Credit Scores May Hamper Housing Comeback

Taken from The Wall Street Journal

By Phil Izzo

Homeownership is potentially out of reach for nearly a third of Americans, according to a new report that highlights the difficulties in the housing market in the wake of the Great Recession.

Bloomberg News

Potential home buyers may be among the hardest hit by the recession.People with a credit score below 620 who went searching for a loan were unlikely to receive even one quote, according to real-estate web site Zillow.com, even if they offered a down payment of 15%-25%. Zillow notes that 29% of Americans has a credit score this low, according to data provided by myFICO.com.

“Today’s tighter credit is a predictable response by banks after the foreclosure crisis, but also keeps a cap on housing demand, which is important for the greater housing market recovery,” said Zillow chief economist Stan Humphries.

While banks may be right to try to avoid repeating mistakes made during the housing bubble, an over-reliance on credit scores could create problems for the real-estate market. Banks shouldn’t be giving mortgages to borrowers who can’t afford to pay them back, but if people with sizeable down payments and solid sources of income are being turned down because of credit scores, that’s not healthy, either.

Many factors influence credit scores. A temporary spell of unemployment and the resultant hardship can easily push them down. According to a new report from the Pew Research Center, the majority of Americans may find themselves in this situation. Pew separates its respondents into two groups, one that “held its own” — 45%, a number similar to myFico’s estimated 47% of Americans who have the best credit scores (over 720) — during the recession and another that “lost ground” — 55%.

The Pew report’s demographic breakdown may be even more troubling for housing. Those who “held their own” tended to be older people who already owned homes. Real Time Economics recently noted a potential “shadow demand” for housing from people who postponed plans to form new households in the wake of the recession, but that pool of potential homeowners was also more likely to have lost ground during the recession. According to Pew, 69% of people age 18-49 and 60% of those 30-49 lost ground.

It’s likely that those groups, who are the most likely first-time and move-up home buyers, took a hit to their credit scores during the recession. Zillow’s data indicate that even if they’ve recovered from the worst, the may not be able to get a mortgage, and if they do, they also are more likely to face higher interest rates.

Why (housing) bubbles aren't good for you

And there’s certainly a lot of bubble talk going on today – especially in relation to the Canadian real estate market.

The bubble isn’t the bad part. That’s when prices inflate and living is good. As most economists will tell you, it’s the bursting that you should be worried about.

But what exactly is a bubble anyway?

Classic economic theory says a bubble is simply an overly rapid expansion of a good or investment followed by a severe contraction, also known as a crash. That’s the not-so-great part.


“A bubble forms when there is a hot new investment idea that capture’s everyone’s imagination,” says David Rosenberg, chief economist for Gluskin + Sheff & Associates.

According to Luis Seco, a professor of finance at the University of Toronto, the definition of an asset bubble is simple:

“It is when asset prices are for whatever reason unfairly inflated. But at the time, it is difficult to know whether it is overpriced unless you put it in relation to other goods and services, so it’s difficult to see it coming.”

Bubbles aren’t an unusual occurrence in markets. Just ask the folk who bought Nortel stock at the height of the technology bubble in 2000 at $1,245 a share. The company was worth more than a third of the entire Toronto Stock Exchange before it plummeted to penny stock status, eventually filing for bankruptcy protection.

“When people start using phrases like ‘this time it’s different, or we have a new paradigm, or I better buy now or I won’t be able to afford it,’ then you know you’re in trouble,” says economist Will Dunning.

In the case of the technology bubble, greed and speculation had set in. It was also difficult to value dot-com stocks since most companies were burning cash and traditional methods of valuing a company went out the door. The subsequent stock market crash caused more than $1 trillion in wealth to be wiped out.

While tech stocks were seen as the “hot new idea” back then, that concept can be extended to the housing market where people see property as a hot investment rather than as a place to live, says Rosenberg.

“The new idea becomes a bubble based on three criteria: excessive leverage, widespread participation and dramatic overvaluation.”

