Wednesday, November 24, 2010

Teranet Index: September 2010


Price declines in all six markets in September

Canadian home prices in September were down 1.1% from the previous month, according to the Teranet-National Bank National Composite House Price Index™. The monthly decline ended a string of 16 consecutive increases in the composite index since the last monthly deflation in April 2009. For the first time since February 2009, prices fell in all six of the metropolitan markets surveyed. The declines were 2.4% in Halifax, 2.2% in Calgary, 1.6% in Toronto, 0.5% in Ottawa and 0.3% in Montreal and Vancouver. For Vancouver it was the third consecutive monthly decrease and for Calgary it was the second.

This result was reflected in a further deceleration of the 12-month price increase in September, to 7.9% for the composite index. It was the third consecutive month of deceleration, leaving the 12-month rise the smallest since last January. The 12-month increases range quite widely from market to market: 9.2% in Vancouver and Ottawa, 9.0% in Toronto, 7.6% in Montreal, 3.6% in Halifax and 1.7% in Calgary.

Teranet – National Bank National Composite House Price Index™

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In October, according to our calculations based on data from the Canadian Real Estate Association, market conditions were balanced in Canada as a whole, with Calgary presenting a buyer's market.

Teranet – National Bank House Price Index™

The historical data of the Teranet – National Bank House Price Index™ is available at

Metropolitan areaIndex level
% change m/m% change y/y
Calgary156.89-2.2 %1.7 %
Halifax128.07-2.4 %3.6 %
Montreal135.67-0.3 %7.6 %
Ottawa132.64-0.5 %9.2 %
Toronto125.98-1.6 %9.0 %
Vancouver154.84-0.3 %9.2 %
National Composite137.94-1.1 %7.9 %

The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at

The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion.

All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.


Marc Pinsonneault
Senior economist
Economy & Strategy Group
National Bank Financial Group

Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report.

1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.

Sunday, November 21, 2010

Mark Carney Speaks to Michael Enright

CBC's Sunday Edition's Michael Enright had a 15 minute conversation with Bank of Canada Governor Mark Carney. You can listen to the entire interview here (hour 2, about 10 minutes in).

The most cutting point he made is transcribed below, at about 26:00 on hour 2 (emphasis mine):
Michael Enright: You expressed concern publicly for a long time I think from the moment you took the job about household debt in Canada. I think it was running somewhere around $40,000... and you're concerned about that. Interest rates are very low at the moment. Is there a correlation between the lower the interest rate [and] the more likely it is for people to take on more debt?

Mark Carney: Well this is the concern. Interest rates in Canada are low, abnormally low, exceptionally low...

ME: Are they emergency rates do you think?

MC: Well we had them at emergency levels from April of last year, in April of 2009 after the crisis...

ME: Right.

MC: The Lehman crisis. We got them down to 25 basis points and we further increased our balance sheet beyond that. But we moved them up from emergency levels because the Canadian economy is back at the level we were before the crash, we recovered all the jobs we lost during the crash, and things have moved quite positively for Canada. But they're still at exceptionally low levels. And the risk is that Canadians, some Canadians, take on debt on the assumption that interest rates will always be this way.

ME: Or they're here now, they look pretty good and they'll probably stay that way for a while.

MC: Excatly. And particularly when one thinks about mortgage debt, thirty year mortgage debt, that is not a sensible assumption. And our concern is that people will get themselves into positions which will make it very difficult to service their debt.

ME: But you can't say, wait a minute folks, I wouldn't go and buy a summer cottage because something might happen in the next 6 or 8 months. I mean, that would send Bay Street spinning, wouldn't it?

MC. No. We're taking a longer term perspective on it and we're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.
That's central banker speak for "Wake the f&%$ up, Canada."

And, for macro nerds, on "currency wars" and exchange rate management:
ME: The huge worry going into the G20 and we read about it all the time... is the possibility of a currency war. First of all what is a "currency war" and if one breaks out is Canada protected?

MC: Well it's not a term that we use but the concern is that there will be a series of countries will engage in what is effectively competitive devaluation. They will hold down the value of their currency relative to others and that the number of these countries and the weight of these countries will be such that unsustainable adjustment will be pushed on other countries...

ME: To do the same...

MC: Yes. And other countries whose currencies float such as Canada. So in the extreme earlier this fall you had roughly 40% of the currencies by trade weight -- with the US dollar -- so in relative importance four of those 10, or 2 out of 5 of the currencies that trade with the US in importance managing their currencies to some extent.

ME: Gaming the system I guess... Is that what it is? It's like a trade war only you're using currency instead of goods.

MC: Yeah, you're using currency instead of tarriffs, and the issue is, the fundamental issue, is that doesn't work in the long term. You can cause damage to the global system in the short term, but it doesn't work in the long term because ultimately, those adjustments to currencies will come through relative inflation differentials, if nothing else. And if you'll allow me a second, the issue right now is that, let's take between China and the United States, and if China's currency doesn't move, the other way for China's real currency to move, in other words the real value of Chinese goods to increase relative to US goods, which is the same thing in effect, is there to be higher inflation in China than in the US. And what we've seen in the last few months, which we've been saying at the Bank [of Canada] for years, is that Chinese inflation's accelerating and US inflation is decelerating. And so you're getting a more difficult adjustment than you would have if currencies were allowed to adjust.

