The Housing Crisis in Regina | The Lack of Affordable Rental and Social Housing
The Disappearance of Affordable Housing in Regina
by Della MacNeil and John W. Warnock
Prepared for the Council on Social Development Regina, Inc.
Regina, Saskatchewan, January 2000. 91 pp.
The text is published as a pdf file on the website of the Social Policy Research Unit, School of Social Work, University of Regina, Regina, SK S4S 0A2
Extract: Saskatchewan and the devolution of housing [by John W. Warnock]
The radical change in housing policy came in the early 1990s. In 1992 CMHC put a cap on money for new social housing. In February 1993 the federal government froze the CMHC budget; no new non-First Nations social housing would be financed by the federal government. By this time the federal, provincial and municipal programs had created 661,000 units of social housing , and around 50 percent of these were operated by the nonprofit and co-operative third sector. If any new social housing was to be created, it had to be through the public-private partnership route, usually led by local community development corporations or the provincial governments in co-operation with municipal governments. With the federal government getting out of social housing, it was inevitable that the target clientele for social housing would shrink from 15 to 20 percent of households to only five to 10 percent. (Prince, 1995; Skelton, 1998)
The 1990s also saw a number of provinces reduce the shelter allowance for certain categories of people on social assistance. Singles and couples deemed to be employable were the hardest hit. New Brunswick introduced a shelter subsidy to assist families, up to $90 per month. Quebec also introduced a shelter subsidy. These subsidies were designed to help low income families not on social assistance. (Prince, 1998)
One significant change was made in New Brunswick. Welfare rules were altered to encourage disabled clients to share accomodations; each client was allowed to receive the single-person rate. The Saskatchewan government has always refused this reform. When no-married people live together, the shelter allowance is reduced.
The Chretien government completed the devolution policy initiated by the Mulroney government. In 1996 Diane Marleau, the minister responsible for CMHC, announced that the administration of all social housing would be transferred to the provinces. In the 1996 federal budget Paul Martin revealed that the federal government would be phasing out its role in social housing and cap all existing expenditure at the 1995-6 level. The existing mortgages would be gradually retired over the next 40 years. Annual increases needed to maintain the existing housing stock would be shifted to the provincial governments and the institutions managing the housing. (Wolfe, 1998; Styles, 1997)
The Saskatchewan agreement
The first province to jump at the chance to take over responsibility for social housing was Saskatchewan. Negotiations were held behind closed doors. There was no public input. The co-operative and non-profit organizations were not informed of the proceedings or allowed to have any input into the process. The basic terms of the Canada-Saskatchewan agreement were released on February 27, 1997. The agreement, which was to set the precedent for any other provincial agreements, included six principles:
(1) Federal funds allocated under the new arrangements are strictly for housing purposes. They cannot be used to support other provincial priorities.
(2) Federal funds will be used to provide residential accommodation and related shelter services through a portfolio of programs described in the new agreements. Relatedshelter services exclude such areas as health, education, corrections and nutrition.
(3) CMHC will establish income limits, which reflect the maximum income for a household to be eligible for targeted federal assistance.
(4) Federal funds currently directed to households with incomes insufficient to cover the cost of appropriate accommodation will continue to be used for this purpose. If thefunding is not needed in the program where it is currently directed, provinces can use this funding for another program, but it must nonetheless be directed to households with incomes below established limits.
(5) Federal funding currently directed to moderate-income households can continue to be used for this purpose until such time as the units are paid off. Should this funding be freed-up at some point in the future, it is to be used for targeted assistance.