Perhaps the first recorded instance of an asset bubble was the Dutch Tulip mania of the 1600s. At the peak in 1637, a single most-sought-after bulb equalled the price of a luxury home on the finest canal in Amsterdam.

Many investors grew fabulously wealthy, with more people purchasing them with intent to flip them for a profit. But the market crashed spectacularly, wiping out parts of the Dutch economy. Substitute tulips for condos, and you pretty much have the Toronto market crash of 1989.

“When you think about it – it’s completely crazy that the Dutch would do something like that but when you are in the bubble you think it is perfectly normal,” says Toru Yoshikawa, a former professor of strategic management at the DeGroote School of Business in Hamilton, who now teaches at Singapore Management University.

Yoshikawa lived through one of the greatest stock market and housing bubbles in history. As a young executive at Canadian-based CIBC bank in Tokyo, he witnessed the implosion of the Japanese stock market in 1989 followed by the bursting of the real estate market. At one point the grounds of the Imperial Palace were said to be worth more than the entire state of California.

The fall of the Japanese economy followed two decades of stagnation. Some economists now wonder whether the American economy, which has seen a massive retraction, will suffer the same fate.

“Everyone said at the time that prices couldn’t go down, that there was only so much land available. It was like brainwashing,” says Yoshikawa. One banker friend ended up buying four condos in downtown Tokyo and almost went bankrupt as a result, he says.

“I was tempted to buy something myself, just because everyone was buying something,” says Yoshikawa. “Now I see many of the same things happening in Canada.”

Another definition of a bubble: They emerge when prices increase more rapidly than inflation, household incomes and economic growth, according to David Macdonald, an economist with the Canadian Centre for Policy Alternatives.

A number of factors can contribute to bubble conditions, including access to easy credit and low mortgage rates.

The bubble burst in the United States because there were other factors, such as sub-prime mortgages in loosely regulated financial markets which caused prices to peak in 2005 – and decline every year since, according to Macdonald. Currently, almost one quarter of U.S. households are “under water,” where the mortgage is more than the market value of the home.

Most economists have ruled out a U.S.-style housing bust in Canada, particularly because we didn’t have the same volume of sub-prime loans. Tougher mortgage restrictions introduced this year means that risky zero-down, 40-year mortgages are no longer allowed.

“Canadian housing policies…continue to mitigate the risk of a massive wave of defaults in the future,” says economist Jim MacGee, author of a C.D. Howe Institute study saying a crash is unlikely.

Still, MacGee’s more bullish report came out only a day after Macdonald’s study, which was titled: “Canada’s Housing Bubble – An Accident Waiting To Happen.”

The case of the dueling reports led to more confusion over the direction of the housing market.

But in reality, the two economists did not have completely diametric views. Macdonald gave three scenarios for a housing bubble bursting, and the U.S.-style example was the most extreme and unlikely he looked at.

Rosenberg, one of the most influential economists, and formerly chief North American economist for Merrill Lynch, says determining if we are in a bubble remains a “close call. If it wasn’t a bubble at the recent peak, then it was one giant-sized sud.”

While most economists agree that sales of homes have gone beyond historical and demographic norms and prices are likely over-inflated in comparison to income, they disagree on whether the third element to be found in most bubbles truly exists in the Canadian housing market: Mass hysteria.

“The human part of it, the psychology is missing – are people really buying these homes because they expect values to rise constantly?” asks Dunning. “Most of the buying we’re seeing is from people who are not being speculators.”

“In a bubble market you have to find that greater fool, the persons who will always buy that good from you at a higher price,” says CIBC Economist Benjamin Tal.

Economist Yoshikawa agrees that Canadians have been much more conservative than his Japanese counterparts.

“In Japan, no one was questioning anything. It was a pure psychological euphoria. That is a key ingredient of a bubble. In this case, Canadians are not that extreme.”

