More evidence of a Saskatoon housing bubble

Click on the picture for a larger image.

This graph shows year over year growth between Saskatoon house prices, inflation, income and Saskatoon GDP.

Did CMHC support risky borrowing?

From the Financial Post " Did CMHC support risky borrowing?"

In compliance with new federal rules, the Canada Mortgage and Housing Corp. on Monday published its first set of quarterly results, something industry observers say is a good thing.
Among the more salient disclosures contained in the results: refinancing activity tumbled nearly 40% following a move by Finance Minister Jim Flaherty to tighten mortgage rules this spring.
Sales of the CMHC’s mortgage insurance fell by 10% immediately after the changes were introduced, though they have regained some ground since then.
According to the CMHC, these numbers show it’s doing a good job of maintaining a healthy, sustainable housing market.
But Finn Poschmann, vice president of research at the C.D. Howe Institute, is skeptical. “The size of the drop in refinancing is surprising to the point of shocking,” Mr. Poschmann said in an email. “You could hardly have better evidence of the extent to which CMHC practices have been supporting high debt and risky borrowing by homeowners.”
A frequent critic of the organization, Mr. Poschmann argues that CMHC practices have helped inflate housing prices and encourage consumers to take on more debt than they can handle.
Experts say average household debt in this country is sitting at record levels, similar to where it was in the United States before the financial crisis.
Starting in March Mr. Flaherty instituted a number of changes to mortgage rules, including reducing the maximum amortization period for loans qualifying for CMHC insurance to 30 years from 35 years; lowering the maximum amount that Canadians can borrow to refinance their mortgages to 85% from 90% of the value of their homes; and withdrawing CMHC insurance from non-amortizing home equity lines of credit.
Mr. Poschmann authored a report earlier this year which suggested ways the federal government could fix the CMHC, the leading provider of mortgage insurance in Canada. In a letter published on its website, CMHC suggested that Mr. Poschmann’s ideas would only lead to the creation of a system like the one in the United States.

Mortgage refinancing is slowing for two reasons.  One, the new mortgage rules.  Two, many consumers have borrowed to their limit.  What does this mean?  Without a doubt, many of the new home buyers that are loaded with debt, will not be able to borrow against their home like others who have borrowed like crazy in the last half decade.  It is no secret that many first time buyers in the past half decade bought homes highly leveraged.  Because most had no savings, they would not have spent money on their homes if it was not for the rise in home prices which lead to the wealth effect. 

Now we  can expect many new homes with unfinished basements, gravel driveways etc. staying that way for a longer time.  And older homes with new young buyers will not be getting the big reno's either, unless people start using credit cards to finance the work. With the startling drop in refinances, this is the start of the deleveraging process the Canadian consumer badly needs.

Return to 20% down payment looms in the US mortgage market

From yahoo" Return to 20% down payment looms"

Hopeful homebuyers may soon need to shell out more money upfront before being approved for a mortgage.
The public comment period concludes Monday for potential mortgage-related provisions spawned by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Among the potential outcomes is that homebuyers could be required to front a higher down payment -- as much as 20% -- before they can legally qualify for a mortgage loan. 
The proposed changes are being reviewed by federal regulators, among them the Treasury Department, Federal Reserve Board, Federal Deposit Insurance Corp., the SEC, the Federal Housing Finance Agency and Department of Housing and Urban Development. There is no set timeline for when final decisions will be made.
Many in the real estate sector have joined forces to fight such a change aimed at so-called Qualified Residential Mortgage loans, arguing that a 10% or 20% down payment mandate would deliver yet another damaging blow to the floundering housing market.
In past decades, a 20% or more down payment was standard. The lower the down payment, according to conventional wisdom and ongoing research, the greater the risk of default.
As housing prices soared and mortgage lenders dove head-first into what would be the subprime crisis, that common practice fell by the wayside. You may pay more in interest, closing costs or PMI, but just 5% down is enough for many banks and lenders. FHA loans, insured by the government, typically require only a 3.5% down payment.
The Mortgage Bankers Association, in written testimony, says the proposed QRM definition "is so restricted that 80% of loans sold to Fannie Mae or Freddie Mac over the past decade would not meet these requirements."
According to the National Association of Realtors, drawing upon national savings rate data, "it would take 9.5 years for the typical American family to save enough money for a 10% down payment and closing costs, and fully 16 years to save for a 20% down payment and closing costs."
"A 10% or 20% down payment requirement for the QRM means that even the most creditworthy and diligent first-time homebuyer cannot qualify for the lowest rates and safest products in the market," an NAR statement reads, adding that such a move will "be placing homeownership out of reach for millions of potential buyers and crippling an already fragile housing recovery."
"Weak underwriting and toxic mortgages are the main cause of mortgage defaults, not well-underwritten mortgages that allow for low down payments," reads a letter circulated to government officials by opponents of the down payment hike.
There is a financial incentive for lenders to push back against tougher QRM standards.
The Dodd-Frank Act requires financial institutions that securitize mortgage loans to retain at least 5% of the credit risk. It exempts securities backed exclusively by QRMs from the risk-retention requirement, lowering the cost of securitizing these mortgages, as they are considered to hold less risk. Narrowing the scope of what qualifies will mean homebuyers need to meet tougher standards.
If fully implemented, other Dodd-Frank related provisions could mean limiting the mortgage payment to 28% of gross income and limiting all debt to 36% as part of the mortgage qualification process.
No credit score requirement is currently mandated, but a mortgage loan would qualify as a QRM only if the borrower is not 30 or more days past due on any debt obligation, or 60 or more days past due on any debt obligation within the preceding 24 months.
Borrowers who, within a span of 36 months, have been through bankruptcy, foreclosed on, engaged in a short sale or deed-in-lieu of foreclosure, or been subject to a federal or state judgment for collection of any unpaid debt would also not qualify.
The National Association of Realtors is among 44 organizations -- including the American Bankers Association, Center for Responsible Lending, National Association of Federal Credit Unions and NAACP -- making up the Coalition for Sensible Housing Policy. That group has escalated a public outreach campaign in recent days that includes broadcast and newspaper advertisements.
In statements, coalition members have stressed that they are not denying that low down payment loans are riskier than higher down payment loans. They argue, however, that high down payment requirements would put homeownership out of reach for millions.
"We are talking about people here who have managed their financial obligations carefully and they have established a good track record -- you can see that in their credit report -- but like so many people today they find it difficult to accumulate very significant savings," says Glen Corso, managing director of the Community Mortgage Banking Project, an organization that represents independent mortgage-banking companies. "They have accumulated a 3% or 5% down payment, or some modest amount like that, and they figure that, plus the careful management of their financial affairs, should get them the lowest cost credit in the marketplace. If this rule goes through, that won't be the case."
Corso says he can appreciate the intent, if not the specifics of how the Dodd-Frank Act sought to ensure a safe and stable mortgage market.
"Everybody knows what happened during the frenzy time," he says. "People threw common-sense out the window. The idea was to create a positive incentive for common sense mortgages ... because, at some point the credit cycle will turn, credit will become easier and people will start to push the boundaries. The idea was to say 'Don't do that.' This is a lot safer for consumers -- and much better for lenders -- so just stick with this and forget the crazy stuff."
But, he adds, "To say, 'Yes, we have a positive incentive -- but guess what? -- 80% of the people won't be able to get loans' is just crazy."
Perspective on where first-time homebuyers may have to look for that extra down payment comes from a survey conducted last year by the National Association of Realtors: only 74% said they used their own savings, while 8% tapped into a 401(k) fund and 6% sold stocks or bonds. Making up the difference, 27% got a gift from a friend or relative and 9% relied on a loan from a relative or friend.