(6) Savings remain in the jurisdiction from which they originate. This means that
provinces can use federal funding savings achieved through cost reduction and efficient management of the portfolio to serve households in their respective jurisdictions. (Wolfe, 1998)
Opposition to the new housing agreement
The devolution of social housing to the provinces and the new agreement was strongly attacked by the Co-operative Housing Federation of Canada. Alexandra Wilson remarked that "It's shocking that the federal and provincial politicians and bureaucrats would meet secretly for month after month to plan the transfer of those co-ops without even bothering to involve the thousands of people who live in those co-ops." Barbara Millsap, president of CHF, warned: "Far from meeting the housing needs of lower-income people, the Saskatchewan deal give an incentive to the province to shut down existing co-ops. Under this deal, Saskatchewan will continue to receive federal housing dollars for a co-op even if the project fails or is closed down by the province." (CHF Canada, 1997)
The National Aboriginal Housing Association denounced the federal government for giving control of social housing to the provinces without even consulting Native groups. They did not see how Aboriginal housing could survive in the long run if funding was limited to the 1995-6 level. Mel Buffalo, president of the organization, predicted that "you're going to see more people in to the ghetto areas, more people kicked out by unscrupulous landlords, more people homeless." (Chung, 1998)
There were many common criticisms of the Saskatchewan agreement. There is no commitment to future social housing. The agreements ratify the decision by the federal government to withdraw from social housing; this will make it very difficult in the future to pressure them to again fund social housing. The existing social housing corporations are forced to try to exist on a declining budget. Social housing will now be the responsibility of the provinces, who have had an indifferent commitment in the past. The provinces are permitted to dispose of housing and amend or alter existing agreements with non-profit groups without their consent. There are national "principles" but no national standards. The provinces will no longer be limited to charging a maximum of 30 percent of a tenant's income as rent. Provinces are not prohibited from shifting responsibility to municipalities. There is no commitment to keep the existing housing as social housing; they can be sold on the market when the mortgages expire. The province may not prepay existing mortgages to take advantage of lower interest rate. Saskatchewan received a "special allowance" of $11.7 million, but there was no indication it would be used for new social housing. (Dunphy, 1997; CHRA, 1997)
The Saskatchewan government proposed changes that were not acceptable to the co-ops. The co-ops were given a list of demands and only 30 days to make a decision. With the help of the Co-op Housing Federation of Canada, they fought back and won some concessions. But in order to continue receiving their subsidy for low-income tenants, they lost some of their traditional decision-making powers to the Saskatchewan Housing Corporation. One project, a senior citizen co-op in North Battleford, was shut down by the provincial government over the opposition of the co-operatives. (CHF Canada, 1998)
The Romanow government strongly supports the agreement. They argue that the federal government has agreed to continue the existing funding over a long period. The merging of all the different programs will allow efficiency savings. Decision-making power has been decentralized to the provinces. The government has decided to make rent scales, utility allowances, income definition, and maintenance standards uniform through the province. This, they believe, will bring savings. The addition of 9,809 federal social housing units brings the Saskatchewan total to 33,800. (Styles, 1997)
Housing policy in other provinces
Some provinces took a different approach to the Chretien government's decision to get out of social housing. Ontario had developed a considerable stock of social housing on its own, without federal support. In 1995 the Progressive Conservative government of Mike Harris canceled their non-profit housing program. Between 1989 and 1993 the provincial program had accounted for 17 percent of all housing starts in the province. In 1997 the provincial government announced that it was devolving the responsibility for social housing to the municipalities. Critics pointed out that municipal governments are forced to rely on the very regressive property tax and lack adequate borrowing authority. Social housing is a redistributive program, and only the senior governments have the necessary taxing authority. (Morris, 1997; ONHA, 1999)
In contrast to Saskatchewan, the provinces of British Columbia and Quebec have refused to sign the devolution agreements, strongly arguing that the federal government has a primary responsibility for helping to finance social housing. These two provinces have their own social housing programs. The B.C. Housing Management Commission is still promoting and partnershiping new social housing projects. Quebec's program, which is more modest, focuses on the revitalization of older neighbourhoods through the Residential Renovation Program, rescuing boarded up buildings, conversion of non-residential buildings, a safety improvement program, and grants to help stimulate new social housing. Municipalities are participating in these programs on a cost-sharing basis. (Carter, 1997)
The Saskatchewan government insists that it is still committed to providing adequate, affordable housing for all its citizens. Its policy paper Investing in People and Communities, released in September 1997, states that the first priority is to maximize "the efficiency and effectiveness of the existing social housing portfolio." There is no indication what-so-ever that the NDP government would be pushing for the federal government to get back into the area of social housing. The clear thrust of the policy paper is that housing is now a provincial responsibility.
