number of common home buyer mistakes. Since buying a home has many far-reaching implications – ranging from where you will live to how hard it will be to make ends meet – it’s important to keep your emotions in check and make the most rational decision possible.
There are eight common emotional mistakes that people make when buying a home. Avoiding these pitfalls will help you find the best home-sweet-home.
Mistake 1: Falling in Love With a House You Can’t Afford
Once you’ve fallen in love with a particular home, it’s hard to go back. You start dreaming about how great your life would be if you had all the wonderful things it offered – the lovely, tree-lined streets, the jetted bathtub, the spacious kitchen with professional-grade appliances. However, if you can’t or won’t be able to afford that house, you’re just hurting yourself by imagining yourself in it. To avoid the temptation to get in over your head financially, or the disappointment of feeling like you’re settling for less than you deserve, it’s best to only look at homes in your price range.
Start your search at the low end of your price range – if what you find there satisfies you, there’s no need to go higher. Remember, when you buy another $10,000 worth of house, you’re not just paying an extra $10,000 – you’re paying an extra $10,000 plus interest, which might come out to double that amount or more over the life of your loan. You may be better off putting that money toward another purpose.
Mistake 2: Assuming There’s Nothing Better Out There
Unless you are a high-end buyer looking at custom homes, chances are that for any home you find that you like, there are quite a few others that are nearly identical to it. Most neighbourhoods have multiple homes that are the same model. Further, most neighbourhoods are full of homes that were all constructed by the same builder, so even if you can’t find an identical model for sale, you can probably find a house with many of the same features. If you’re considering a condo or townhouse, the odds are also in your favour.
Even when you have a long list of must-haves, there are probably several homes out there that can meet your needs. If there are snags with the home you’ve decided you like – such as major repair issues, an inflexible asking price or a difficult possession date – consider moving on. Being open to keep looking will save you from making rash decisions you might regret later.
Mistake 3: Being Desperate
When you’ve been looking for a while and you’re not seeing anything you like – or worse, you’re getting outbid on the houses you do want – it’s easy to get desperate to get into your new house now. However, if you move into a house you’ll end up hating, the transaction costs to get rid of it will be costly. You’ll have to pay an agent’s commission (up to 5-6% of the sale price) and you’ll have to pay closing costs for the mortgage on your new house. You’ll also deal with the hassle and expense of moving yet again. If you decide not to move but to try to make the best of what you have, remember that alterations and renovations are expensive, time-consuming and stressful. If you have time on your side, it’s OK to wait until something that suits you comes along – as long as your demands are realistic for your budget, you are bound to find something you live with.
Mistake 4: Overlooking Important Flaws
For any of the three reasons we just discussed, you might be tempted to ignore major problems with the house that will be difficult, expensive or impossible to change. Carefully consider your options before you make a commitment, and consider waiting until something better comes along. New houses come on the market every day.
Mistake 5: Overestimating Your Handyman Skills
Don’t buy a fixer-upper that’s more than you can handle in terms of time, money or ability. For example, if you think you can do the work yourself then realize you can’t once you get started, any repairs or upgrades you were planning to make will probably cost twice as much once you factor in the labour – and that may not be in your budget. Not to mention the costs involved to fix anything you may have started and the fees to replace the materials you wasted. Honestly evaluate your abilities, your budget and how soon you need to move before purchasing a property that isn’t move-in ready.
Mistake 6: Rushing to Put In an Offer
In a hot market, it may be necessary to pull the trigger very quickly if you find a home you like. However, you have to balance the need to make a quick decision with the need to make sure the home will be right for you. Don’t neglect important steps like making sure the neighbourhood feels safe at night as well as during the day and investigating possible noise issues like a nearby train. Ideally, you’ll be able to take at least a night to sleep on the decision. How well you sleep that night and how you feel about the home in the morning will tell you a lot about whether the decision you’re about to make is the right one. Taking the time to consider the decision also gives you a chance to research how much the property is really worth and offer an appropriate price.
Mistake 7: Dragging Your Feet
It’s a tough balancing act to make sure you make a careful decision, but don’t take too long to make it. Losing out on a property that you were almost ready to make an offer on because someone beat you to it can be heartbreaking. It can also have economic consequences. Let’s say you are self-employed. Perhaps for you more than anyone else, time is money. The more time and energy you have to take out of your normal activities to search for a house, the less time and energy you have available to work. Not dragging out the homebuying process unnecessarily may be the best thing for your business, and the continued success of your business will be essential to paying the mortgage. If you don’t pull the trigger quickly, someone else might, and you’ll have to keep looking. Don’t underestimate how time-consuming and routine-disrupting house shopping can be.