With 0 down, cash back mortgages, free down payments still available in Canada, which country has loose lending now? Could you imagine what a 20% down payment requirement would do to house prices in Canada? 

Is the CMHC financing a house of cards?

From the Globe and Mail

Is there a bubble in real estate? Canadians have been arguing about this for years. We’ll keep arguing, because asset bubbles are hard to identify until they’ve deflated, and this one hasn’t. Besides, it depends on which of Canada’s many real estate markets you’re looking at. In Saint John, New Brunswick, where a detached home can be had for a monthly payment of $750, or Calgary, where prices have levelled off and the typical house sits on the market for six weeks, there’s no sign of trouble. But if you’re in Vancouver and must sign up for 25 years of financial servitude for the privilege of owning a small glass box in the sky, prices look very dangerous indeed.

So the bubble question is complicated, but a few points are not in dispute. On average, owning a home is now more expensive, compared to renting, than it has been in generations. Prices are growing faster than incomes; in Vancouver, the mortgage payments on an average home would consume more than half of the typical household’s wages, says TD Bank’s economics department. Buyers respond to high prices by borrowing heaps of money. Three years ago, just one out of every nine mortgage-holders borrowed more than 80% of the value of their homes. Today, it’s one in six.

These are verifiable facts; whether they add up to a bubble, I can’t say. But given the data and the terrible consequences of real estate bubbles (see: United States of America), the Harper government could—at the very least—stop pumping air into the property market. And that means reining in the Canada Mortgage and Housing Corp., the vehicle through which you, dear taxpayer, have assumed the risks for these urban bidding wars and the jumbo mortgages they create.

The Tories, and Finance Minister Jim Flaherty in particular, are given a lot of credit for steering the country through the worst of the financial crisis, and some of it’s deserved. When investors became reluctant to lend money to banks during the Black Autumn of 2008, the government, via CMHC, bought tens of billions of dollars worth of mortgages from financial institutions. That was clever. The program gave the banks fresh cash with which to make loans and improved public confidence in them. Later, when it became clear that homebuyers were beginning to take stupid risks, Flaherty essentially eliminated the 40-year mortgage, then the 35-year. He also tightened the borrowing rules for investment properties.

These were good moves, but they left intact the basic structure of the home-financing market in Canada: Ottawa backs virtually all of the riskiest residential mortgages. CMHC provides default insurance on loans for which borrowers put down less than 20% (remember, that’s one in six mortgages). It makes it possible for a person of modest income and little savings to buy that $500,000 townhouse. It is the official insurance company of the House Poor.

CMHC insurance creates a terrific one-way deal for the banks. If Ms. $500,000 Townhouse makes her mortgage payments, the bank makes money; if she defaults, CMHC pays for any loss. So the bank gives her the loan. What business doesn’t want risk-free profit? In part because of this sweet arrangement, home buying in Canada has soared. The home ownership rate, long stuck just above 60%, is now about 70%.

By definition, the new entrants are marginal buyers—the people who, in different circumstances, would still be renters, many of whom probably should be renters. By international standards, 70% is quite high. Fewer than half of German households own the place they live in; same with the Swiss. The last time we looked, Germany and Switzerland were modern, orderly, prosperous nations, busting the idea that a country needs a substantial majority of homeowners to enjoy social stability.

That’s certainly what Americans believed. Through government-sponsored financing entities such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), the U.S. also raised its home ownership rate to almost 70%—until the foreclosure crisis. The two mortgage giants then became sinkholes for public money, and Washington placed them into conservatorship in 2008. The U.S. home ownership rate is now 66% and declining fast.

Just as the U.S. bubble probably couldn’t have happened without an implicit public subsidy from Fannie and Freddie, the Great Canadian Home-Price Inflation couldn’t have occurred without CMHC. In just six years, its insurance business has doubled, and it now backs more than $500 billion worth of mortgages. Most of these are fine. But about $45 billion is with the riskiest group—buyers with less than 10% equity. These people could be wiped out if there’s a sharp correction.

The banks won’t lose. Only Ottawa will. It’s too late to do anything about those insurance policies now—we’re on the hook. But it’s not too late for Mr. Flaherty to show up at the CMHC board with a new set of orders: Shrink it.

More than a quarter of Saskatchewan residents say: "Why have one house when you can have two?"

TD survey

- 2011 TD Canada Trust Repeat Home Buyers Report finds buyers in Manitoba and Saskatchewan most likely to keep their current property in addition to new one -

TORONTO, Aug. 23, 2011 /CNW/ - Even though they're shopping for a new home, more than a quarter of buyers in Manitoba and Saskatchewan say they will keep their current property (versus 18% nationally). The TD Canada Trust Repeat Home Buyers Report, which surveyed Canadians who recently bought or intend to buy a home that is not their first, found that of those who aren't selling their current home, more than a third say the new purchase will be an investment property (35%), another 30% will move and keep their current home as an investment property and one-in-five (22%) are shopping for a vacation property.