Nevertheless, Investing in People and Communities recognizes that there are serious problems in the housing area: an aging population, increasing Aboriginal population, increasing urban population, more single parent families, and more one-person households. The government admits that there is a very serious housing problem in northern Saskatchewan, with a fast growing relatively young population with virtually no private housing market coupled with a high degree of poverty and unemployment.
At the same time, the government is aware of the fact that there is a declining supply of affordable housing, a shrinking rental market, and rising rents and prices of homes. The conversion of rental units to condominiums and the demolition of older houses has reduced the supply of rental properties. (Sakatchewan, September 1997)
The lack of affordable housing is a crisis for many
But what has the province done to meet this growing crisis? In 1992 it lifted all rent controls. It sat back and watched as Boardwalk Equities subsequently moved into the province, bought up thousands of affordable rental housing, and raised the rents. It did nothing when Boardwalk Equities took over Gladmer Park in Regina, did some renovations, and doubled the rents. This represented the loss of one of the most important social housing projects in the city. These policies, or lack of them, have resulted in a major loss of affordable housing in Regina.
On the other side of the ledger, some new programs have been introduced. Three community development projects have been sponsored, one each in Regina, Saskatoon and Prince Albert, under the Neighbourhood Home Ownership Program. These developments, which required a tremendous amount of time and energy to bring forth, provide 34 low income families with the opportunity to buy their own home.
The Homes Now program provides for the renovation of 80 urban houses for conversion to social housing. The Home Adaptations for Senior's Independence provided grants to 84 senior citizens. The Community Home Incentive Program provided funds to non-profit groups to develop 180 affordable rental units in rural areas over a three year period.
The Remote Housing Program, announced in 1997, provided assistance to individuals to build their own homes. Over a three year period it will help 70 familes in the north. The Rental Market Assistance Program provides an initiative to build 75 rental units in the north, again over a three year period. An additional 70 housing units in the north received grants for repair.
On an administrative level, the province has been promoting the development of regional housing authorities. As of March 1997, there were eight regional housing authorities in the north managing 874 of 1,315 social housing units. (Young, 1998; Saskatchewan, September 1997)
These programs are all very commendable. The only problem is that the funding for them is very limited, and they don't begin to meet the need. For the NDP government, affordable housing for low income people has been a very low priority.
In response to the report of the Mayor's Homelessness Action Task Force in Toronto, public pressure from advocacy groups, and demonstrations by the poor and homeless, the Chretien government named Claudette Bradshaw, Minister of Labour, to be the Federal Co-ordinator on Homelessness. On December 17, 1999 the Minister announced a three-year program totalling $753 million to help "alleviate and prevent homelessness across Canada."
Of the total, $305 million was to go to communities to help eliminate homelessness, $57 million to expand services, $268 million to expand the RRAP program, and $10 million to make surplus federal property available for housing. But the federal government was careful that none of these programs actually got them back into the business of social housing.
The iniative was welcomed by a number of politicians as a good "first step." In contrast, the National Housing and Homeless Network called it a "patchwork reponse to Canada's national homelessness disaster and housing crisis." They strongly objected to the "partnership approach" to social housing, which requires multiple funding and creates additional barriers. "Groups will have to spend months or years fundraising instead of building housing and providing services." They argued that "unless there is a massive federal reinvestment in a national housing program, it cannot be called a step in the right direction."
John Clarke of the Ontario Coalition Against Poverty, which has been mobilizing homeless people in political actions, called Ottawa's announcement "an empty gesture" and suggested that they were "misrepresenting the crisis." (Dunphy, 1999; McHardie, 1999)
The new programs are designed to get the homeless off the streets. The question of whether or not the federal government would be getting back into the housing business was left for discussions with provincial and municipal governments in the year 2000.
The central problem of the devolution of the responsibility for social housing from the federal government to the provincial governments is put forth by Tom Carter, Professor of Geography at the University of Winnipeg and former director of their Institute of Urban Studies.
The federal and provincial governments have ceased to provide any significant number of new housing units. The result is "the level of new affordable units provided each year is less than five percent of the level provided in the late 1970s or early 1980s. Most governments are also avoiding programs that build in ongoing subsidy responsibilities."