ME: If the worst-case scenario gets into play, is Canada going to get caught in the crossfire? What protections do we have?

MC: Well we have a number of protections. I think the short answer is no, I mean we're not naive in this situation. We have a number of tools: in the extreme we can intervene in currency markets if extreme movements in our dollar seriously threaten economic outcomes in Canada and those are decisions taken by the Minister of Finance and the [BoC] Governor. They are extreme... but we have tools there. We, very importantly, and I think it's important to understand, our level of currency is very relevant for the Bank of Canada's mandate, obviously. It affects the outlook for inflation in Canada, and if it were to threaten our ability to achieve our inflation target, which is what we're accountable...

ME: the 2%...

MC: The 2%. That's what we're accountable to parliament and Canadians for, we would adjust policy. And we have flexibility in policy here in Canada and we would not hesitate to use it if it were appropriate.

Monday, November 08, 2010

Residential Mortgage Market

Here is the annual survey of Canadian mortgage holders.

"About one-in-five (18%) of mortgage borrowers took equity out of their home in the past year, unchanged from a year ago. The average amount is estimated at $46,000. These results imply that the total amount of equity take-out during the past year has been $46 billion. The most common use for the funds from equity take-out is home renovations, which accounted for about $15 billion of the equity take-out. Debt consolidation and repayment account for $13.5 billion of the total take-out."

"22% of mortgages in Canada have amortization periods of more than 25 years. , The share is quite high (42%) among home owners who have, during the past year, taken out a new mortgage on a newly purchased home or condominium."

Thursday, November 04, 2010

Competition Bureau and MLS

As you have probably heard, the Canadian Real Estate Association (CREA) approved changes to the rules governing the use of its Multiple Listing Service and the ability to pay for a la carte services such as a flat fee "listing only" service (akin to For-Sale-By-Owner FSBO). Others have commented on the changes. CBC's The Current ran a piece on November 3rd talking to a Calgarian owner, Bernadette Lonnegan who has tried to sell her property since May, first through an FSBO service, then through a Realtor on MLS offering a "listing only" service.

Ms. Lonnegan, however, has had little luck in selling her property. Her ability to list on MLS produced more traffic but, as it turns out, it also produced a lot of "undesirable" traffic in the form of (likely) scam artists, and, perhaps, anaemic traffic from buying agents at established firms. The overhead in selling a large capital asset, for her, even given she had free time to handle the listing, has turned out to be significant. Herein lies one of the many issues with FSBO in general.

Certainly Realtors have been given a hard time on local real estate blogs, from being called "realtards," shills, used-car salesmen (ouch...), to the more poignant criticisms of the real estate sales industry in general surrounding: the commission structure, obfuscation of previous sales data (which is public through land title offices), conflict of interest when acting as a buyer agent, etc. In the case of poor Bernadette, it turns out selling an expensive capital asset has proven to be difficult. She goes as far to state she thought going FSBO was not worth her time and effort and, doing it again, would have used a Realtor.

The CREA's move to allow access to MLS to FSBO certainly provides a need to a segment of potential home sellers. It should not be underestimated, however, how difficult the sales process for a multi-hundred-thousand dollar capital asset can be. For those who regularly sell in such an environment or simply have confidence they know the sales process, FSBO is a viable choice. But for the overwhelming majority of homeowners this is unlikely the case. Even with FSBO, there is still a chance a buyer agent will want a commission regardless.

What The Current's interview showed me is that, while opening MLS to FSBOs is welcome in principle, it is unlikely to have a significant effect on the marketplace. That the overwhelming majority of Realtors voted to accept these changes is an indication of this.

The next likely step in overhauling MLS will come in the form of opening up the previous sales data to the public, as has been done in the US for several years now. Companies like Google or Redfin, with their various technological innovations, are effectively kept out of the marketplace. Certainly another method of "opening" up the previous sales data could come in the form of changes to the land title offices' distribution of bulk sales data to large companies for a fee. In sum, depending upon what data are provided, it could produce more revenue for them than would the piecemeal requests they receive today.

A big question, as with FSBO, is will access to previous sales data help make the market more efficient? As much as I would like to think so, experience in the US showed that even with unfettered access to sales and mortgage data, many areas of the country saw significant price run-ups regardless. As a value investor looking to buy property, I would not care too much (though not at all) about previous sales data. The price paid is based upon value -- net operating income and development potential -- not what other people are currently paying. As a seller I would care quite a bit about previous sales data, though in theory even if going through a listing-only service, such a service should be able to provide sales data for little extra charge. Nonetheless, in principle, having previous sales data would be a welcome change towards a more open marketplace.