"A home is, obviously, a very big purchase - especially if you will not be selling your previous home to put towards the cost. Even if you're not selling, you may still be able to use the equity in your current home to finance your new one with a Home Equity Line of Credit," says Farhaneh Haque, Director, Mortgage Advice, TD Canada Trust. "A mortgage expert at your bank can walk you through your financing options and show you strategies and products that may save you money and provide flexibility over the course of your mortgage."
Forty-percent of repeat buyers considered a Home Equity Line of Credit (HELOC).  Many would simply like to have it as a financial cushion (48%). Another 46% would use it to finance a renovation.
Manitoba and Saskatchewan buyers movin' on up - earlier than planned
Two-thirds (64%) of Manitoba and Saskatchewan residents are moving on to larger or more luxurious homes and many are moving earlier than they originally planned.  Six-in-ten repeat buyers in Manitoba and Saskatchewan are moving earlier than they expected (39%) or had no intention of moving but now find themselves on the house-hunt again (23%). People in Manitoba and Saskatchewan were among the most likely to say that market conditions played a factor in their decision to buy another home (28% versus 21% nationally).
The top five features that Manitoba and Saskatchewan residents felt they compromised on when they purchased their previous home that they are not willing to budge on this time are a garage or sheltered parking (42%), price (35%), layout of the home (32%), number of bedrooms (29%) and a renovated kitchen (29%).
"If you are dissatisfied with something like the layout or features of your home, a renovation can be a convenient option to save the hassle and expense of moving. A Home Equity Line of Credit will allow you to use the equity you've built in your home to finance the renovation.  Further, if you do ultimately decide to sell, the renovation could increase your resale value," says Haque.
Manitoba and Saskatchewan residents are savvier sellers than last year
The TD Canada Trust Repeat Home Buyers Report showed that 56% of people in the provinces have a mortgage on the home they are moving from and they are among the least likely in the country to take out a mortgage on their new home (58% versus 69% nationally).
In 2010, 21% of Manitoba and Saskatchewan residents who planned to sell their home didn't know they had options when it came to their mortgage.  This year, that number decreased to 15%.  Thirty-two percent of sellers say they will bring their mortgage with them and people in the provinces are the most likely in the country to say they'll use it as a selling feature (21% versus 14% nationally). Although they say they are aware of the options, 32% haven't considered what they will do.
"It's just as important to consider your mortgage options as a seller as when you are buying. You may be overlooking your mortgage as an important selling feature of your home or you may be able to save money by keeping your low rate and bringing your mortgage terms with you. Talk to an expert to find out what option might work for you," says Haque.

This is probably one of the reasons why housing starts have outstripped household formation in Saskatoon over the past decade. In 2006 there were 2.4 people per house in Saskatoon but during the 2000's Saskatoon built at a 1.86 pace. For people that say that speculation was not really a problem in Saskatchewan or Saskatoon, they may want to rethink this.  This is not Phoenix, but there was/is a level of speculation that could spell trouble down the road.

What happens when all these people that hold multiple homes start dumping homes for whatever reason?

Saskatchewan records slowest wage growth yoy with 1%

From the Financial Post

OTTAWA — The average weekly wage of Canadians edged up 0.3% in June from the previous month, and rose 3% from a year earlier, Statistics Canada said Thursday.
The federal agency said earnings on average totalled $876.27 per week in June, compared to $873.47 the previous month and $850.53 in June 2010. The average hours worked per week were 32.9, unchanged from a year earlier.
“The 3% (year-over-year) increase reflects a number of factors, such as wage growth and changes in the composition of employment by industry, by occupation and by level of job experience,” the agency said.
Weekly earnings were up in all provinces in the 12 months to June, with the biggest gains in Alberta, up 5% to $1,041.45, and British Columbia, up 4.5% to $849.69.
“Alberta has recorded year-over-year growth in earnings above the national average since March 2010,” Statistics Canada said.
Saskatchewan and Prince Edward Island saw the slowest wage growth, up 1% to $854.60 and up 1.7% to $723.15, respectively.
Meanwhile, the number of employees on payrolls totalled 14.92 million in June, a gain of 1.8% from a year earlier.

Inflation is around 3% but wage growth is at 1%?  I recall reading many union contracts settling at a total of 5.5% over 3 years.  So much for keeping up with the cost of living.

Here is the Stats Canada report ( 388 pages)

Notable industries such as mining, wholesale trade, transportation were up by quite a bit, while construction, service producing, and health care industries were down.  All other industries were either up or down just a touch from a year earlier.

Saskatoon Home Prices: 7% annual growth since 1990, annual inflation 2%, reversion to the mean is next

 City Price, 1990 Price, 2010 Compound yearly growth rate

Halifax	97,238	242,000	4.7%
Saint John	78,041	174,000	4.1%
Quebec City	81,462	238,500	5.5%
Montreal	111,197	284,000	4.8%
Ottawa	141,562	342,000	4.2%
Toronto	254,890	409,000	2.4%
Windsor	106,327	182,000	2.7%
Greater Sudbury	108,596	-232,000	3.9%
Winnipeg	81,740	238,000	5.5%
Saskatoon	76,008	294,500	7.0%
Calgary	128,484	382,000	5.6%
Vancouver	226,385	638,000	5.3%
Source: Canadian Real Estate Association (MLS®)

The average annual rate of inflation from 1990 to 2010 was 2.02%.

Why is inflation important in house prices?
From the Great US Housing Bubble

"Since 1890 houses have appreciated at 0.7% over the general rate of inflation. Over the long term house values are tied to incomes because most people buy houses with mortgages for which they must qualify based on their income. Inflation keeps pace with wage growth because people will bid up the prices of goods and services with their available income. Therefore, over the long term house prices, wages and inflation all move in concert. There are short-term fluctuations in this relationship due to variations in financing terms, migration patterns, employment, local limits on construction and irrational exuberance, but any such deviations from the mean will be corrected over time by market forces. As an investment, houses serve as a hedge against the corrosive effect of inflation, but over the long term appreciation much in excess of the general rate of inflation is not possible. In this regard, houses are little better than savings accounts as an asset class, and they are inferior to stocks or bonds in the long term."

Saskatoon experienced an average of 7% yearly appreciation of real estate, wage growth was between 2% and 3% per year while inflation was 2% per year for those 20 years.  Now the thing is that if we strip out 2006-2007 where house prices appreciated 53% and 2007-2008 where house prices appreciated 32%, house prices would have followed inflation and wages for the whole 20 years and there would be no housing bubble.

For people who say that Saskatoon was undervalued before the run up of prices, I ask, undervalued to what?
Because Saskatoon certainly was not undervalued to inflation, wages or rents in 2006.  Saskatoon was priced just right. The argument that Saskatoon was undervalued to other cities does not hold any water.

