Monday, June 22, 2015

Canada’s housing affordability trends diverged regionally during Q1 2015: RBC Economics

From RBC:
  • Affordability measures for Alberta improved the most among Canada’s provinces
  • Affordability conditions continued to deteriorate in Toronto and segments of the Vancouver market

TORONTO, June 22, 2015 -  Housing trends across provinces largely counteracted one another in the first quarter of 2015, leaving affordability relatively unchanged at the national level compared to late-2014, according to the latest Housing Trends and Affordability Report issued today by RBC Economics Research.
RBC says that mortgage rate declines that took place earlier this year contributed to improved levels of affordability in many markets and housing categories where home price increases were subdued, but that deterioration was noted in markets with stronger price gains.
“Canadian markets heavily associated with the oil and gas industry – Calgary and Edmonton in particular – were impacted earlier this year by the plunge in oil prices which tipped the market in favour of buyers due to softening home prices and ownership costs,” said Craig Wright, senior vice-president and chief economist, RBC. “At the other end of the spectrum, solid price increases continued to erode housing affordability in Toronto and Vancouver which remain Canada’s hottest markets.”
Following a temporary slowdown over the harsh winter, home resales picked up smartly in the spring with resales rising 11.2 per cent between February and May to 521,400 units nationally – 11.1 per cent above the 10-year average. RBC says that demand continues to be strongest in Vancouver and Toronto, though there were signs that demand in some previously soft markets, including Montreal and Ottawa, began to pick up.
RBC anticipates Canada’s home resales will rise modestly by 1.5 per cent to 488,500 units in 2015, up from 481,200 units in 2014. The increase mainly reflects strength in British Columbia and Ontario, with mild gains in other oil-consuming provinces also making a contribution. The forecast expects partial offsets from declines in Alberta (down nearly 21 per cent) and Saskatchewan (down close to 13 per cent).
Contrasting regional affordability pictures across Canada are likely to continue in the near term, RBC says, with balanced demand-supply conditions in the majority of local markets supporting modest price increases and somewhat stable levels of affordability overall.
“It’s likely that we’ll see small price declines in the markets dependent on oil, which suggests that home ownership costs may fall further in Alberta, Saskatchewan and possibly markets in Atlantic Canada as well,” said Wright. “We also anticipate strong price momentum to further erode affordability in Toronto and Vancouver, particularly in the single-detached home segments.”
RBC points out that the eventual normalization of monetary policy, which is expected to begin in Q2 2016, could adversely impact affordability levels across Canada. Wright comments: “Exceptionally low interest rates have been a key factor keeping housing affordability levels in a largely manageable state in recent years. The knock-on effect of the anticipated rise in rates would be most visible in high-priced markets.”
The report indicates that affordability generally remains neutral in Canada, with limited signs of stress being exerted on home buyers outside Vancouver and Toronto. RBC’s measures are still quite close to their long-term averages, suggesting that current conditions are within historical norms.
The RBC Housing Affordability measure captures the proportion of pre-tax household income that would be needed to service the costs of owning a specified category of home at current market values (a decrease in the measure represents an improvement in affordability). During Q1 2015, affordability measures at the national level edged lower by 0.3 percentage points to 27.1 per cent for condominiums and 0.2 percentage points to 47.9 per cent for two-storey homes. The measure for detached bungalows was unchanged at 42.7 per cent.
RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities in Q1 2015 is as follows: Vancouver 85.6 (up 2.8 percentage points from Q4 2014); Toronto 57.3 (up 0.6 percentage points); Montreal 37.2 (down 0.2 percentage points); Ottawa 35.4 (down 0.6 percentage points); Calgary 32.8 (down 1.0 percentage points); Edmonton 32.8 (down 0.8 percentage points).
The RBC Housing Affordability measure, which has been compiled since 1985, is based on the calculated costs of owning a detached bungalow (a reasonable property benchmark for the housing market in Canada) at market value. Alternative housing types are also presented, including a standard two-storey home and a standard condominium apartment. The higher the reading, the more difficult it is to afford a home at market values. For example, an affordability reading of 50 per cent means that home ownership costs, including mortgage payments, utilities and property taxes, would take up 50 per cent of a typical household’s monthly pre-tax income.
It is important to note that RBC’s measure is designed to gauge ownership costs associated with buying a home at present market values. It is not a representation of the actual costs incurred by current owners, the vast majority of whom have bought in the past at significantly different values than those prevailing in the latest period.
Highlights from across Canada:
British Columbia: Vancouver skews provincial affordability
  • Q1 developments varied by housing categories, but still signaled greater-than-average pressure on affordability. RBC’s measures eased 0.4 percentage points for condos and 0.1 percentage points for two-storey homes, and rose 1.0 percentage points for bungalows.
Alberta: plummeting oil prices contributed to improvement in affordability
  • Housing affordability improved significantly across the province during the first quarter, with RBC measures falling across all categories (between 1.0 and 0.6 percentage points).
Saskatchewan: slower resale activity combined with moderating household income mutes impact on affordability
  • Home resales plummeted more than 16 per cent in the province during Q1, contributing to price declines across housing segments. The impact on affordability was partly muted by a moderation in household income. RBC’s measures fell 0.1 percentage points for condos, rose 0.3 percentage points for bungalows and remained unchanged for two-storey homes.
Manitoba: affordability stands close to long-run averages
  • Affordability of single-detached homes and condos evolved in opposite directions in Q1. RBC’s measures rose by 0.3 percentage points for both bungalows and two-storey homes, while the measure for condos fell noticeably by 1.1 percentage points.
Ontario: affordability theme continues to be split
  • For the past four years, owning a single-detached home at market prices in the province has become less and less affordable, whereas the weight of owning a condo has remained fairly constant. RBC’s measures for bungalows and two-storey homes rose by 0.3 percentage points, while the measure for condos edged lower by 0.2 percentage points.
Quebec: affordability at multi-year best levels
  • After remaining steady for years, housing affordability improved in the province over the course of 2014 and the trend continued in Q1 2015. RBC’s measures fell across all three categories tracked (between 0.3 and 0.1 percentage points).
Atlantic Canada: affordability still attractive and improving
  • The lingering effect of earlier softness in home resale markets led to further improvement in housing affordability in the Atlantic region in Q1. RBC’s affordability measures fell 0.7 percentage points for bungalows and 0.5 percentage points for two-storey homes. The measure for condos was unchanged.
The full RBC Housing Trends and Affordability report is available online as of 8:00 a.m. ET today.