Tell that to frustrated buyers who were caught up in bidding wars earlier this year. Only a few months ago, buyers lined up overnight to be first in line to get condominiums in North York. It was the same scene when buyers camped out at a housing site in Mississauga for three weeks to get first crack at buying a property. Justin Beiber fans could identify.

Still, most consumers don’t care about the semantics of whether the market is in a bubble or not. They just want to know whether prices are coming down.

Here, most economists at least agree that prices will have to fall or level off over the next several years.

“I don’t think you should be surprised if we see a 10-per-cent drop in average housing prices,” says CIBC’s Tal.

Dunning says the market is not in a bubble, but simply in a corrective phase, with prices coming down by 5 or 10 per cent.

The bursting of a bubble, as in the U.S., would be far more radical, with prices dropping by 30 per cent in three years. In Toronto, starting in 1989, prices fell 28 per cent in four years. A variation of this scenario might be possible if interest rates keep going up and government does not clamp down further on mortgage regulations, argues economist Macdonald.

A correction, meanwhile, is a short-term realigning of the market, but not severe enough to be called a crash – the aftermath of the bubble bursting.

“There is a difference between a popping of a bubble and a correction,” says Tal. “What we have seen are house prices overshooting and coming back to earth, but I don’t think it is going to be a dramatic fall.”

So why talk about bubbles?

“Because they’re a lot more sexy” says Tal. “People immediately understand what you’re talking about – and boy do they pay attention.”

Smart-shelter rules of thumb

• Buy a home you want to live in, not flip. Most studies show that in the short run, renting a home is cheaper than buying one. In the first years of purchase, your monthly payments are mostly paying off interest and the only person you’re making rich is your banker.

• Don’t buy during a boom. Markets move in cycles. We’ve been in a strong up cycle over the last decade, but the laws of market gravity will not be defied. What goes up can eventually come down.

• Make the biggest cash down payment you can afford. It’s simple. The more money you put down, the less interest you will have to pay on your property. This could result in substantial savings in the long run.

• Location, location, location. All the funds you’ve invested to improve your home’s “curb value” will be for naught if the neighbourhood is a no-go zone. It’s better to buy a fixer upper in a good neighborhood than having the best house in a run down area.

• Be Realistic. Buying a home is an emotional purchase, but don’t bite off more than you can chew. Make sure you keep within your financial comfort zone. A pool and a picket fence might be ideal – but not when you’re stressed out about paying the monthly dues.

How mortgage market has tightened

Robert Selna,Carolyn Said, Chronicle Staff Writers
San Francisco Chronicle

Sunday, September 12, 2010

In 2006, Arthur Brito, a self-employed Bay Area landscape designer, and his wife were prequalified for a $625,000 home loan. After being priced out of the housing market by inflated values, they started looking again last year, but quickly learned that the mortgage crisis had changed their fortunes: They now qualified for a loan of only $280,000.

Brito's experience illustrates how residential lending practices have shifted dramatically, from a market where high-risk buyers got loans far exceeding their ability to pay to one in which borrowers who are employed and have good credit and a healthy down payment may be out of luck.

"Financially, we are the same people as we were in 2006, so it's pretty frustrating," said Brito, 33. "Our incomes haven't changed, but the rules have changed, so we don't really talk about buying houses anymore. We've shelved it."

Like Brito, many borrowers are suffering a housing loan hangover precipitated by historically lax lending standards.

In 2006, chicanery driven by avarice infected the mortgage industry food chain: Some mortgage brokers pushed risky loans, borrowers lied about their income, appraisers inflated home values, lenders originated shaky mortgages, Wall Street firms bundled them as securities and sold them, and ratings firms characterized them as safe investments.

At the center of this distorted world was the subprime loan, issued at a high interest rate to borrowers with tarnished credit, checkered employment history and little or no money in the bank. Wall Street firms such as Lehman Bros. traded in the lucrative high-interest loans, which yielded quick profits for brokers who sold them and lenders that originated them.

By 2005, the subprime market was $630 billion a year and growing - triple the $210 billion market in 2002.