But we all know that home price growth can only outstrip inflation and wages for so long and then prices revert back to the long term fundamentals.

The US housing market deviated from fundamentals such as inflation, but that market is now returning to the mean. So will Canada.

Saskatoon will also revert to the mean as well.  Things were OK up until about 2005 and then things went goofy.

While measuring inflation with house prices over the long term is just one way to determine the economic health of a housing market, it is but one economic indicator.  That is why I like using a bunch of economic measurements,and they show that Saskatoon's housing market is showing about a 30% over valuation to its long term valuations.

Saskatoon housing was undervalued (Just like the rest of the world) repost

Sometimes I just have to resubmit an earlier post just to remember where we came from.

"Saskatoon housing was undervalued before and now we have caught up."  I hear that at work, at Rider parties, at family gatherings.  We were not undervalued.  What happened to Saskatoon was an equilibrium of housing market forces with other city markets within Canada and the world.

The late 80's and early 90's saw a housing bubble that affected many places throughout the world. Japan is noted as the post boy of that real estate bubble, as real estate still has not recovered 20 years later.  Places like California had a bubble as well.  Canada was no exception to the bubble party and the hangover in the 90's.  According to CREA data, the average Canadian house sold via the MLS went for $146,965 in 1989, with prices staying pretty much flat throughout most the 1990s. As late as 1999, the average Canadian house price had risen to only $158,145, an increase of just 7.6% over the decade.  Adjusted for inflation the return was in negative territory.
 
The entire world’s property markets move in a synchronized manner, highly affected by the US economy and US interest rates. But when the world wide housing bubble was launched in the early 2000's not all countries and cities saw values climb at the same time.  Some places saw housing bubbles launch overnight but in other places it took awhile but they eventually achieved bubble heights. Places like Las Vegas and Phoenix started their bubble more than one year after cities in California started their bubble.  Vancouver had lift off before Calgary and Calgary had lift off before Saskatoon.  Thus was the phrase " our housing is/was undervalued".  Housing markets use this phrase to justify 20%-70% increases in house prices in a matter of a couple of years.

Phoenix:
The "Catch Up" Effect - Much of the current appreciation we are seeing in the Phoenix metro area can be attributed to the lackluster performance during the 80s and 90s. During that period, home prices were relatively flat, so the current rise in prices can be seen as a "catch up" effect.

Las Vegas:
Las Vegas real estate at the beginning of 2003 was undervalued

South Africa in 2005:
"Why do Analysts believe South African real estate is undervalued?"

Vancouver in 2004:
"We are undervalued for Canada for the level of quality that is standard in our market and we are undervalued in relation to the low-profit margins that Vancouver developers accept."

Richmond BC
Richmond BC real estate has always been affordable and undervalued for the most part.

Montreal in 2006
Montreal’s home prices were sorely undervalued through the 1990’s.

Canadian Resort Properties in 2004
"Re/Max says the areas of Banff/Canmore, B.C.'s Okanagan Valley, and properties in Atlantic Canada are of particular interest to American and European purchasers. "Given current property values in prime international recreational destinations such as Cape Cod, Nantucket, the Hamptons, Aspen, and Vail, many of these Canadian markets are undervalued,"

United States Housing Market 2004
Bear Stearns economist David Malpass arguing that the housing market was healthy and that much of the rise in prices simply represented a "catch-up" because they had lagged behind the rise in equity prices since the mid-1990s.

Here is a quote about Saskatchewan.
"The Saskatchewan market was at least 30 to 40 per cent undervalued last year and the market has simply caught up to other areas in Canada," said Harry Janzen, executive officer of the Saskatoon Region Association of Realtors (SRAR).


So in a nutshell, the United States housing markets like California were undervalued to the rise in equity markets in the 90's.  When the California cities rose in value, Phoenix and Vegas then undervalued to cities in California, were justified to see house prices launch.  The rest of the world saw this and they were undervalued as well and so a huge spike in prices was fine.  Vancouver and BC resorts were undervalued to other comparable world cities and world class resorts so its was normal for the rocketing of house values.  Then Calgary was undervalued and when prices cranked up higher than was justified by wages it was normal and then Saskatoon was one of the last markets to shake the undervalued status by rocketing up over 50% in just one year. The one common theme in every housing market is that the rise in houses values was not in sync with the rise in incomes ( Saskatoon has experienced house prices rise 3 times faster than wages over the last 12 years).

By 2007 Saskatoon was one of the last cities in the world to shake their undervalued status, some of the first cities in the world that launched their house prices had their bubble pop.  Then one by one, cities around the world had their housing bubble pop.  It really was just an equilibrium of house prices upward and it will be an equilibrium of house prices downward.  Like it was said before, most of the entire world’s property markets move in a synchronized manner.

Compared to the 2000's, house prices in 1990's were undervalued, but that was because houses were considered places to live in and not really an investment like we come to believe in the last few of years.  In the 90's, investors and speculators were feeding the dotcom bubble.  After the dotcom bust and the lowering of interest rates, investors, speculators, boomers, young couples turned to real estate as the safe haven the stock market they all felt wasn't.  It did not matter if it was Phoenix, Madrid, London, Miami or Saskatoon, cities around the world had house values rise ( some doubled in a few years) without incomes or other fundamentals to support to rise in values.

Now that the global housing boom is over and the bust has hit numerous cities in dozens of countries, people should ask one more time, what was Saskatoon housing undervalued to?

RBC Affordability: Saskatchewan Homebuyers Modestly Strained

RBC is out with their quarterly affordability survey here

Some quotes:

Among the markets, Vancouver really stands alone in its extreme unaffordability across all housing types. It is no doubt the most stressed market in Canada and the one facing the highest risk of a downturn. Other markets where some signs of unaffordability are emerging include the two-storey home segments in Quebec (Montreal), Ontario (Ottawa and Toronto), and Saskatchewan where the measures have climbed more clearly above long-run averages.

Strong price increases for two-storey homes and, to a lesser extent, bungalows weighed on Saskatchewan’s housing affordability in the second quarter. The RBC measures for the province’s two-storey homes and bungalows rose the most in more than two years—by 2.8 percentage points and 2.0 percentage points, respectively. The change in the measure for condominium apartments was more subdued, moving up by just 0.6 percentage points. Despite three quarters of improvement, affordability has remained above longterm averages for the province and has moved more significantly away from such in the second quarter. This indicates to us that Saskatchewan homebuyers are being modestly strained at this point. However, this has not prevented home resales in markets such as Regina and Saskatoon from picking up their pace after slowing in the winter.

