March 13, 2019 Largest retreat for a February outside of
recession In February the Teranet–National Bank
National Composite House Price IndexTM was down 0.4%
from the previous month. Except for the recession
year of 2009, it was the largest February decline in 19 years of
index history. Indexes lost ground in nine of the 11 metropolitan
markets of the composite index: Victoria (−2.0%), Hamilton
(−1.4%), Quebec City (−1.2%), Calgary (−0.8%), Vancouver (−0.7%),
Ottawa-Gatineau (−0.7%), Winnipeg (−0.4%), Toronto (−0.2%) and
Edmonton (−0.1%). The only indexes up from the month before were
those for Montreal (0.4%) and Halifax (0.3%). All five constituent markets in Western
Canada have now joined the downtrend. For Calgary it was the eighth
consecutive month without a rise, a cumulative decline of 3.2%, for
Vancouver the seventh (a cumulative −3.9%), for Edmonton the sixth
(−3.5%) and for Victoria the fifth (−2.5%). The index for Winnipeg
has risen only once in the last five months (cumulative −1.9%). In
central Canada, Hamilton has gone five months without a rise
(cumulative −2.3%) and Ottawa-Gatineau has risen in only one of the
last five months (cumulative −0.8%). The index for Montreal, in
striking contrast, has declined only once in the last 11 months
(cumulative gain 5.3%) and is the only constituent index that was
up from six months earlier. For the composite index it was a fifth
consecutive month without a rise, for a cumulative decline of 1.4%.
Bank National Composite House Price Index™
In changes from 12 months earlier, only
three indexes showed the weakness that has more recently become
apparent in several regions: Calgary (−2.7%), Edmonton (−1.6%) and
Vancouver (−1.1%). The change from a year earlier remained positive
for Halifax (1.2%), Winnipeg (1.3%), Victoria (2.8%), Hamilton
(3.0%), Quebec City (3.5%), Toronto (3.6%), Montreal (5.2%) and
Ottawa-Gatineau (6.0%). The composite index was up 1.9% from a year
earlier. Besides the Toronto and Hamilton indexes
included in the composite index, indexes exist for the seven other
urban areas of the Golden Horseshoe. In February, they were down
from the previous month for Kitchener (−1.3%), St. Catharines
(−1.0%), Oshawa (−0.5%) and Guelph (−0.3%). The index for Barrie
was flat. Indexes were up for Peterborough (0.5%) and Brantford
(1.5%). As with Toronto, Hamilton and Ottawa-Gatineau, none of
these indexes was higher than it had been six months earlier. Indexes not included in the composite
index also exist for seven markets outside the Golden Horseshoe,
five in Ontario and two in B.C. In February four of them were down
from the month before: Sudbury (−3.4%), Kingston (−2.6%),
Abbotsford Mission (−0.9%) and Windsor (−0.4%%). Kelowna was up
0.3%, Thunder Bay 0.3% and London 0.9%. Only two of these seven,
Windsor and London, were up from six months earlier. In other
words, of 25 metropolitan markets surveyed, only three – Montreal,
Windsor and London – were up from six months earlier, the weakest
diffusion of six-month gains for any February since the recession. For the full report
including historical data, please visit our website. *Note
on methodology: The current-month data used to
calculate the index are those of closed sales registered in the
provincial land registry. To illustrate the home price trend, the
published indexes of the 11 metropolitan markets entering into the
Teranet–National Bank Composite House Price Index™ are moving
averages of the last three months of raw indexes. This procedure
evens out month-to-month fluctuations. More granular monthly data
are available upon request, possibly subject to subscription fees.
For further information about the methodology, please visit www.housepriceindex.ca
Copyright 2019 Teranet Inc. and National
Bank of Canada
REBGV released their stats package through December 2018. Here are the numbers:
Sales have mimicked 2012 in the last "downturn", the difference being that inventory is still rather low, leading to a lower months of inventory than that year. Inventory is normal-ish again, after being torched in 2015 and 2016. Here are two price graphs, the first is the scatterplot of 6 month index changes versus months of inventory (6 month changes are -7.0%), and year-on-year price changes, which are negative, as they were in 2012.
2018 was an interesting year - sales were weak for a few reasons, the two most pertinent in my view are what appears to be tighter controls on mortgage approvals, and at the higher end of the market demand is very weak. Inventory ended the year in the historical range, and could increase further in 2019.
For what my predictions are worth (looking back I was mostly correct about 2018 but a bit optimistic), I expect further inventory growth in 2019. Completions will likely accelerate in 2019 and will eventually find their way, either directly or by spawning sales of existing properties as people move, into the MLS market. This should be helpful to contain upwards trends in prices.