Mistake 8: Offering Too Much
If there’s a lot of competition in your market and you find a place you really like, it’s all too easy to get sucked into a bidding war – or to try to pre-empt a bidding war by offering a high price in the first place. There are a couple of potential problems with this. First, if the house doesn’t appraise at or above the amount of your offer, the bank won’t give you the loan unless the seller reduces the price or you pay cash for the difference. If this happens, the shortfall on your bid as opposed to your mortgage will have to be paid out of pocket. Second, when you go to sell the house, if market conditions are similar to or worse than they were when you purchased, you may find yourself upside down on the mortgage and unable to sell. Make sure the purchase price for the home you buy is reasonable for both the house and the location by examining comparable sales and getting your agent’s opinion before making an offer.
It’s natural for emotion to come into play in the home-buying process. Buying a house is a big decision, but this is exactly why you need to ensure you are making rational choices, rather than getting wrapped up in the notion of a dream home. Slow down, overcome your emotions and, ultimately, make a home-purchase decision that’s good for both your feelings and your finances. http://ca.finance.yahoo.com/news/Top-8-HouseHunting-investopedia-617819117.html?&mod=pf-sp14e
Canada’s economy will see 3.2 per cent GDP growth this year: RBC Economics
Sunny Freeman, The Canadian Press
TORONTO – Canada’s economy will grow by 3.2 per cent this year, helped by high commodity prices and a continued recovery in the United States, according to the latest outlook from RBC Economics.
It expects gross domestic product will grow at a respectable 3.1 per cent pace in 2012.
“Strong demand for commodities and a revival in U.S. demand for autos will drive healthy gains in exports – at an average of nine per cent per annum for the next two years,” RBC chief economist Craig Wright said in a report released Thursday.
However, RBC predicts a notable shift in the makeup of domestic growth.
Although consumers were the mainstay of growth coming out of recession, the key driver will switch from households — as consumer spending slows and household debt levels rise —to business-driven growth as corporate investments pick up, the report said.
The positive outlook projects that lingering global economic crises — such as European debt and tensions in North Africa and the Middle East that are driving oil prices higher, and disappointing U.S. economic indicators — will begin to fade in coming months.
RBC’s report suggests that the economy in the United States, Canada’s largest trading partner and a key concern for forecasters north of the border, is moving into expansion mode. The bank projects growth in the U.S. economy will increase 2.7 per cent this year and 3.4 per cent in 2012.
Despite current global economic uncertainties, Canada’s economy posted a 3.9 per cent gain in the first quarter of the year on the back of higher commodity prices, and growth is expected to moderate just slightly over the rest of the year.
“With more than 50 per cent of Canadian exports linked to natural resources, higher commodity prices have provided a substantive and positive boost to our economy,” said Wright.
“Higher prices mean higher domestic income growth.”
Rising commodity prices also helped buoy the loonie above parity with the U.S. dollar in the five months of 2011, and the bank expects it to remain elevated for the rest of the year, which helps to spur business investment, Wright said.
“The dollar has made a remarkable recovery from the all-time low we saw in 2002, to within six per cent of its all-time high,” he said.
“This improvement has caused a dramatic fall in the price of imported machinery and equipment and will likely drive Canadian companies to purchase imported goods to update their capital stock and improve Canada’s productivity performance.”
The forecast factors in the assumption that Canada’s output gap will be eliminated in the second quarter of 2012 as the headline and core inflation rates are expected to hover close to the Bank of Canada’s two per cent target.
“At this point, the level of uncertainty about the global economic outlook — worries about sovereign debt and fiscal balances — is driving the Bank of Canada to hold the policy rate at its current level of one per cent,” Wright said.
“As concerns start to dissipate, attention will turn to domestic fundamentals.”
RBC believes the Bank of Canada will likely raise its key interest rate from the current one per cent this fall, and it will sit at 1.75 per cent by the end of 2011 and three per cent by the end of 2012.
That could put further pressure on Canada’s housing market, which is already slowing due to eroding home affordability amid sky high home prices.
“Rising interest rates will largely be balanced by growing income levels and ultimately contribute to a stable home price environment,” Wright said.
“With interest rates heading higher, we anticipate that the volume of home sales will calm and prices will post very modest gains.”
At the provincial level, Alberta will lead economic growth with Newfoundland and Labrador following closely behind.
The other Prairie provinces, Saskatchewan and Manitoba, are expected to achieve above-average growth this year, while Ontario will post average growth and British Columbia and the Atlantic provinces fall to the lower end of the pack. http://ca.finance.yahoo.com/news/Canada-economy-see-3-2-per-capress-1243280093.html?x=0