*This measure is based on a 25% down payment, a 25-year mortgage loan at a five-year fixed rate and is estimated on a quarterly basis. The higher the measure, the more difficult it is to afford a house.

Ben over at the economist analyst has a great post titled "why housing affordability is a misleading indicator"

1)  Affordability is still stretched by historic measures. 
2)  Interest rates will rise much faster than incomes over the next decade.
3)  The RBC Affordability Measure assumes a 25% down payment
4)  The measure is in pre-tax income
5)  The measure uses the 'standard' home
6)  The often-cited city-specific data excludes property taxes and utilities
7)  The measure ignores other consumer debt

Conclusion:
Affordability measures can be one indicator of potential housing market issues.  However, they should not be placed in front of other measures of fundamental value such as rent and income growth.  While the RBC measure in particular is interesting, it is not without its major flaws, a fact overlooked by some who would seek to portray the housing market as less risky than it truly is.

I totally agree with Ben, as the monthly affordability study which has its limitations is only one indicator we should be looking at to gauge the housing market.  That is why when we look at inflation, wages and rents, we can calculate that the Saskatoon housing market is around 30% overvalued.

How many first time buyers are putting 25% down?  That may have been the norm 20 years ago, but not now. Changing the ratio to 5% down and the graph looks like this for a bungalow in Saskatchewan.  Yep, near 50% of pretax income. Ouch!

Has Saskatoon Overbuilt?

Ben at the Economic Analyst has a great post "Revisiting the "population growth drives house prices" argument: Still leaking like a sieve".  I highly recommend taking a look at his post.

I found a couple of interesting stats in that post in regards to Saskatoon population and housing start growth over the last decade. As we know that in Canada the average household size in 2006 was around 2.5 persons per house.

Here are how household sizes break down for the Prairie City CMA's in 2006 from Stats Can

Household size, by census metropolitan area (2006 Census) (Winnipeg, Regina, Saskatoon, Calgary, Edmonton)

	2006
	Winnipeg (Man.)	Regina (Sask.)	Saskatoon (Sask.)	Calgary (Alta.)	Edmonton (Alta.)
	number
Total households1	281,760	80,320	95,275	415,605	405,270
1-person households	85,020	23,605	27,480	103,545	107,130
2-person households	90,310	27,265	32,520	136,270	134,670
3-person households	42,740	12,275	14,045	69,245	64,275
4-person households	41,045	11,370	13,450	67,860	62,300
5-person households	15,870	4,140	5,600	26,225	25,115
6-or-more person households	6,770	1,660	2,170	12,455	11,780
Total persons in households	682,065	191,885	230,300	1,067,665	1,021,000
Average number of persons in household	2.4	2.4	2.4	2.6	2.5

Here is the population and housing start growth for Saskatoon in the last decade from Ben

Over the last decade, housing starts have clearly satisfied household formation if household formation continued at the average of 2.5.  Actually it looks like there are too many housing starts for the growth in population over the last decade.  Some may say that 2008,09 and 10 did not have enough housing starts for population growth.  But that did not lead to house price growth as seen here.

The big run up in house prices was from 2006 to 2008, but population growth did not lead to higher prices.  It was always easy and cheap debt and the emotions of greed and fear for the launch of house prices in 2006 to 2008.   If population growth and under supply of homes leads to home prices, there should have been a big run up in house prices in the last three years.  At best, prices are about even in the last three years.  But we also know with a bigger run up in population growth in the mid 80's compared to now, inflation adjusted house prices actually dropped!

Before we get side tracked too much, we need to answer the question, has Saskatoon overbuilt?
It would appear by looking at housing starts and population growth over the last decade it would appear that Saskatoon has indeed overbuilt.  But there are a few variables that need to be addressed that do not have any answers right now.
1.  What type of household formation has Saskatoon experienced in the last half decade?  If Saskatoon has experienced a lowering of the household size, that may explain part of it.  During the global housing boom, household sizes across the globe ended up being lowered.  But in some places that have busted, household sizes have reversed and have started to get bigger for a number of reasons.

2.  Was? Is, Saskatoon's population under estimated?  How many illegal suites are in Saskatoon?  How many people go unaccounted for when there is a census?

3.  The funny thing is that many real estate associated associations are saying that there is a housing crunch, a housing shortage, blah blah.  And they are right, as long as demand is continually juiced with real estate fever, cheap credit, lax lending " for people that just need a break" and those free down payment mortgages. There is the possibility, Saskatoon has had too many 1 person households getting mortgages.  How many parents have bought houses for their child(ren)?

Any more questions that need answering?
  
To think that Saskatoon is the only city with the possibility of overbuilding, this is what supply/demand looks like over the last 30 years in Canada.

In many of the countries that had their housing bubbles burst, many real estate associations were complaining of housing shortages right at the peak.  Many of these koolaid drinkers said their was a housing shortage in the US in 2004 and 2005. Now what? And just as recently as last year in Australia, there were calls of housing shortages.  In 2011, the Australia market has done a complete reversal with many places experiencing oversupply and a housing bust now firmly in full view.

As long as the bubble keeps chugging along, it will not seem like any Canadian city has overbuilt, but once the bubble pops, overbuilt cities will pop up all over the country.  Saskatoon is not immune.

Other links worth looking at:
Has Canada Overbuilt?
TD Bank 2009: Overbuilt and Overpriced, Canadian Real Estate Returns to Fundamentals

How long can home prices keep rising?

From Moneyville: How long can home prices keep rising?

