Tuesday, December 09, 2008

RBC Economics - Housing Affordability Improves in Vancouver - Long Way to Go Still

These comments (in italics) are from RBC Economics:

Housing downturn — Canadian-style

Canadians have watched with amazement for nearly two years now at the collapse of the housing sector in the United States, the United Kingdom and other countries that experienced overvalued housing prices with the sense that markets in this country stand on much more solid ground. After all, the sub-prime business never represented more than a marginal phenomenon here; Canadian households, while carrying heavier debt loads than in the past, were not financially overstretched; Canadian banks emerged islands of stability amid the global financial storm; incomes remained well supported by steady job creation and a strong domestic economy; and the influence of speculation — especially on new construction — was deemed to be subdued.

Then, late in 2007, red-hot Alberta markets began to slide, followed earlier this year by British Columbia’s markets. Most recently, Saskatchewan, last year’s hotspot, and areas in Ontario joined the weakening trend. All of a sudden, Canada no longer appeared immune to a generalized housing downturn. In fact, the souring of economic conditions, eroding consumer confidence and, in some instances, past excesses are creating a downdraft that the majority of Canada’s housing markets will be hard-pressed to resist.


As a sluggish economy threatens income growth and makes households much more skittish about major financial commitments, issues of affordability are coming to the fore. Much of the market correction taking place in British Columbia, Alberta and, now, parts of Saskatchewan can be traced to very poor affordability levels in those provinces.

However, high home ownership costs are not unique to western Canada. RBC’s affordability measures lie above long-run averages in all provinces and across all housing segments, which suggests that the downdraft will be felt widely.

Still, the extent of “unaffordability” varies substantially by province, with measures running as high as 48% above average in the B.C. standard townhouse segment and as low as 6% above average in the Quebec detached bungalow segment. Overall, British Columbia, Saskatchewan and Alberta remain the least affordable markets in Canada (relative to their respective historical norms).

While the Canadian housing sector is undoubtedly entering a cyclical downturn, the risk of experiencing a U.S.-style meltdown is remote. The supportive factors mentioned above are still mostly in play and should provide enough backing to prevent markets from spiraling down even as the Canadian economy slips into recession.

In short, RBC provides a half decent view on the current housing situation. They pull a couple punches when it comes to pointing out how ridiculously unaffordable BC and specifically Vancouver is but that is what I expect from the bank. This is what they have to say about BC:

British Columbia — In full-blown correction mode

The situation is unraveling fast in British Columbia. Provincial housing markets are correcting from extremely tight conditions that built up during the boom and drove prices sharply higher (more than doubling between 2002 and early 2008). By the first quarter of this year, RBC’s housing affordability measures for
British Columbia ranged from 38% to 50% above long-term averages — the most inflated ownership costs of all provinces (the higher the measure, the least affordable is home ownership) and clearly an unsustainable position. Demand has subsequently dried up, while elevated prices have attracted more sellers, swiftly shifting pricing power to buyers. Prices began to decline in the spring, a trend that gathered speed through the early fall. This has helped improve affordability modestly in the second and third quarters, but levels in British Columbia still suggest that further price correction should be expected in the near term.

Not too bad for a bank economist! This is what they have to say about Vancouver:

Vancouver — Bumpy ride on its way back to earth

Despite price declines since the first quarter, valuations in Greater Vancouver continue to reign supreme atop Canada’s housing markets. In the third quarter, prices were roughly double the national average for most housing types, with standard condominiums the exception at “only” 70% above average. Meanwhile, median family income in Vancouver is estimated to exceed the Canadian norm by just 8%. Poor affordability is nothing new to the city, as its home ownership costs have long been the highest in the country. However, the significant deterioration in the past three years or so has exacerbated the situation, attaining unprecedented levels by the start of 2008 and adding tremendous stress on the local market. Price drops so far this year have brought some minor relief but much more is likely coming. With qualifying income estimated at more than $150,000 for a standard two-storey home and $135,000 for a detached bungalow, the vast majority of Vancouver families are effectively shut out of those market segments. The only option for many remains standard condominiums where the cost of ownership is not as steep.