As a result, the trend everywhere is to local self-help partnerships between governments, the private sector and community groups. Nevertheless, without federal government subsidy programs, "it may be impossible to accommodate the very low income households that are unable to access adequate affordable housing in the private sector." Many of the new housing projects implemented with local development corporations focus on moderate income families. This "may result in a growing number of households living in poor housing as well as in poverty." (Carter, 1997)
Affordable Housing in Regina
by John W. Warnock
May 7, 2010
How is the housing situation in Regina? It all depends on who you talk to. Those who owned a house or condominium four years ago, or were buying one from the bank, are feeling pretty good. The current market price for their investment has doubled in the past two years, and they believe that housing prices only rise and never fall. They are quite smug these days. Their biggest concern is the high level of property taxes compared to other cities in Canada.
Despite the high and rising cost of buying a house, there are still people around who believe that if you are going to start producing kids, you have to be in the process of buying your own residence. It is time to start collecting stuff. Fill the basement, the attic and the garage. This is what life is all about in Canada.
On the one hand, times have never been better for those who want to buy a house. No longer do you have to have 20% cash for a down payment; mortgages are no longer limited to 25 years. In 2009 the average down payment for first time buyers was only 6%. It is now possible to be a debt slave to a bank for 35 years. Thanks to the Bank of Canada (and the Harper government), mortgage interest rates are at an all time low. New five year fixed rate mortgages can be obtained at an interest rate of less than 5%. The average over the past 20 years has been 8.2%. I know people paying less than 2% for a variable rate mortgage.
Furthermore, the Central Mortgage and Housing Corporation (CMHC) is providing mortgage insurance for people with no cash, primarily to protect the lenders. While CMHC still claims that a mortgage payment should not exceed 30% of household before-tax income, nor 40% of total household debt payments, we know they don’t enforce this. For example, in Vancouver the average fool buying a residence currently puts out 70% of their income for a mortgage and property taxes and has no trouble getting insurance. If CMHC actually enforced their directives, there would be virtually no sales in Vancouver and market prices would fall dramatically. What is affordable housing?
Historically, banks and lenders in North America have held that “affordable housing” exists when the median price of a single detached house ranges between two and three times the median household income. Across Canada today the average is around six times household income. What does that tell you? Capitalism cannot work when the majority of the workers cannot afford a house.
In recent months the average sale price of a detached house in Regina has been around $240,000. Given that the median household income in Regina is around $62,000, this would suggest that there is a 30% bubble in the current Regina housing market.
There is another traditional rule of thumb used to judge a local housing market. The median price for a single detached house should not exceed 15 times the cost of renting a roughly equivalent space. Boardwalk Corporation will rent you a three bedroom townhouse in Regina for $1160 per month. While the cost of renting has risen rapidly in Regina over the past two years, even this guide suggests that current house prices are inflated by 13%. It is not the time to buy. All the current signs are that the Canadian housing bubble has peaked and prices will be starting to decline. What’s wrong with renting?
It was not that long ago that most working class families rented their housing. My father grew up in a company mill town where almost all the houses were the same, were owned by the company, and were rented by the workers. Tenure was secure, and rents were reasonable. Believe it or not, this system of accommodations contributed to stable families and nice children.
In Germany today 50% of the population chooses to live in rented housing. In Switzerland, it is 65%. There has been no bubble in housing prices in these two countries over the past five years. North Americans seem to like working hard to support the owners of banks.
However, it is not easy to find an affordable rental space in Regina today. The latest CMHC statistics reveal that there are 500 fewer rental units in the city than there were ten years ago. Apartments have been torn down. Owners want to convert older apartments, where their capital investment was returned long ago, into condominiums, sell the units, and pocket even more profits. In 1992 Roy Romanow’s NDP government removed rent controls which existed on older apartments, arguing that they were an impediment to private investment in new apartments. But since then virtually none have been built, showing once again that capitalist economics 101 can be completely wrong.
Between 1999 and 2009 rental housing starts in Saskatchewan were only 9% of total housing starts. However, 32% of Canadians are in the rental market! Could it be that the highly touted free market in housing is not working well?