Mortgage-backed securities create the liquidity that allow banks to originate mortgages, so they are not going away, but in many respects real estate lending has returned to its more traditional and conservative standards.

Higher standards
Borrowers generally need good credit, relatively large down payments, stable employment and a high percentage of income to debt to get a home loan. Dubious mortgages - with no money down, no documentation of income, adjustable rates that skyrocket after an introductory period - have largely gone by the wayside.

"The bottom line is that we have had a complete reboot of the mortgage lending system in this country," said Keith Gumbinger, vice president at HSH Associates, a leading publisher of mortgage and consumer loan information.

Gumbinger said there has always been risk associated with the different facets of mortgage lending, but during the housing boom, one risk was layered on top of another. Now, much of the risk in the market is undertaken by the federal government.

Since the subprime market dried up, buyers with lower down payments and subpar credit increasingly have turned to Federal Housing Administration-backed loans. The FHA requires just a 3.5 percent down payment for buyers who obtain loans from government-approved lenders and pay an insurance premium. The program is funded by the premiums.

Historically, the FHA program had been more popular in states with lower housing costs. That changed with the Economic Stimulus Act of 2008, which doubled the maximum loan the FHA insured to $729,750 in high-cost areas. As a result, FHA lending has boomed in the Bay Area during the past two years. Nationally, FHA lending has gone from 2 percent of all loans originated in 2006 to 30 percent in 2010, according to Gumbinger.

The mortgage-backed securities markets now are dominated by Fannie Mae and Freddie Mac, the nation's largest buyers and sellers of mortgage-backed securities, which became insolvent in September 2008 and were placed under government conservatorship. By law, they are allowed to buy only conforming loans, which include debt-to-income ratio limits and income documentation requirements.

"With the end of Lehman Bros. and others, the machines that create credit came to a standstill," Gumbinger said. "The securities markets are now broken for mortgages that are not supported by Fannie and Freddie."

With subprime loans gone and tighter government regulations, mortgage bankers labor to qualify buyers who don't fit the mold of the ideal borrower: traditional job, good credit, substantial down payment and low debt-to-income balance, according to East Bay mortgage banker John Schaff.

While self-employed people like Brito could have applied for a "stated income" loan three years ago with little documentation, they now have to supply business tax returns and a detailed account of their profit and costs, creating a complex formula and reducing their chances of approval, Schaff said.

Self-employed 'risk'
Because Brito is self-employed and gets more work in good weather than bad, he is considered a lending risk in today's market. As a result, his wife's modest income as a nurse at a nonprofit clinic was the primary basis for the couple's $280,000 loan limit.

"I would have had no problem getting Arthur a loan at a much higher level three or four years ago," Schaff said. "Generally, the new lending standards are a good thing, but he's an example of how the pendulum may have swung too far in that direction."

Bank of Canada raises rates, but sees soft recovery

Hike will be noticed immediately by those who have variable mortgages, lines of credit

By Fiona Anderson, Vancouver Sun September 9, 2010

The Bank of Canada raised its benchmark lending rate Wednesday, the third increase in just over three months.

The bump of 25 basis points brings the bank's target rate for overnight loans between financial institutions to one per cent. Canada's largest banks followed suit by raising their prime lending rate to three per cent.

The increase in prime lending rates will be noticed immediately by anyone with loans -- like variable mortgage rates or lines of credit -- that calculate interest according to the prime rate.

People with big lines of credit "are the people who are going to hurt," said Andrey Pavlov, associate professor of finance at Simon Fraser University.

But that's what the Bank of Canada was thinking when it raised the overnight rate, he said. The bank wants to slow consumption and it does that by hitting those who consume the most.

"Now they're not out there to hurt anyone in particular, but they do need to slow down the economy because if we grow too fast we're going to get inflation," Pavlov said.

But whether fixed mortgage rates will be affected is a different story. While the central bank has been raising its overnight rate since June, commercial banks have been lowering mortgage rates.

