The real estate industry reports that across Canada listings are up and sales are down, and a “cooling in prices” is beginning to develop in a number of markets. In Regina 264 homes were sold in July which was down 37% from the previous year. For the first seven months of 2008, house sales were off 12%.

    Statistics Canada reports that across Canada building permits were down 5.3% from 2007. New house and condominium construction in Saskatoon and Regina is down from the previous year.

When are houses overvalued?
    Economists point out that historically prices for individual houses in North America have remained relatively constant in the period since World War II. Prices have been directly related to household incomes. The trend is that the average price of a house has cost around three to four times the total income of the household. In the United States this changed dramatically beginning in 2001 with the housing bubble. The average price for a house rose to between 4.5% and 5% of household income.

    As we all know by now, this bubble was caused by the sudden availability of very soft mortgages, known as “NINJA loans” (no income, no job, no assets). Mortgages were pushed by brokers using new credit and borrowing arrangements encouraged by the government deregulation of the financial industry. These included 40-year mortgages, 100% financing of purchase price, and no serious investigation of the credit standing of those buying. The subprime mortgage loans (very low interest rates for the first few years, followed by an increase to market rates) were only one tool of this move to “free market’ financing. During the boom home equity loans greatly expanded: these loans were to access the equity tied up in a home, based on supposed market value. The capital borrowed was very often spent to buy new cars and trucks.

Canadian mortgage rules tightened
    In Canada those who do not have a 20% down payment on a house or a condominium have been required to obtain mortgage insurance, very often with the Central Housing and Mortgage Corporation. While Canadian banks and other financial organizations do not face the capital losses of their American and British counterparts, they had ventured into the area of 40 year mortgages and 100% financing. But this has now changed.

    As of October 15, 2008 all insured mortgages must meet new standards set by the federal government. The new rules include:

    * Mortgage limits of 35 years.
    * A 5% down payment is required.
    * Borrowers must have a minimum credit score of 620 by the rating companies.
    *New stricter loan documentation standards are required

    The new rules require a debt-service ratio of a maximum of 45% of household income going to total housing costs. In some markets, like Vancouver and Calgary, this will reduce the number of people eligible to obtain a mortgage. It is expected that these new rules will weaken the housing market in such centres.

John W. Warnock is a Regina political economist and author.

Comments

Written by pelliott on 2008-08-14 09:55:48 I was out of the province, and the 50 per cent overvaluing figure for Sask was widely reported. I'm surprised to return and hear it was not in the newspaper here, as it should be important news for home buyers.

Shouldn't be surprised Written by shagya on 2008-08-16 07:30:03 The reaction of the Leader Post should not surprise anyone. Everywhere in the financial world there is talk about serious problems caused by the "credit crunch". The Bank of International Settlements which is the most authoritative voice in the banking sector has published a warning about the possibilities of an economic depression. The LP isn't likely to reprint this either.

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