Housing has been quite the investment this decade. In some areas of the country, house prices have doubled and some places prices have almost tripled. Saskatoon is no exception with an average price of about 120k in 2000 and hovering at about 300k 10 years later. Does Canada have a housing bubble or are there just some bubbles scattered in some areas around the country? Was Saskatoon inexpensive before and now priced properly? Is Saskatoon in a housing bubble?
First, lets define a housing bubble. From Wikipedia :
"A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by a reduction in price levels."
Some mainstream economists say that economic or housing bubbles can not be identified until after the fact. Other economists suggest that there are housing market indicators that can be used to identify bubbles. So who do you trust?
This blog will take a look at this part of the definition: "until they reach unsustainable levels relative to incomes and other economic elements" and apply it to Saskatoon and Canada and look at some calculations based on the fundmentals such as incomes, interest rates, average prices and rents.
Affordability
RBC does an affordability report a few times a year so we will take a look at that. Here is the latest one.RBC Affordability The RBC affordability report uses house prices, interest rates and incomes in determining their calculations. This measure is based on a 25% down payment and a 25 year mortgage at a five year fixed rate. According to CMHC affordable housing costs less than 30 per cent of before-tax household income. New entry level housing such as townhouses should cost no more than 2.5 times the avergage income in order to be affordable.These costs include mortgage payments (principal and interest), property taxes, and any condominium fees, along with payments for electricity, fuel, water and other municipal services.
Scrolling down to page 7 of the RBC Affordability report you will find mortgage carrying costs by city. 1990 saw some cities in Canada experience a housing bubble and affordability was terrible for those cities. Saskatoon did not experience so much as a price bubble but more of an affordability bubble as affordability in Saskatoon peaked at about 32% of income when factoring in a detached home with 25% down with a 5 year fixed rate mortgage over 25 years. House prices did not do much in the early 90's and interest rates then fell for a few years until we see in 1993 that it took about 22% of income to afford a house. Even though house prices crept up after 1993, affordability stayed in the 22-25% range up until 2006 thanks to interest rates continuing their downward trend and increases in income. In 2007, we see affordability take a huge hit. At the peak of 2008, it took about 44% of income to afford this type of house. Since then prices have eased, incomes have improved and with record low interest rates it takes about 33% of income to afford a detached home.
It is safe to say that Saskatoon had an affordability problem (bubble) in 2008. Historically, affordability in 2010 is higher than usual, but it does not look too bad compared to 2008. But this is hidden with low interest rates. Replace 2010's interest rates with 2008's interest rates and affordability in 2010 is again at dangerous levels. This graph shows affordability for Canada if interest rates increase over the coming years.
Price to Income and Historic Price to Income
This measures the average house price to the average house hold income. Sometimes median valuations are used. One report that comes out annually is the Demographia Housing Affordability Survey that measures median income and median house prices. Affordable housing is usually measured at 3 times income or less. In 2010 Saskatoon measured at 4.4 which means that housing is severely unaffordable. They came to that calculation using a median income of 56k and a median house price of 247k. For comparisons sake, in 2006 Saskatoon measured at 2.6. This was with a median income of 52k and a median house price of 138.
But there are other sources we can use. Stats Can shows that median income in 2008 was 77k. CMHC shows that median income was 52k in 2008 ( after tax dollars). Saskatoon Tourism puts the average family income at 72k in 2009. I prefer to use statscan and add 3% for two years to get 2010's median income which would be about 81k. Using a median house price of 290k brings our calculation to 3.58. Now how does this measure to years past?
Now I don't have the median prices, but looking at SRAR's website and we can look at the average prices and make a guess. In 2006 statscan shows the median income in Saskatoon was 68k while the average price was about 162k. Price to income was about 2.4 in 2006. In 2004 the median income was 60k while the average house price was about 140k. Price to income comes in at 2.3. In 1998 the median income was 49k while the average house price was about 100k. Price to income comes in just over 2. I know that I am mixing up medians and averages but it is about the best I can do with the numbers I can find and it just gives up an idea how this ratio has changed over the years.
As we can see through this calculation, the average house price has grown at a faster pace than income. And not by a little but by a lot. Compared to historical levels, this calculation is showing bubble.
Buy to Rent Ratio
Rents have not seen the same run up as house prices over the past few years. The Buy/Rent Ratio has hit 1.85 in Canada. This ratio is computed using average rents and average house prices. Include taxes and maintenance and on average across the country its costs well over 2 times to buy than rent. How does Saskatoon compare?
Our good friends at CMHC help us out again. CMHC/ The average two bedroom rents for $904 a month. Average house price in Saskatoon is about 300k. Using a 25 year fixed rate mortgage at 3.75% monthly payments are $1537. The buy/rent ratio is 1.7. Taxes of about $300 and maintenance of $150 a month brings the cost of owning compared to renting at 2.19. Compare this to 1998 when the average house was 100k the 25 year mortgage was at 6%. Monthly payments were $639 for this mortgage and the monthly rent was $516. The buy/rent ratio was 1.2.
Lets see what we get when we use the average condo. The average condo price for 2010 is about 240k. Using a 25 year fixed rate mortgage at 3.75% monthly payments are $1230. The buy to rent ratio is 1.36. Throw in taxes of $200, fees of $200 and maintenance of $100 a month the cost of owning compared to renting is 1.9.
Remember these numbers are arbitrary. I could have used a variable rate, bigger down payment which would have pushed the ratio down. I could have also used historic and average interest rates which would have pushed the ratio up. I also know that rents are probably higher for many listed on Kijiji or in the newspaper. Somewhere in the neighborhood of 1400 for an average house. I am sure that for some renters or landlords the ratio is lower but I am using the buy/rent ratio which uses the same calculations from 15 years ago as of now so we can see how the ratio has changed.
The buy/rent ratio is at all time highs and indicates a bubble.
House Price to Earnings
This is measured by the average house price divided by the average monthly rent x 12. It really is just a variation of the buy/ rent ratio. This ratio is mostly used for stocks and anything over 20 is usually overvalued. Using a average house price of 300k and a yearly rental income of 10848 from CMHC, the P/E is 27. Using an average condo price of 240k and a yearly rental income of 10848, the P/E is 22. Back in 1998 plugging in an average house price of 100k and a yearly rental income of 6192 the P/E was 16.
Most would not buy a stock that had a P/E of 27 unless they felt that stock would see significant gains in appreciation and/or earnings in a short time. The house price to earnings is near all time highs.
Debt to Income
There are no real stats available to know what debt levels households in Saskatoon have. But there are resources available for Canadian stats. The Bank of Canada and the major banks like TD have been warning Canadians about their levels of debt over the past year. Since the mid-1980s, total household debt as a share of personal disposable income in Canada has almost tripled – from 50% to 146%. For comparisons sake, the United States hit 160% at the peak of the housing market. It is probably safe to say that Saskatoon's debt to income number is close to the nation's number.
Conclusion
So what does this all mean? All these calculations show that the housing market is at dangerous levels and is showing bubble signs. So what will happen to Saskatoon's real estate market? We will look at some indicators and have some fun while we try to figure that out.
