If we listen to our politicians, business leaders, the real estate industry, the mass media, and many academics, we have nothing to worry about. The Saskatchewan economy is strong. Canada’s banks are the safest in the world. We can see that builders are moving fast to add new houses to the local market. Compared to most places in Canada, Regina’s houses are still relatively inexpensive.

Trends in the U.S. housing market
    All indications are that the United States is in a recession. The financial sector of the economy has yet to deal with the mountain of “mortgage backed assets” and other derivatives which they are hiding from the public and their stockholders. Governments everywhere are pledging trillions of dollars of taxpayers’ money to try to rescue the financial industry. The bubble in the natural resources industry is deflating. In every corner of the globe, governments are facing a financial and economic crisis. A world wide recession appears quite possible.
    In the United States the median price on the sale of an existing house peaked in July 2006 at $230,200; the median price in September 2008 was $191,600. To return to the long term trend of the past thirty-five years, the price will have to move down to within the band of $150,000 and $175,000.
    The U.S. housing crisis continues, with foreclosures climbing and the price of houses falling in almost all markets. With over a 10-month inventory of unsold new and existing homes on the market, builders have virtually stopped construction.

The housing bubble in Canada
    Between 1998 and 2007 the average sale price of an existing home rose 65%, discounted for inflation. During this period there was a 28% increase in the general rate of inflation. Many commentators have argued that the price bubble in the housing marked peaked later in Canada because of changes to the rules on mortgages introduced by the Central Mortgage and Housing Corporation (CMHC) in December 2006. CMHC suddenly announced that it would begin to insure mortgages which included no down payment, interest only, and up to 40 years amortization. In 2007 40% of all new mortgages were for 40 years. In reality, these mortgages are not that much different from the U.S. sub-prime and Alt-A mortgages. Their owners will be in financial difficulty if the price of houses continues to fall and Canada moves into a recession.
    The housing bubble in Canada peaked in the early part of 2008. House prices have begun to fall. The average price of a resale house in September 2008 was $289,916, down 5.4% from the previous year. CMHC projects that for 2008 the sale of houses will decline by 13.5% from 2007, and then another 4.2% in 2009. New housing starts are expected to fall by 16% in 2009. The estimates for 2009 assume a lower rate of economic growth but no recession in Canada.

The Regina housing market
    The housing market is still in the bubble phase in Regina. CMHC reports that in September 2008 new housing starts in Regina were up by 48% over 2007. The average price for the sale of an existing detached bungalow was $279,000 in September, up 34% from the previous year. The Regina Real Estate Board reports that listings are up dramatically but sales are starting to level off.
    Saskatoon is quite different. Housing starts in September 2008 dropped by 30% from the previous year. The average sale price in October 2008 was $280,000, still below the national average of $315,400.
    David Wolfe and Carolyn Kwan, housing specialists with Merrill Lynch Canada, believe that Canada is “tracking the United States with a two-year lag.” While the decline in house prices in Canada has been more moderate so far than in the United States, they believe that this should change. The increase in new house construction in Canada is larger than in the United States during the peak. This “overbuilding,” they argue, will likely contribute to a decline in the price of houses in 2009.

To rent or own?
    As a general rule, this would not be considered a good time to buy. The economy is definitely slowing down and a recession is predicted by many economists. There is rising unemployment, falling wages as well as higher mortgage rates. The time to buy a house is when prices are rising, not falling.
    Real estate economists have noted that over the past 20 years there has been a close correlation between the price of a house and the cost of renting. The price-to-rent ratio has been fifteen times annual rents. So what does this standard say about Regina?
    I looked at three bedroom town houses available for rent from Boardwalk Real Estate. At seven different sites, their average monthly rent is $1200. Over a year the total rent for one of these units would be $14,400. Multiply that by 15 (the price-to-rent ratio) and this produces a total of $216,000. If the three bedroom bungalow that you want to buy costs more than this price, then you should seriously think about renting.
    There is nothing wrong with renting. Indeed, mainstream economists argue that you come out ahead by renting rather than owning. Thirty-five percent of Canadians are renting their home. One of the main problems we have in Regina (and Saskatchewan) is the fact that the capitalists in the housing business can make more money building cheap condominiums, and we have a general shortage of rental housing that is affordable, adequate and suitable. This is one of the drawbacks of allowing our  governments to get out of the housing business.

John W. Warnock is a Regina political economist once again working on the issue of affordable housing.
   
   

   
   

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