This is news only for the handful of Canadians who are not watching the real estate market closely. The average house price in Canada reached an all-time high of $371,000 this spring. In Toronto, the average hit $456,000 and in Vancouver it was $786,000, according to the Teranet - National Bank House Price Index.
Although there has been a slight price pull back during the last month or two, these market values are 100 per cent higher than a decade ago. Your house has more than doubled in 10 years, a compound appreciation of more than 7 per cent per year. This has occurred while virtually every other financial asset (other than gold) has declined in real value and housing prices in the United States have dropped by 30 per cent or more.
Canadians who own their home are watching these numbers with glee, while those still renting are filled with envy and remorse. They both wonder: “How long can this continue?”
I can’t tell you when the housing correction will come. But I can tell you that when it arrives it will be correlated with other bad news. And it’s the second correlation that worries me.
Median Canadian household income stands at roughly $55,000 after-tax. This number is what’s left in your bank account if all you had to pay were federal and provincial income taxes. The $55,000 has to cover the mortgage, as well as the cost of kids, food, clothing, transportation, utilities, retirement savings — and maybe some fun if there is any leftover.
Sadly, that pie has grown a mere 10 per cent over the decade, while housing prices have more than doubled. Who can pay these prices if wages and income barely budge? Luckily mortgage rates have declined over that time period, which has created an aura of affordability. But even the Economist magazine estimated last month that Canadian real estate is about 25 per cent overvalued. Don’t say you weren’t warned.
My bigger concern is that bad economic news tends to come in clusters. If and when housing prices decline in Canada, you will likely have other problems, as well. That is where your vulnerability lies.
Imagine you live in a medium-sized city in southern Ontario with a population of 100,000. Assume this city has two or three major employers. You work for a multinational technology company and your spouse works for a multinational insurance company.
If one or both of those companies runs into difficulty and is forced to lay off employees, there is a good chance you might have to move to another city, province or even country. You might not be forced to do this, but you might want to do it to take advantage of better opportunities.
The last thing you want is to have your mobility, flexibility and options hampered by a bad real estate market or, even worse, a house that is worth less than the outstanding mortgage. To make things worse, your RRSP, your company’s retirement plan, or your stock portfolio has lost a big chuck of its value.
The combination of all these events could mess up your long-term financial plans.
This is what statisticians call correlation. You might think the odds of losing your job, your RRSP declining, and your house tanking are all independent events, but they are not. The risks are correlated.
Here are two pieces of advice, one for owners and one for renters.
Owners: Don’t spend your home equity quite yet. Yes, that renovation might add value to the house, but will you really be able to get your money back when you need it?
If you have been diligently paying down your mortgage and have reached the milestones of 40 per cent, 50 per cent or even 60 per cent ownership, keep it that way. Don’t turn back the clock by spending equity in the hopes the 7 per cent continues indefinitely. Half of California made that mistake.
Renters: For the young renters with fragile careers, new jobs and daunting work prospects, remember that if and when the real estate market corrects itself, it won’t happen during sunny economic times. In all likelihood it will coincide with a constellation of bad news.
In those times there will be a huge premium on flexibility. You will want to load up the car and move to better pastures. One month’s notice to the landlord and you are gone.
Oh, and next time you are at a cocktail party, being teased about renting by some debt-laden MBA or hedge-fund manager, remind the antagonist that your personal balance sheet is deleveraged, liquid and safer. That should give them pause.

Selling your home in the summer? Why is there snow in the picture?

It is mid August, we have not had snow for 5 months or so.  If this was my house, I would not be too happy with the listing, but hey, that is just me.

What you (really) made on your home

From Yahoo Finance

In recent years, homeowners have been feeling pretty smug about their investing prowess as they've watched home prices surge. But the costs homeowners face to buy, sell and maintain their homes mean they haven't made nearly as much as they think.
In this example, we calculated your real profit — after expenses — if you bought a typical home in the Greater Toronto Area 10 years ago, and sold it this year. We assume that it was purchased with a 10 per cent down payment and a five per cent fixed-rate mortgage. The home would have cost $248,601 to buy in 2001 and today it would sell for a hefty $456,147.

So does that mean you made $200,000? Not even close.
2011 sale price: $456,147
Subtract:
• $168,434 for the amount still owing on the mortgage;
• $4,000 for legal fees to buy and sell;
• $22,807 in realtor fees for the sale;
• $159,265 for 10 years of mortgage payments ($1,327 per month for 10 years);
• $42,000 for 10 years of property taxes;
• $19,000 for 10 years of home maintenance;
• $2,211 for the land transfer tax when the home was bought;
• $24,860 for the original down payment; and
• $358 in provincial sales tax on the mortgage insurance.
Actual profit: $13,212
Plus, you got a place to live for the last 10 years, of course.

Most people will say "we bought for 150 and sold for 325, so we made 175".  No they didn't.  Nobody factors in "other costs" associated with owning real estate.  And those costs can really add up if the place they bought is a lemon.

Building wealth through renting

From the Kansas City Fed

The analysis in this article shows that while homeownership often builds more household wealth than renting and investing the saved cash flow, it also often does not. More specifically, for most ten-year occupancies beginning during the 1970s and 1990s, homeownership unambiguously built more wealth. In contrast, for most occupancies beginning during the 1980s, renting and investing unambiguously built more wealth. Renting and investing is also likely to build more wealth than homeownership for many of the occupancies that started in 2000 through 2009.

These results suggest that either homeownership or renting and investing can be reasonable strategies for building household wealth. In other words, the conventional wisdom that homeownership is usually the better strategy is probably too strong. For many households inmany years, renting and investing the saved cash flow has built more wealth than homeownership. On the other hand, about half of the time, homeownership has built more wealth than renting. Moreover, it may be easier to purchase than to rent a house that closely matches a household’s unique tastes. Put differently, identical houses are typically not available both to rent and to purchase.

People who rent are not " throwing money away".  The argument that housing bulls have is that with getting a mortgage to buy a house, you may pay extra compared to renting per month, but you will pay down the mortgage and this is known as forced savings.  They say the difference that renters save is not "saved" but spent or squandered.  For some renters that may be the case, but for the smart ones, if done correctly, renting and saving can be more advantageous than owning.  Timing is definitely a key factor as well.  There have been times like the early 80's in Saskatoon where renting was better, but buying a home in the mid 2000's was definitely clutch here.  With the possibility of Saskatoon housing overvalued by as much as 30%, now is a time where renting and saving could come out better than owning. 

Saskatoon median household income compared to median house prices showing a big bubble

Median household income 2010 ~ 60,000*

Median income in 2005 - All private households ($) 49,313

Median household income, 2000 ($) - All households

$41,991

 *Estimation from the City of Saskatoon.  Demographia pegs the median household income for Saskatoon in 2010 at $62,000.  So median household income is probably near the low to mid 60's for 2011.
2000 and 2005's numbers for income are from Stats Canada.  Anybody who thinks the median household income is about $90,000 is smoking crack.  

Median house price 2011~ $300,000
Median house price 2005~ $140,000
Median house price 2000~ $100,000

Median multiple for 2011 is just under 5
Median multiple for 2005 was ~ 2.8
Median multiple for 2000 was ~ 2.4

Demographia suggests that housing bubbles are triggered at anything over 3 times income.  If it is not incomes or savings keeping pace with house prices it must be debt.  And unless Saskatoon new home owners have magic debt ( especially with less people working here year over year) thinking it's different here, this market is a bubble just waiting to be popped.