The squeeze for decent rental accommodations in Regina and Saskatoon is more pronounced because of the lack of housing at the two universities. Across Canada universities provide housing for 20% of their students. Saskatchewan provides housing for only 6%.
It used to be that rental facilities would be dictated by local governments through the planning process. Certain areas and lands were zoned for socially necessary rental units. But in the era of neoliberalism, governments are not supposed to act for the general public interest as this might infringe on the ability of private capital to maximize profits. Real planning is now done by developers and builders.
The latest CMHC rental market survey found that Regina had the lowest average rental apartment vacancy rate in Canada at 0.6%. Between October 2008 and October 2009 average rents for all apartments and townhouses rose by 9.5% while median income increased by 5.5%. But the large majority of Canadians who rent their accommodations find themselves in the bottom one third of the income distribution scale, generally must contribute more than 30% of their income to housing, and most often work in jobs without trade unions. Pay raises are few and far between. Do you know any workers in the retail or service industries who have full time work?
When I first moved to Regina in 1986 there was good, affordable housing. Almost anyone with a decent job could afford to buy a house. Rental units were available and rents were affordable. Furthermore, the federal and provincial governments were building good, attractive social housing. Co-op housing was available. Senior’s housing was available. Those days are long gone. What happened?
This article was written for Utilitarian Donuts, a new Regina magazine.
Squeezed Out in Saskatchewan: A Critical Look at the History of Provincial Housing Policy
by John W. Warnock
The Sasquatch (Regina)
By now everyone must know that we are experiencing a world economic downturn, with quite a vew economists projecting that we could be entering a period of deflation similar to that experienced by Japan after 1989. In every country financial institutions are on very shaky grounds; they have all purchased the “toxic assets” of the mortgaged-backed securities, once rated AAA by Moody’s, Standard and Poor and Fitch. The example of the failure of Lehman Brothers in mid-September 2008 suggests these highly leveraged assets may only be worth 9.5 cents on the dollar.
The housing bubble
The ongoing financial and economic collapse is being triggered by the inability of many people who bought expensive houses in the past few years to pay their mortgages – as well as meet the payments for debt incurred on their lines of credit at the banks, home equity loans, credit cards, car payments, and student loans.
While the North American media has concentrated on the huge debt bubble in the United States, even greater housing bubbles were built in Great Britain, Ireland and the rest of Europe. As many economists have pointed out, historically the price of a house has ranged between two and three times total household income. The price of a house should not exceed 16 times the annual rental income. Since the 19th century, house prices in North America have averaged an increase in market price roughly equal to the increase in the rate of inflation. By all the standard measurements, there is a housing bubble in Canada. A decline in house prices is starting to show across Canada, even in Saskatoon. But not in Regina. Yet.
To buy or to rent?
Mainstream economists also point out that it is always cheaper to rent than to own a home. Home ownership has higher costs, including paying for heat, water and sewer, insurance, property taxes and regular upkeep. The capital invested does not bring a regular return. This point is stressed by Garth Turner in his widely read book, The Greater Fool, in which he predicted that the U.S. housing bubble and collapse would move across the border into Canada.
According to Statistics Canada, the median household income in Regina in 2007 was around $60,000. So the median price for a house should be in the neighbourhood of $180,000. Yet the median price of a house sold was around $268,000, and even higher in Saskatoon.
In 2007 an estimated 50% of all houses sold in Canada were financed under the rules introduced by Stephen Harper’s government in December 2006: no money down and up to 40 years to pay. Not much different from the infamous U.S. sub-prime mortgages. Shortage of housing in Saskatchewan
Many economists who follow the housing industry argue that Canadian housing trends lag similar trends in the U.S. by around two years. 2008 saw the beginning of the housing meltdown in Canada, with prices falling in Vancouver, Toronto, Calgary and Edmonton. In Regina the average price of a house grew by 27.6%, the highest in Canada. In Saskatoon, they rose 10.9%, but in the past two months they have started to retreat. The standard argument is that the house price bubble in Saskatchewan is due to the boom in the resource economy and the influx of people seeking jobs.