"So it doesn't necessarily mean that the fixed rate will go up," said Tsur Somerville, director of the centre for urban economics and real estate in the Sauder School of Business at the University of British Columbia.

"But it certainly means the variable-rate mortgages will go up [and] so by definition it has to dampen the housing market."

With the higher variable rate there will be some downward pressure on house prices, he said. But at the same time, the strengthening economy should have a positive effect on the market.

"And the strength of the economy is going to be a more important factor for the housing market," Somerville said.

Despite the rise in variable rates, and the uncertain effect on fixed-rate mortgages, Pavlov believes that variable-rate mortgages are still the way to go, especially since he believes this rate increase will be the last for some time to come.

"I wouldn't be surprised to see another year with no further increase," Pavlov said.

So although people who took out a variable-rate mortgage six months ago or a year ago now are paying a little bit more compared to a fixed-rate mortgage they could have taken out six months ago, they are still way ahead, he said.

"If [rates] do hold for another year you'll surely be ahead regardless of what happens afterwards because you're paying down your mortgage. You should be keeping your payments high; then even if interest rates go up they are going to be on a lower balance," Pavlov said.

But whether the Bank of Canada will hold rates steady or not is an open question. In its announcement, the central banker said economic activity in Canada had been softer than expected and that the economic recovery was now expected to be slightly more gradual than projected. But it also said "consumption growth is expected to remain solid and business investment to rise strongly."

As a result, "any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook," the bank said.

Douglas Porter, deputy chief economist at BMO Capital Markets, called the central bank's statement "a bit more hawkish than we expected."

"The Bank of Canada clearly retains its tightening bias, and seems generally unfazed by the recent cooling in the Canadian economy," Porter wrote in a note. "While we had been expecting the bank to now move to the sidelines for a spell, it appears that it will take a deeper slowdown in domestic spending ... than what we have seen so far to prompt them to stop raising rates."

Avoiding the crash

For all the ominous talk of a housing market collapse, the end result could be yet another rebound in prices

by Jason Kirby on Saturday, September 4, 2010 10:20am
PHOTOGRAPH BY SIMON HAYTER

As the housing market stalls, several people who bought pricey Vancouver condos before they were built are suing to get out of the deals. In Toronto, condo sales during the first half of the year fell for the first time since 1994. And at least one homeowner near Halifax just offered to give away his house for free, so long as whomever took it assumed the $395,000 mortgage. Everywhere, tales of real estate woe and miserable sales data have prompted predictions of a crash. James Grant, a prominent U.S. investment newsletter author well known for his bearish outlook on the American economy, has warned house prices here are primed to fall: “The median Canadian house is, in fact, certifiably unaffordable.” Even if prices tumble, though, as happened in 2008—when the economy was also teetering and house prices were at record levels—they could still make another surprising comeback.

No question Canadian prices are outrageously high. As Grant points out, compared to rental rates, home prices in Canada are more than 60 per cent above the historical average. And with home ownership rates and household debt levels higher than they’ve ever been, Scotiabank economist Derek Holt says there’s nowhere for prices to go but down. “This time when we come off the boil, prices are going to stay lower,” he says.


That’s quickly becoming the prevalent view. And another modest eight to 10 per cent correction could occur. But if that happens, there are reasons to expect a repeat rebound, as happened previously when the Teranet-National Bank house price index slipped eight per cent in 2008 and then roared back 18 per cent, reaching an all-time high two months ago. That’s because mortgages remain wildly cheap and, if anything, are getting cheaper. True, the Bank of Canada has raised interest rates twice since June to 0.75 per cent. That only affects homebuyers taking out variable-rate mortgages, though, which currently sit at 2.75 per cent. The fact is, lenders are furiously cutting fixed-rate mortgages. Since May, five-year fixed mortgage rates have fallen to 3.99 per cent from 4.75 per cent, according to Canequity.com.
Another reason house prices rebounded so sharply after the 2008 drop was that there were far more buyers than sellers. As the financial crisis hit in 2008, new home construction slowed while sellers yanked properties off the market, lest they get caught in a downward price spiral. But when the Second Great Depression in Canada turned out to be Just Another Recession, home buyers flocked back to the market before sellers had a chance to react, thus driving up prices. A similar phenomenon could play out again.

