How Hard Are the Big Canadian Cities Hit by the Housing Bubble

by admin on May 22, 2010

If you want to move to Vancouver and have been looking for a home to buy, you are probably quite surprised by the prices in real estate there. Vancouver Sun reported that depending on the neighborhood, a typical bungalow will cost you between $674,000 and $1.1 million – hardly an affordable price unless you are the owner of an oil well in the Middle East or the like. And the other types of housing in Hollywood North claim just as, if not heftier prices. At the same time, data by Canada Statistics shows that the median family income in Vancouver is just above $80,000.

The situation is pretty much the same in other large cities, such as Victoria and Toronto, where housing prices have skyrocketed compared to previous years. Vancouver Sun reports that in Toronto, the price you would have to pay for a standard bungalow in the first quarter of 2010 was 13.3 per cent higher than that of the prior year while for a condo of medium size, you would have to fork out 10 per cent more than in 2009. 

Are these high prices an indicator of a housing bubble? Definitely, since the situation in these cities is even worse than that during the US housing bubble. When home prices soared at Canada’s southern neighbor, the ratio of the average household income to the average house prices in the affected localities was 1:10. In Vancouver, the same ratio presently sits at 1:11.   

Surprisingly, some Canadian cities have not followed suit to that extent and in places like Edmonton, Calgary, Montreal and Ottawa, home prices did not increase as drastically from previous years. Persons who seek to buy a regular single-detached home in Edmonton will need approximately $380,500. While this price is below the 2007 peak, it is still 11 percent up, compared to the last year. The median family income in the city is at $80,744 (Statistics Canada), pointing to an obvious fact – 4.75 annual salaries are needed to purchase a house if you don’t spend a dime on groceries (which is hard to imagine or do).

But let’s look at another piece of evidence. At the end of last year, RBC Economics carried out a nation-wide survey which measured the percentage of pre-tax income needed for the payment of a 25-year mortgage at the current home prices. The results were quite telling: for the last quarter of 2009, the national average income percentage necessary to cover the mortgage on a detached bungalow was 40.6 while in Vancouver it was 69 percent (Toronto did a little less bad with a percentage of 49). In Edmonton and Calgary that figure was 32.9 and 37.1 per cent, respectively. 

Similar was the situation for mortgages on standard two-storey houses: on the average, residents of Vancouver would need 80 per cent of their income to meet their obligations and those of Toronto – 58 per cent. For Edmonton and Calgary this rate was close to the 40 per cent mark.

This trend, which so conspicuously emerged from the survey, has continued in 2010 and is now a plain sight even to individuals uninitiated in the mysteries of real estate housing. 

So, what general conclusion can be drawn from these facts? Well, for one, it seems that while provinces like Alberta are slowly recovering from the recent financial crisis, other less fortunate areas like Vancouver, Victoria, and Toronto are undergoing a relapse in the housing sector, whose outcome is hard to guess but definitely warrants a close watch.

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