Fairly balanced and they do allude to further price drops. The report properly lays blame on unaffordability for the price decreases in the local real estate market. It is outrageous that prices have gotten to these current high levels and the current correction is going to be very severe out of the necessity to bring affordability back for average families in Greater Vancouver.

Not content to let sleeping dogs lie, Cameron Muir had to weigh in on the affordability discussion with some BCREA talking points. Here are the quotes from the Financial Post:

Cameron Muir, B.C. Real Estate Association chief economist, said that affordability has actually improved more than the RBC report suggests because the report is based on third-quarter data and more information has since been collected. "We've seen prices erode even further," Muir said. Sales numbers are unlikely to go much lower than those seen last month, he said. Muir anticipates that after the first quarter of next year, if not before, sales numbers will pick up.

Home prices will edge down as long as there's an imbalance between the number of buyers and number of sellers, Muir said. Over the next several months, he predicts that gap will narrow and "home prices will firm up." By the second quarter of 2009, Muir said "we expect to be in a situation where home prices are fairly flat," and home sales will begin to increase on a year-over-year basis.

We'll hold you to that prediction Cameron. It is now enshrined forever and we'll see how your rose coloured crystal ball works compared to some eyes-wide-open analysis.

12 comments:

Skye said...

I do believe prices could be very sticky on the way down, with a lot of people treading water in the false hope that there's going to be a flood of buyers after the Olympics. Plus construction layoffs are probably going to peak in 2010. On the other hand, if everyone floods the market in the Spring and inventory gets up to 35,000 or more...

mohican said...

Totally agree skye that prices are sticky on the way down. Unlike the stock market - the real estate market is essential 'illiquid' during the correction phase and it takes a substantial amount of time for the price drops to feed through the system.

I don't expect a 'spring bounce' just because of the huge supply situation and the much tighter lending conditions. If Months of Inventory stays above 10, there won't be any meaningful positive price changes.

Tony Danza said...

I do believe prices could be very sticky on the way down

Since when is a 10-15% drop over the course of a few months "sticky"?

mohican said...

tony - in comparison to the stock market or any other highly liquid market the real estate market is very 'sticky' even at that current levels of price correction, which seem very fast for real estate.

Outlaw said...

liquid vs illiquid markets will not affect the velocity of the drop, the drop just may not be seen.

eg. a home can sit on the market for $100 when the highest bid is $50. just because there are no sales to show the market price is dropping doesnt meen the market price remains the same.

blueskies said...

at one point there were discussions on prices "gapping down"
is this still happening?

patriotz said...

Canadians have watched with amazement for nearly two years now at the collapse of the housing sector in the United States, the United Kingdom and other countries

This is incorrect of course, the Canadian housing bust began in mid-2007 in Alberta, the same time as the UK bust..

I would also substitute "ignored with smugness" for "watched with amazement".

mohican said...

"ignored with smugness"

LOL - so true. I meet people everyday who blame the US for all Canada's problems. As if Canada doesn't have it's own problems of its own making. We have our own 'made in BC' housing bubble and we'll reap the 'made in BC' consequences. We'll blame the US the whole way down while looking to them to pull us out of the funk when we are at the bottom.

Octagonian said...

Careful, Mo, you may earn the censorious, Wizard of Oz-like wrath of the frightened little fools and mountebanks over at the REBGV.

But Muir is beyond belief at this point. Prices to begin rising after mid next year. This guy is priceless.

Meanwhile, it appears even the RBC is hinting, by my reading, that prices will yet come off another 50%.

And probably more in West Van.

Rob said...

Is Muir for real? I can certainly appreciate not wanting to bite the hand that feeds you, but these pronouncements fly in the face of a reality easily understood by clever 12 year olds: if there's a bumper crop of apples, don't expect to get top dollar at your apple stand.

He's starting to sound like a juke-box. Plug in a quarter and he'll sing any tune you want to hear.

Are economists really allowed to just beak off inanely without their remarks being accountable to some ethical or disciplinary college?

patriotz said...

Economists have no college as they are not a legally recognized profession. Economists are not legally required to have any credentials from a professional body or the government. The only discipline they face is in the marketplace of ideas.

This is the case for most occupations for which one gets a BA or BSc as opposed to going to professional school - e.g. scientists, computer programmers, etc.

Actually I agree with this as I think intellectual endeavor should not be subject to legal sanctions.

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