But if another rebound occurs, it will likely be triggered by Ottawa. The Harper government has repeatedly intervened to micro-manage the $2.8-trillion housing market. Before the U.S. subprime mortgage crisis hit, Ottawa dramatically loosened mortgage rules, allowing Canada Mortgage and Housing Corporation to insure zero-down, 40-year mortgages. Ottawa reversed course when such loans were shown to be dangerous. But with the recession, Ottawa swung back into action. It offered first-time home-buyer subsidies, allowed Canadians to withdraw more from RRSPs to buy homes, and authorized CMHC to take $75 billion of mortgages off lenders’ hands. Finally, as the market began to overheat in February, Finance Minister Jim Flaherty tightened mortgage lending standards. But Holt says Ottawa may loosen mortgage restrictions once again if the housing market craters. And it seems entirely possible the government will use its clout through CMHC to spur banks to lend and people to buy.

Efforts to halt prices from falling sharply might keep homeowners, and hence millions of voters, happy, but it’s bad economic policy. First-time buyers would be forced to take on even more dangerously large mortgages. At the same time, if the housing market continues to swing up and down, that eventually translates into stagnation—albeit at high levels.

Which is why many believe it’s time to let the housing market pursue its own trajectory—and, given recent data, that would appear to be down. “There’s a strong case to be made for letting the markets follow their natural evolution, and the U.S. offers a good lesson,” says Holt. “Every time they’ve tried to use stimulus to avoid what’s inevitable in the long run, they end up making things worse.”

5 facts you should know about real estate transactions and your estate plan

By Maria Baler/Columnist

Wicked Local Dedham

Posted Sep 05, 2010 @ 07:00 AM

DEDHAM — Real estate transactions happen with increasing frequency these days, and while real estate can be easily transferred or mortgaged, it is important to seek advice from a qualified professional to adequately protect your property and maintain the integrity of your estate plan.

For example, transfers of real estate between family members and into or out of trusts are commonly done for estate and long-term care planning purposes. Further, the low interest-rate environment we are currently experiencing has made refinancing mortgages more attractive than ever. However, any time you undertake a transaction that involves your real estate, keep in mind the impact it may have on your estate plan and related matters.

Here are five facts to keep in mind when transferring or mortgaging real estate.

1. Homestead Protection can be disturbed by certain real estate transactions. A Declaration of Homestead is a document that is recorded at the Registry of Deeds to protect up to $500,000 of equity in your home from claims of creditors. A transfer of your home to a family member or a trust can disturb the homestead protection. Some attorneys interpret existing law to provide that refinancing a mortgage can terminate homestead protection if there is language in the mortgage document that waives the existing protection. If you have filed a Declaration of Homestead, make sure you seek the advice of your attorney before entering into any real estate transaction to ensure your homestead protection is maintained.

2. Changing property ownership can affect real estate tax exemptions. Some cities and towns in the commonwealth offer property tax exemptions for owner-occupants of property, for owners who meet certain financial criteria, or for veterans and their spouses. If ownership of property is transferred to a trust or to another family member, these exemptions may no longer be available. If you are eligible for a real estate tax exemption from your town, be sure to investigate this carefully before transferring title to your property so that you do not inadvertently lose a valuable benefit.

3. Title insurance policies can be voided by a change in ownership. Many people purchase owner’s title insurance when they purchase real estate. This coverage offers valuable protection against title defects. Because the decision to purchase title insurance is often made in the haste of purchasing property, many people do not remember they have title insurance. Be aware that transferring the ownership of your property to family members or to a trust can terminate your title insurance coverage. Check with your title insurance company on the steps necessary to continue your title insurance protection when you transfer your property to a trust or to a family member. Often an inexpensive rider is all that is required to continue this valuable protection.