However, for people with a low or moderate income, this trend has been a disaster. The vacancy rate for rental housing has fallen to 0.5% in Regina and 1.9% in Saskatoon. CMHC reports that over the past year rents in the larger Saskatchewan cities have risen by 16%, far higher than the rate of inflation or the rise in costs. There are a number of reasons for this squeeze. Why is there no affordable housing?
First, there is less social housing available today than fifteen years ago. In 1992 the federal government stopped financing new social housing, as well as non-profit co-operative housing. New financing only began again in 2003, and then it was at a lower level.
In 1996 Jean Chretien’s government decided to shift the responsibility for housing from the federal government to the provinces. In February 1997 Roy Romanow’s NDP government became the first in Canada to accept the devolution of responsibility to the provinces. Under this template agreement, federal operating support for existing social and affordable housing, now under provincial jurisdiction and responsibility, would be frozen at 1996 levels. With rising upkeep costs, housing authorities were forced to first raise rents and then sell housing. Today there are only around 31,000 social housing units in the province, down around 2,000 from 1997.
Second, In 1992 the Romanow government lifted rent controls which were applied to older apartments. Boardwalk Corporation from Calgary then entered the province, bought up much of the “affordable” rental housing, did some minimum upgrades, and raised rents significantly.
A key indicators of the policy direction of the NDP government involved Gladmer Park, a highly-valued housing project with low rents. With the mortgage completed on this federally-subsidized housing project, the owners wished to sell it. The tenants petitioned the Romanow government to take over the project and convert it to provincially-owned social housing. The government refused, and Gladmer Park was sold to Boardwalk. Following the upgrades, the rent was doubled and low income tenants were forced to leave. Failure of the private housing industry
Third, the rationale for lifting rent controls was that they were an impediment to investment in privately owned apartments. But few apartments have been built since the rent controls were lifted. This is a prime example of how the private market does not fulfill social needs. Around 35% of Canadian individuals and families cannot afford to buy a house or do not want to own one. Yet since rent controls were lifted, only around 10% of new housing units have been for the rental market. Builders can make much higher profits by building condominiums, another popular but expensive form of housing. The new apartments which have been built serve the high end rental market.
Fourth, since 1992 Saskatchewan governments have taken the position that the private sector should have the responsibility for providing housing. New social housing has received a very low priority. Policy shifted to a few programs to try to help low income individuals and families buy houses. For obvious reasons, this new policy could not possibly solve the issue of the lack of affordable housing.
The crisis for people with low income
With a decline in the availability of good social housing, more low income people have been forced to rely on the private market for housing. Much of this housing is far below the standards found in Saskatchewan’s existing social housing. Entrepreneurs bought cheaper houses and rented them out to people on social assistance. But there have been no standards required for such housing.
As a general rule, the rent charged by the landlord exceeded the rental allowance provided by Saskatchewan Social Services. The answer put forth by the NDP government was to use taxpayers’ money to provide subsidies to private landlords. However, without any form of rent control or licensing, this program has been of little help to our citizens forced to exist on social assistance. Rents were just raised again.
Finally, municipal governments must also bear part of the responsibility for the lack of rental and affordable housing. In the past, when there was actual city planning, municipal governments would designate certain areas of every new development for rental housing. Today development firms and builders are doing the real city planning, and they are stressing housing where they can maximize profits. This is not the case everywhere. Many urban governments still require the construction of rental accommodations. Ken Livingston’s government in London required 50% of all housing in new developments to be affordable housing.
So as we survey the crisis in housing in Saskatchewan today, many of us who have been around here for some time are likely to ask: What happened to housing as a basic human right? What happened to “People before Profits” and “Humanity First”?
John W. Warnock is co-author with Della MacNeill of The Disappearance of Affordable Housing in Regina (2000).
Regina Housing Bubble?
By John W. Warnock
Act Up in Saskatchewan
October 31, 2008
All across North America housing markets are on a downward trend.. Even Saskatoon is reporting an increase in the listing of houses for sale, a drop in the number sold, and a decline in the average price. But Regina appears to be an exception
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.