* Oh yeah, if you need a new car or vacation, I found a few sellers are now throwing these into the deal to move houses.  Sign of a healthy market, or 2008 all over again?

* Inventory has been very sticky, not going up or down in the last couple of months.  We are now entering a usually slower period of sales of the year, with a whole pile of starts in the pipeline.  Might be more cars for sale!

Australia 60 Minutes: Home Ownership Dream - The Big Squeeze

The other commodity nation, Australia,  which escaped the global housing bubble popping in 2008, can not hide anymore.  Anybody who thinks resources will save the Saskatoon housing bubble, should think again.  Australia is crashing, it will happen here too.

Here is the 13 minute video : The Big Squeeze

The Reserve Bank decided to keep interest rates on hold yet again. And with good reason.
Record numbers of Australians are struggling to keep up with their mortgage repayments.
Home ownership has never been tougher or more thankless.
A generation ago, buying a house was the done thing - the one investment that was considered as good as money in the bank.
If you didn't own the roof over your head, you'd failed in some way.
Not anymore.
Now, renting might just put you ahead of the game.

Euro Banks Get Clobbered, Good Thing This Is Not 08, Or Is It?

From the Disciplined Investor

European banks are in bad shape – and this is being VERY kind. With all of the problems that the sovereign nations are facing, the stress on the banks has been increased. Austerity is by far not a good solution for the banking industry. A sovereign default is definitely not beneficial. Cuts to credit ratings is unhelpful. High unemployment cuts into their profits. Basel rule implementation hurts profitability…and so on.
If you have not seen the actual losses for investors in many of the banks within the EuroZone, here it is. Not a pretty sight.

French Banks are in the spotlight now. 
From the Globe and Mail 

French bank stocks remained under pressure Thursday as volatile and nervous traders ignored officials' repeated attempts to assuage fears over their financial health.
A rebound from Wednesday's battering, when rumors about Société Générale 's financial health, gripped markets, proved short-lived and France's bank stocks were back under renewed selling pressure, in another sign that investors remain worried over their exposure to the debt of countries like Greece and Italy, and Europe's ability to deal with its debt crisis.

Is it 2008 all over again? 
From Zero Hedge

For at least the past year, whenever there is any decent sell-off in stocks, virtually every perma-bull trots out the tired platitude that “it isn’t 2008”.  Concern over sovereign debt problems in Europe get brushed aside with a simple comment that “it isn’t Lehman”.  Well, guess what, it is starting to feel a lot like 2008 again, or at least the summer of 2007. 
The market is selling off today on rumors and fears of some European bank being on the brink of default.  Monday, it was BAC that was rumored to be in big trouble.  Markets are moving again because of rumors of bank problems.  That sounds a lot like 2007 and 2008 to me....

•         No matter how far down we go, people are more concerned about missing a rally than the risk of another down leg
•         Bank CEO’s go on TV to calm shareholders and send letters to employees and the market reacts negatively
•         Rating agencies issue long lists of credit downgrades, MBS and CMBS then, sovereign and municipal debt related now
•         Pressure in the short term funding market are being talked about
•         No one can understand why CMBS isn’t down more
•         CDS is once again a 4 letter word
•         Mortgage Insurers (PMI) are back in deep trouble.
•         Fannie Mae is not government guaranteed.  Owned, yes, guaranteed, no.

I’ve also been informed of some key differences

•         Countries were in far less debt and austerity was not a commonly used word
•         EFSF didn’t exist and few people knew that the IMF wasn’t just for Emerging Markets
•         SOVX has been around for a few years, LCDX and ABX managed to drag down their respective markets much quicker
•         Alternative Method’s of Easing were just that, Alternative, as opposed to mainstream
•         China was doing incredibly well, and ghost town only applied to the old west
•         Companies have lots of cash on hand, after 2 years of record debt issuance

Al this market volatility is not going away anytime soon. But hey, according to remax "It's a great time to buy or sell a home" :)

 

26% of all mortgages in the US are underwater

From the Orange County Register 26% of all mortgages in the US are underwater.

Top 25 Metro Areas	Value	Qtr chg	Yr. chg	Vs. peak	Neg.Eq.
Minneapolis-St. Paul	$160,800	-0.6%	-12.6%	-35.0%	n/a
Sacramento	$203,100	-2.7%	-12.5%	-51.2%	49.5%
Atlanta	$124,200	0.4%	-11.5%	-32.0%	53.8%
Chicago	$172,200	0.3%	-11.4%	-36.7%	42.2%
Detroit	$74,200	2.1%	-10.4%	-53.2%	32.9%
Phoenix	$122,800	-2.4%	-10.4%	-56.5%	67.6%
Tampa	$108,600	-0.4%	-8.7%	-49.9%	56.4%
St. Louis	$131,400	0.0%	-8.3%	-16.5%	28.5%
Seattle	$262,400	0.3%	-8.0%	-31.2%	33.9%
San Francisco	$479,300	0.5%	-7.8%	-31.9%	22.2%
LA/OC	$389,400	-0.5%	-7.2%	-35.7%	20.1%
Portland	$210,400	1.5%	-7.2%	-28.2%	33.1%
Philadelphia	$192,100	0.1%	-6.9%	-18.8%	19.1%
Denver	$196,300	0.5%	-6.9%	-15.5%	39.8%
Cleveland	$111,700	0.8%	-6.5%	-22.8%	37.2%
Baltimore	$222,700	0.6%	-6.3%	-26.1%	28.2%
Orlando	$117,900	0.5%	-6.1%	-53.9%	n/a
San Diego	$350,400	-0.2%	-5.8%	-34.7%	25%
Miami-Ft. Lauderdale	$140,900	1.1%	-5.3%	-54.2%	45.8%
New York	$347,100	-0.3%	-4.7%	-24.3%	17.1%
Dallas	$128,600	1.6%	-4.0%	-10.8%	n/a
Riverside	$185,700	-0.8%	-3.9%	-53.9%	50.2%
Washington, D.C.	$316,500	1.7%	-3.0%	-27.9%	24.9%
Boston	$318,700	2.1%	-2.8%	-20.6%	11.8%
Pittsburgh	$110,400	2.8%	2.7%	-1.0%	6.7%

If Saskatoon were to be on that list, it would be the seventh most expensive market at an average house price of $305,000 .  Only 5 years ago, Saskatoon's average house price was about $155,000.  Many of these US cities experienced similar appreciation but have completetly crashed. Some were not really subprime driven like Seattle.  Fundamentals like income, GDP growth, inflation don't matter until they do.  Then the bottom falls out.