Prices are strong at the beginning of the year -- most years see prices, as measured by the MLS-HPI, rise in the first half, even in terrible years; conversely if prices are to be weak in the year, most of the price drops occur in the second half. We certainly saw prices drop in the second half of 2018 and this has provided a slightly lower starting point for the 2019 prime spring selling season. If prices are to be weak in 2019 on a year-on-year basis, expect meager price gains (probably not negative, but you never know) in the first half.
More broadly, we are a decade away from the last recession, and I wouldn't be surprised if we are due for another one in the next five years. If this is to occur, it is looking like there is a possibility that Vancouver could be caught on the wrong side of an oversupply during the advent of a recession and that could lead to more significant distresses in terms of sales and inventory, and the effects of this could linger longer than most are expecting. Nonetheless, Vancouver is a growing metropolitan area and land will always be scarce. I foresee no particular reason to think that a prolonged housing recession will last more than a handful of years, though those years could be painful.
REBGV released their stats package through October 2018. Here are the numbers:
Sales are a bit better, as they were in 2012 in the last "downturn", the difference being that inventory is still rather low, leading to a lower months of inventory than that year. We can see the relationship between price changes and MOI is still generally being followed, though it is apparent that price drops are bit more aggressive than before at previous MOI levels (the red dots on the graph, the latest point is at about (7,-0.04)):
Sales are still weak, despite the upturn in October. Some are calling out the sales trend similarities to 2012 as indication the worst is over and the next couple of years will see things re-stabilize (i.e. a soft landing like we had in 2013 and 2014). I acknowledge that 2019 may plausibly prove itself to be a stabilizing year (which would mean better sales than this year). Nonetheless I don't think anyone should lose history that prices were on an absolute tear from mid-2015 through mid-2017, and unless that was simply rationally correcting what was significant undervaluation, we should be prepared for more than a couple of years of at least flat prices. In other words, it's hard for me to point to the similarities to 2012 as strong evidence that the worst is over, especially with some likely financing and additional inventory headwinds that will be coming our way. A "soft landing" is a distinct possibility but so is a few years of more meager pickings.
The stalwart Metro Vancouver housing starts and completions graph (conceived by Van Housing Blogger over a decade ago) has been updated for including preliminary housing starts data from September 2018:
The total number of starts has continued to be very strong through 2018. Completions have increased to record highs the past year, and it is reasonable to assume that many of these have started showing up, directly or indirectly, on the MLS-brokered market and have contributed to a moderate increase in new listings for used homes. In my previous post I noted that the market has cooled and we may not be free of this weakness for some time (though who knows for sure?). Developers might be "building into" a protracted downturn.
These graphs highlight how unprecedented current construction activity is. This activity has led to acute shortages for trades and backlogs in approving permits and inspections. This should come as no surprise to anyone — this is how market cycles are supposed to work.
What is of interest to policymakers and governments here is how long it takes to render new supply onto the market. Not shown here is the time required to acquire land, plan the site, rezone, and get approval; the actual "project start" is far in advance of the starts shown in the graphs above. Ramping up supply takes years, but a sudden change in demand can occur in a single season. In addition, historically when units don't sell, there is significant impedance to commence new starts or even the preamble work, which makes it very difficult to keep a steady supply of abundant housing in the pipeline to prevent shortages, at least not without significant supplementary government intervention. I am concerned some facile interpretations of housing economics may not be well versed in the grim realities of recessions and how difficult it is to maintain over-supply and thus bypass the shortage portion of the cycle. Food for thought.
REBGV released their stats package through September 2018. Here are the numbers:
And by popular request, here is the months of inventory and Greater Vancouver composite HPI on a time series graph. The stark increase in MOI and accompanying change in price can be seen.
Sales are very weak. Months of inventory has increased to the point where at least a mild price correction is likely. The MLS-HPI is dropping.
The market is very slow. This is on the lower side of my prediction from the beginning of the year; a more significant slowdown after a near-unprecedented run-up in prices in 2015 through mid-2017 was always going to be a possibility. I am now formally on housing correction watch. More housing supply is coming onto the market, remember, and that will help with increasing for-sale inventory in 2019. Corrections do not last forever, but that does not mean there are not some lean times coming. Some people are calling for a substantial correction and some people were anticipating price corrections back in 2014 before prices proceeded to increase another 50%, so for all we know we are very removed indeed from a bottom. I have no evidence to suggest calls for a more substantial correction are fundamentally incorrect, but that does not mean such a call is certain. Nonetheless, I think the next order of business should be to figure out where the bottom is going to be.