Robert Shiller: Now Is Not the Time to Buy a House
by John W. Warnock
Act Up in Saskatchewan
October 14, 2008
Robert Shiller is the renowned Professor of Economics at Yale University, one of the foremost experts on housing and markets. He is author of Standard and Poor’s widely-cited index on housing. He writes in the October 11, 2008 issue of Newsweek Magazine that home ownership is good for the community but not a good investment:“What's ironic, as any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies. The popular argument that renting is equivalent to throwing money down the drain is really fallacious, since the money you save can be invested to produce dividends.”Governments promote home ownership
The idea of home ownership has been promoted by our governments. For example, the Saskatchewan government’s approach to “affordable housing” has shifted away from providing good quality rental properties. Since the last NDP government, the emphasis has been put on helping low income people buy houses. It is assumed that people are now acquiring a house primarily for investment purposes. Lost is the notion that people actually want a home, a comfortable place to live with family or friends in a desirable community. What does that say about Vancouver, where the majority of people live in rental housing?
It has also been widely assumed that the value of a house in the market will continue to grow at a steady pace. You can’t lose money and may be able to make a good capital gain. As we can see now from the continuing collapse of house prices in the United States, this is not always so. Moody’s is now projected by the end of 2009 30% of those in the United States with mortgages will be “under water,” defined in the industry as having a mortgage which is worth more than the market value of the house. This will ensure that house prices will continue to fall.
Home ownership in Regina
If someone in Regina is thinking about buying a house, how is it possible to tell whether or not this is a good decision? Currently the housing market may be stable in Regina, but house prices are falling across the United States and in most Canadian cities, including Saskatoon.
In addition, there is the continental and international melt down of the bubble in finance. The terms and conditions for obtaining a mortgage are much more constrained. Interest rates are rising. Can Regina really be the exception to this general trend?
The first thing to do is see how purchasing a house compares to renting. There are, of course, many additional costs to owning a house aside from paying the mortgage. For one, property taxes are very high in Regina compared to other cities in Canada.
Guides to the housing bubble
But a good place to start is the New York Times which has created a graphic where you can quickly compare the cost of buying a house to renting a similar residence. You just need to type in a few figures. Check this out: http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
Is it really true that there is a housing bubble in North America? If you are skeptical of this claim, check out the Case-Shiller House Price Index for the United States: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_093042.pdf
Whereas the construction of housing in the United States has all but ceased, and is dropping off across Canada, developers and builders are still ploughing ahead in Regina. Will the market change with the major expansion in Southwest Regina?
John W. Warnock is a Regina political economist and financial conservative.
What is a House in Regina Actually Worth?
By John W. Warnock
Act up in Saskatchewan
October 6, 2008
By now everyone knows that the housing market in the United States has been in steep decline since the peak in 2006. Sales of new and existing houses have been steadily dropping. House construction is down dramatically. Mortgage money has all but disappeared. Lending institutions are only providing mortgages to people with very good credit. Interest rates are rising. Buyers now are expected to come up with 20% or 30% of the value of a house as a down payment.
But our political and business leaders insist that Canada is different – the banks are sound and the “economic fundamentals are good.” Stephen Harper is still proclaiming that the U.S. housing problem will not move over the border into Canada. What can we make of this?
The Canadian housing market
However, the latest figures show that across Canada sales of new and existing houses are down, the price of houses being sold is dropping, and the number of houses listed for sale is rapidly rising. Several studies released in the past couple of months argue that Canadian houses are also overvalued.
Saskatchewan has been the exception. The former NDP government, the current Sask Party government, and the real estate industry have insisted that this province will not experience the same trends in the market and finance seen elsewhere in Canada. The local economy is too good for this to happen.
I recently received the assessment for my old house, built in 1920, in and older area of Regina. According to the city’s calculation, based on house sales in the neighbourhood, the value of my house has increased 28% in the past year. I have done nothing to upgrade this house in the past few years, and it has never been renovated.
So how can someone who owns a house, or someone considering buying a house, know what a house is really worth? In researching this issue over the past month, I have found three basic approaches used by economists.