4. Transferring property into or out of trusts should be handled with care. You may have established one or more trusts as a part of your estate plan. Real estate may be held in trust for a variety of reasons, including avoidance of probate, estate tax savings, asset protection, etc. In connection with refinancing your mortgage, your banker or real estate attorney may suggest or require that you remove the property from the trust in order to refinance the mortgage. This is not uncommon. However, it is vital that you make your estate planning attorney aware of the transaction so that she can properly advise you about transferring the property back into trust after your financing transaction is complete, and about any other effects such a transfer may have. Failure to do so may adversely affect the estate plan you so carefully created.

5. Transfers of mortgaged property must be done with awareness of the implications. If you have a mortgage on your property, a bank or other lender has agreed to lend money to you on the condition that you agree that your property will serve as security for that loan. Most mortgages prohibit any transfer of ownership without the bank’s consent; however, federal law permits transfers to certain trusts and family members under certain circumstances without violation of the terms of the mortgage. However, your mortgage, the applicable law, and the circumstances of the particular transaction should always be reviewed and legal advice obtained before undertaking a transfer of mortgaged property to determine if the consent of the bank is required.

No matter how simple a real estate transaction may seem, it is always worth taking the time to obtain good advice and ensure you understand all aspects of the transaction.

Attorney Maria Baler is an estate planning attorney and a partner with the Dedham firm Samuel, Sayward & Baler LLC. She is also a director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA). For more information, visit www.ssbllc.com.

Copyright 2010 The Dedham Transcript.

Calgary housing 'bubble' at precarious 30-year peak, report cautions

Steep rise in 6 Canadian markets 'an accident waiting to happen,' warns Canadian Centre for Policy Alternatives

By Mario Toneguzzi, Calgary Herald August 31, 2010

The report, Canada's Housing Bubble: An Accident Waiting to Happen, looks at trends in house prices in Calgary, Toronto, Vancouver, Edmonton, Montreal and Ottawa.Photograph by: Archive, Calgary HeraldFor the first time in three decades, a "synchronized housing bubble" has spread to six "red-hot" real estate markets in Canada, including Calgary, says a report released today by the Canadian Centre for Policy Alternatives.

The report, Canada's Housing Bubble: An Accident Waiting to Happen, which looks at trends in house prices in Calgary, Toronto, Vancouver, Edmonton, Montreal and Ottawa, says that between 1980 and 2010 increases were "outside of a historic comfort level."

The report says that on average, inflation-adjusted house prices in these cities have historically held stable at between $150,000 and $220,000 in today's dollars but current housing prices in all six major cities are now over $300,000 on average.

"The bursting of housing bubbles is a rare event in Canada but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen," says David Macdonald, author of the report and research associate with the organization.

The report says that historical trends indicate Canada's hotttest six real estate markets are more unstable than a generation ago, especially after steep house price increases between 2002-2007. Before 2000, house prices tended to hover with a narrow range of between three and four times provincial annual median income. Today, house prices are anywhere from 4.7 to 11.3 times the median income, says the report.

"As house prices rise outside of their historical range they become much more susceptible to mortgage rate changes," says Macdonald. "The hotttest six real estate markets could be in for a correction at best or, at worst, a bubble burst. Rate setters at the big banks are in the driver's seat now as mortgage rates inch up. They need to hit the brakes lightly."

The report says Calgary saw housing prices soar by 198 per cent between 1997 and 2007.

Under three different scenarios, the report looks at the possibility of a market correction through housing price deflation, the possibility of a deeper and longer housing crash and the possibility of a rapid and steep decline.

Under the first scenario, Calgary would see an almost 20 per cent decline in prices from $403,000 today to $325,000 in three and a half year's time. If the bubble burst slowly over a period of time, the report says Calgary would experience at least a 30 per cent drop from today's prices to just over $280,000.

And under the worst-case scenario, Calgary would see a 30 per cent plunge in prices.

© Copyright (c) The Calgary Herald