Gotta watch this video of Dylan Ratigan: MAD AS HELL

Dylan Ratigan.  I never heard of him until today, but I am now a huge fan. This video is sure making its way across the internet. The next five minutes definitely will not be wasted.
Click here if the video link does not work

Visit msnbc.com for breaking news, world news, and news about the economy

Saskatoon Housing Starts July 2011

CMHC is out with their monthly housing start report here
From the Globe and Mail

Canadian housing starts unexpectedly climbed 4.3 per cent in July, data showed Tuesday, setting the third quarter off to a strong start in new home construction and maintaining its role as a key support to the economy.

Saskatoon CMA saw 203 housing starts in July, down 3% from July 2010.  Jan to July housing starts have totaled 1699 which is 42% higher than the 1199 at the same time last year.

These charts I made are of just Saskatoon not Saskatoon CMA.  You can see how the last 13 months our so has been the strongest for housing starts..  Lots of homes coming down the pipeline.  As long as demand is continually juiced with low interest rates, easy lending and emotional buying it should get absorbed.  But if demand falters because of confidence in world wide markets, then it's 2008 all over again for sales and prices.

Someone made 10 Billion Dollars in one day

Remember this post from two weeks ago. The 1 Billion Dollar Armageddon Trade Against the United States

Someone dropped a bomb on the bond market Thursday – a $1 billion Armageddon trade betting the United States will lose its AAA credit rating... The value of the trade was about $850 million dollars. In simple terms, if that was a direct bond buy, no one would be talking about it.
However, with the use of futures, you have to have margin capacity behind the trade. That means with a single push of a button someone was willing to commit more than $1 billion of real capital to this trade with expectations of a 10-to-1 return ratio.
You only do this if you see an edge.

I wonder who this was and if they had any insider dealings.  $10 Billion bucks, not a bad payday.

What will the stock market crash do to the Canadian housing bubble?

The TSX is down over 13% in just two weeks, bringing back fears of 2008.

From Sept 20th to Oct 20th in 2008, the TSX lost over 25%.

If Canada is supposed to be a safe haven, why has there been a 13% drop?  My theory and it is just a theory, that there has been quite a bit of speculation in commodities.  And there could be more carnage in store for commodities if the world wide debt crisis continues.  And so would go the housing bull's idea that resources will save the housing market, even though Australia, another commodity rich nation, is now experiencing the first stages of their housing bubble pop.  Just for reference, POT lost 5.54% today, oil dropped 6% today and over 30% since the spring.

How does this affect house prices?
A loss in confidence and tightening of credit led to this for Canadian house prices in 2008. From chpz.biz Some places lost over 18% from the peak to the trough, others not so bad.  Calgary and Edmonton got clobbered in 2008.

This is what it looked like for Saskatoon house prices in 2008 during the panic.  The average price dropped about 10% in just a few short months.

In the short term, real estate is driven by emotions.  Over the long term, real estate is driven by fundamentals.  And if we look at the fundamentals, Saskatoon housing is 30% overvalued compared to the long term trend.  There is a lot of fear in world wide markets and if the declines continue, it is absolutely the wrong time to overpay for a house with a 5 or even 10% downpayment.  If the stock market continues to decline like 2008, I am expecting a demand pullback and supply to grow in the housing market.  You can guess what that will do to prices.

Less people working in Saskatoon, but house prices and sales up

I take a couple of days for a holiday away from computers and newspapers and all hell breaks loose.
Here are a couple of things worth noting other than the debt crisis.

Labour Force Survey shows a drop in workers in Saskatoon
From Stats Canada Saskatoon population increases by 5200, but 3100 less people working year over year.  (page 46)

Sales and Prices up year over year in Saskatoon

From SRAR The month of July was active for Saskatoon REALTORS® selling 403 residential properties that number up 13% from July 2010 when 356 properties sold. The average residential selling price in July was $303,439.00 this number was up 4% from July 2010 when the average selling price was $290,411.00

I love this quote from SRAR at the bottom of the press release.

Job creation in the Saskatoon area remains steady.

Really? Because Stats Canada has shown that jobs are DOWN year over year for quite some time. 

BNN had a few great reports last week on real estate.  Here they are:
Too young to buy a house
Is homeownership really beneficial to society?
The future of real estate

Just a note: Comments are now moderated.  You can thank the Alberta Realtor Troll and our Saskatoon Troll.  If the comment is worthy of discussion, it will be posted.  I welcome comments that challenge my opinion.  Otherwise the comment is going into the garbage.

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Buying an average house in an average housing bubble peak

Some people I talk to say that even with a housing crash ( they don't think it will but if it did) low interest rates will allow people to pay off their mortgage faster than what a housing bust would do to eroding home equity.

Let's take a look at the numbers.  An average bungalow in a decent area will set you back about $340,000.  At a 3.75 five year mortgage term over 25 years the monthly payments are $1742.  At the end of the 5 year term, the remaining balance is $294,680.  So the amount paid down in 5 years is $45,320. Not bad.  After 6 years the amount remaining on the balance is $284,561.

A few things to consider, property taxes, home and mortgage insurance, utilities, and maintenance should be added to the monthly cost as well which would push the monthly payment close to $2500 a month.  And we also know that within 3 years of every sale in Canada almost $25,000 is spent on the house. ( 2007 stats)  Some of these are considered "hidden payments". 

Squeezing that $25,000 into the first six years of home ownership and we see that $205,000 is paid out of pocket so you can build equity of $45,320.  But hey, you "own" your home right?

 Buying at the start of a housing bust

The Aftermath of Financial Crisies

We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years

So if Saskatoon has an average housing bust of 35% over 6 years, that same house would be worth $220,000 in 6 years.  But you owe $284,561.  Negative Equity.  Negative equity is another term for throwing money away.

Let's say that you rent a comparable unit for $1800 ( yeah, rents are in a bubble in this city as well, but you can find decent rent prices).  Over 6 years, you will spend $129,600 on rent and would save just over $75,000 by renting compared to owning on average and this is just money out of pocket.  The economic cost of renting compared to owning is well over $150,000 in 6 years if prices were to fall by 35%.  While nobody can say for sure how far the housing market will plop, by some measurements Saskatoon's real estate market is over 30% overvalued when looking at some economic measurements.

If renting is throwing money away, then "owning" a home in this situation is akin to borrowing money from the bank and burning it.