Ratio of the price of a house to household income
Many economists look at the long term relationship between the price of housing and average household income. This can be seen in the widely-cited index created by economist Robert Shiller. Discounted for inflation, Shiller and many other economists argue that historically the price of an average house has been the equivalent of three times the household’s income. When there have been house price booms, they have evened out with subsequent down cycles.
This historic average began to change in the United States in 1996, the beginning of the housing bubble. This bubble peaked in mid-2006. At that time the average price of a house had reached over 4.5 times the average household income. By the spring of 2008 this had fallen to 4.0 times the average household income. Thus many economists argue that prices will continue to fall until the average house price is between 3.0 and 3.5 times average household income. This analysis is also widely accepted in Canada.
Thus, for example, the new row houses that were originally to be built as rental social housing, Maple Leaf Estates at 14th and Toronto, were instead put up for sale as “affordable housing” at a price of $169,000. By this calculation they should have been bought by families with at a minimum income of $56,000. Shelter costs also include property taxes, water and sewer, electricity and energy for heating.
House prices and inflation
A second approach used by economists measures the price of housing in relation to inflation. This is easy to calculate. Between 1996 and 2006 house prices in the United States rose by 70% above the general rate of inflation. It is argued that historically the price of housing did not rise faster than the general rate of inflation. There were ups and downs which went with the economy, but it averaged out.
Since the peak in housing prices in 2006, the average price of a house sold in the United States has fallen about 25%. According to this standard, the average price in the United States will have to fall another 40% - 45%. Currently, there is a growing stock of unsold houses. It is expected that around 3.6 million U.S. homeowners will receive foreclosure notices this year. In Chicago the resale of foreclosed houses has been at a discount of 40% to 60% from the original mortgage price.
Household net worth and annual income
Other economists have pointed to the supposed net worth of a household in relation to annual income. According to the U.S. Federal Reserve Bank’s Survey of Consumer Finances, in 2004 the average U.S. household had an estimated net worth of $448,000 and an average income of $43,000. The estimated wealth of the family was the equivalent of 10.4 years of income. But in 1989 it was only 7.3 years of income and in 1962 even lower at 3.8 years of income.
How could it be that household net worth had risen to ten times annual household income? The answer is leveraging. Going into debt. With easy borrowing available, through very unusual mortgages, people bought unnecessarily large houses in the suburbs. Others moved from rental units into “owning” their own home. A great many saw the assessed value of their homes go up rapidly and took out home equity loans to buy other assets. The average U.S. family acquired many credit cards and maxed them out. They bought expensive vehicles on credit. Total household debt increased from 50 percent of disposable income to over 100 percent by 2006. This house of cards has started to crumble. The 1962 ratio seems more realistic in this period of the great financial melt down.
The value of a house today
Given this reality, what is the real value of a house today? California has made the headlines due to the high rate of foreclosures. Most of this has occurred among middle and upper middle income families. In many areas of California the housing market has been dominated by the resale of foreclosed properties. Sales in these markets suggest that house prices will have to fall to 50 percent of their original purchase price. Economists call this “de-leveraging.”
The lesson is here for all to see. Be careful if you are looking to buy a house or taking out a home equity loan. As prominent U.S. economist Martin Feldstein warned a couple of weeks ago, there will be no end to the present U.S. recession until house prices have reached the bottom, which may be a few years down the road.
John W. Warnock is a Regina political economist and co-author with Della MacNeil of The Disappearance of Affordable Housing in Regina (2000).
Regina House Prices are Too High - Merrill Lynch
by John W. Warnock
Act up in Saskatchewan
August 8, 2008
Do you believe that the prices asked for houses in the Regina market are too high for their value? You are not alone. A study just released by Merrill Lynch Canada concludes that across Western Canada house prices are “overvalued” by at least 10% and that we can expect a “sustained downturn” over the next few years.
The Regina Leader-Post carried this story but for some reason cut out the part which included the specific reference to Saskatchewan. Merrill Lynch pointed particularly at Saskatchewan where it concluded that house prices in Saskatoon and Regina “are almost 50 percent overvalued.” In July 2008 the average price of a residential property sold in Regina was $247,262. Canada is experiencing a falling housing market
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.