Friday, June 12, 2015

HOME PRICES UP 0.9% IN MAY

JUNE 12, 2015
HOME PRICES UP 0.9% IN MAY
In May the Teranet–National Bank National Composite House Price Index™ was up 0.9% from the previous month, a fifth consecutive monthly increase. The 0.9% rise was slightly below the May average of 1.1% over the last 14 years. This was because Calgary prices fell 3.3% from April, the largest monthly drop recorded for that region, subtracting 0.3 percentage points from the gain of the composite index. The monthly slide left Calgary prices the lowest since April of last year. By contrast, all 10 of the other metropolitan markets entering into the composite index were up on the month, a breadth last seen in August 2014. Prices were up 2.3% in Halifax, 1.6% in Toronto and Montreal, 1.5% in Ottawa-Gatineau, 1.3% in Vancouver, 0.9% in Quebec City, 0.6% in Hamilton and Edmonton, 0.5% in Victoria and 0.2% in Winnipeg. The Ottawa-Gatineau gain came after a run of eight declines in nine months. In the other markets  east of Toronto, namely Montreal, Quebec City and Halifax, prices have risen rather sharply over the past three months after downward corrections that lasted from four to seven months depending on the case. This suggests that these markets are stimulated by historically low mortgage rates. The composite index was at an all-time high in May, as were the indexes of four of the 11 markets surveyed – Toronto, Vancouver, Hamilton and Quebec City. 

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In May the composite index was up 4.6% from a year earlier, an acceleration from April. The 12-month gain was well above the countrywide average in Toronto (7.6%) and in Hamilton and Vancouver (6.2%). In Victoria and Edmonton (4.8%) it was close to th average. In Quebec City (2.9%), Montreal (1.5%), Winnipeg (1.0%) and Halifax (0.4%) it was well below the average. Prices were down from a year earlier in Ottawa-Gatineau (−0.9%) and, for the first time since July 2011, in Calgary (−1.4%).
Victoria    Vancouver    Calgary    Edmonton    Winnipeg    Hamilton    Toronto    Ottawa-Gatineau    Montréal   Québec    Halifax
For the full report including historical data, please visit: www.housepriceindex.ca
National Bank of CanadaTeranet

Wednesday, December 03, 2014

An In-depth Look at the Canadian Housing Market

by Tom Bradley, Steadyhand Investment Funds
In the last couple of weeks, there has been two excellent reports published on the Canadian housing market – one by the Canada Mortgage and Housing Corporation (CMHC) and the other by RBC Global Asset Management. Both are good reads for people who want to dig into the detail and get a better understanding of the many factors that drive housing prices and activity.
Both reports draw conclusions that are consistent with what the real estate industry and banks are saying – there are some signs of strain in the market, but the risks are more benign than what the doomsayers like me are suggesting.
CMHC’s fourth quarter assessment provides an overview of where we are today (price trends, sales to listings ratios, unabsorbed inventory levels and vacancy rates on rental units). Overall, the report concludes that the Canadian market is not overbuilt and overheated, and only moderately overpriced.
Despite the conclusion, I find the CMHC report less useful in addressing what lies ahead. It uses some sophisticated modeling to measure current valuation, but the interest rate cycle is not discussed. Given that house prices are highly geared to changes in interest rates, some sensitivity analysis would have been useful.
The RBC report is very thorough and attempts to address all of the doomsayers’ concerns. There are many interesting charts, including the scorecard below:

I find the author’s conclusion (Chief Economist Eric Lascelles) to be surprising in light of this scorecard. He says, “Broadly, the near-term outlook appears benign, tilting only slightly in a negative direction.” Yes, the near-term is holding up OK, but there’s nothing benign about his 1-5 year outlook.
I learned a lot from both reports, but they didn’t change my view. There are a number of factors that weren’t discussed or need more emphasis:
  • House prices hinge on mortgage rates that are, by any measure, well below normal levels. Basing the price of an asset on another asset that is overpriced (bonds) is a scary proposition.
  • Pricing and market psychology will not be determined by the 72% of homeowners who have more than 25% equity in their house. Rather, it will be driven by the 5% who have less than 10% equity. The mistake forecasters made in the U.S. a decade ago was taking comfort from the majority instead of being wary of the weak minority.
  • What is bothersome is the number of factors that are in negative territory. It’s possible to explain away one or two ratios that are off trend (which Eric does well), but when there’s a wall of them, it gets to be a stretch.
  • Even the most positive of analysts have trouble pointing to any factors that are highly positive. The best either report can do is ‘neutral’. In my mind, it’s hard to make a case for investment when there are no positive indicators to offset the risks.
  • There’s little recognition in either report of how good the environment has been. These are not normal times. Housing prices have had a howling tailwind at their back – subsidized mortgage rates, abundant credit, a growth spurt in the buying cohort (25-34 year olds), rising home ownership and foreign buying. In a few years, we’ll look back and marvel at how good everything was.
  • And the one I feel most confident about – extreme cycles don’t end with ‘benign’ corrections. It just doesn’t happen.

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