Homes over valued

Some Canadian homeowners should be prepared for a fall in housing prices, warns a study that estimates homes in most cities are overvalued, and by as much as 25%.

With the exception of Toronto and Edmonton, houses in Canada's major cities are overvalued by anywhere from $32,000 to $87,000, says the study of prices in nine cities by researchers at the Sauder School of Business at the University of British Columbia.

The study, released Monday, looked at prices for single-family homes in the second quarter of this year in nine major Canadian cities, and compared prices in those cities with what they would be in a balanced market based on the relationship between house prices and rents.

Only in Toronto are prices in balance with rents, the study concluded. In Halifax, Montreal, Ottawa, Regina and Winnipeg prices would need to drop by at least 20% to be in balance and in Calgary by 7% and in Vancouver by 11%.

In contrast, Edmonton prices are actually below equilibrium, and would have to rise by 8% to be in balance, it says.

"The decade long boom in Canadian markets is over," says Tsur Somerville, the study's lead author.

Housing affordability is a severe problem in some Canadian cities, limiting the ability of markets to continue to rise, says the report titled Are Canadian Housing Markets Overpriced?

The rapid price increases in many Canadian cities since 2001 along with the downturn in the U. S. housing market has raised concerns about the future of housing markets here, it notes.

"There are parallels between the path of house prices in Canadian and U. S. markets," it says. During the U. S. housing boom, which ran from 1997 to 2006, prices rose 132%, while in Canada over the 2001-08 boom, prices in the nine cities rose an average of 87%.

While Canada's more conservative lending practices have prevented the speculative excess and severe downturn in U. S. markets, they haven't prevented homes from becoming overpriced, it says.

The assessment of whether a housing market is in balance takes into account the ratio of rent to prices, mortgage rates and the cost of owning a house, and the expected long-term price appreciation.

In dollar terms, the amount by which house prices would have to fall to bring them into balance in each of the overpriced cities is: Calgary, $32,000; Halifax, $58,000; Montreal, $68,000; Ottawa, $81,000; Regina, $87,000; Vancouver, $85,000; and Winnipeg, $74,000.

That houses are overpriced doesn't, however, guarantee that they will fall, it says.

"Instead, the market could return to equilibrium through an extended period of housing price appreciation that is above zero, but below the long run rate," it says.

The potential for price declines is greatest in cities that have a large supply of unsold inventory or a mismatch between the number of units and the number of households ready to occupy them, it says, adding that by that criteria Vancouver is the most at risk of a housing-price correction, though compared with most of the other cities the decline would be relatively moderate.

While the study looked at prices for single-family homes, it noted that a concern in some housing markets is that the buyers of units are not living in them.

"If markets turn, these investor-buyers might behave in a manner akin to other asset markets, dumping their units to avoid future greater perceived price declines," it says. "In contrast, owner occupiers, unless forced to sell, can remain in their units and wait out a weak market."

In contrast, prices in Edmonton would have to rise by $32,000 to bring them back into balance, and that's despite what has been an annual increase in prices of 13.4% during the 2001-08 housing boom.

Annual price increases during the 2001-08 housing boom for the other cities studied were 14.5% in Regina, 12.4% in Calgary, 10.6% in Vancouver, 10.2% in Winnipeg, 8.1% in Montreal, 5.7% in Halifax, 5.7% in Ottawa, and 7.2% in Toronto.

(prepared by Eric Beauchesne/Vancouver Sun)