Wednesday, February 24, 2010

Teranet House Price Index for December 2009


The composite index above the pre-recession peak

Canadian home prices in December were up 5.2% from a year earlier, double the 12-month advance recorded in November, according to the Teranet-National Bank National Composite House Price Index™. December was the third consecutive month in which prices were up from a year earlier, after 10 consecutive months of 12-month deflation. The turnaround is due to eight straight monthly increases in the countrywide index. December's robust 1.2% monthly gain pushed the composite index above the pre-recession peak, that is, to a new record.

Teranet – National Bank National Composite House Price Index™

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The December monthly rise exceeded 1% in four of the six metropolitan markets surveyed: Calgary (1.6%), Vancouver (1.3%), Toronto (1.2%) and Montreal (1.1%). For Montreal it was the first vigorous increase in four months, corroborated by data from the Greater Montreal Real Estate Board showing a tightening of the resale market in December. The Vancouver gain, though slightly greater than Montreal's, was the smallest recorded in the seven months since prices in this market began rising again. For Toronto it was the second smallest.

Halifax-area prices declined 1.9%, their first retreat in six months. The monthly rise in the Ottawa market was 0.4%, about the same as in the previous two months.

The 12-month appreciation was 7.1% in Toronto, 6.2% in Ottawa, 5.1% in Vancouver, 5.0% in Montreal, 2.9% in Halifax and 0.1% in Calgary. It was the first time in 18 months that Calgary prices were higher than a year earlier. Vancouver having passed that point in November, 12-month deflation is now a thing of the past in all of the markets surveyed. However, Calgary prices are still down 9.3% from their pre-recession peak of August 2007 and Vancouver prices are down 1.1% from their peak of June 2008.

Teranet – National Bank House Price Index™

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

Metropolitan areaIndex level
December 2009
% change m/m% change y/y
Calgary159.031.6 %0.1 %
Halifax122.21-1.9 %2.9 %
Montreal127.991.1 %5.0 %
Ottawa122.780.4 %6.2 %
Toronto119.651.2 %7.1 %
Vancouver149.001.3 %5.1 %
National Composite132.151.2 %5.2 %

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.

Wednesday, February 17, 2010

CMHC - Canada's Moral Hazard Corporation

From here:

As the world’s spotlight turns to the Vancouver Olympics, all eyes will be on Canada. Our nation suffered comparatively less than other G7 economies during the last recession, and our banking system has received praises for being good and boring (read the Sceptical Market Observer’s comment on this).

To be sure, our economy is adding jobs, our stock market has rallied sharply, our currency is close to reaching parity with the USD, commodity exports are up, everything looks great. A buddy of mine even told me that our currency is being bought by central banks around the world. Canada seems to be on a tear.

But things are far from perfect. For one, there is a housing bubble in the making that could last a lot longer than people think. Stephen Jarislowsky, one of Canada’s best known investors, says he believes government measures aimed at juicing the housing market has put the sector in a bubble:

“I am convinced there is a housing bubble in Canada,” Mr. Jarislowsky told Bloomberg News. “… I conclude that the prices of housing today in the U.S. are cheaper than they should be, and that the prices in Canada are far more expensive than they should be.”

Mr. Jarislowsky is not alone. Other economists have also fretted about a bubble given the stunning rebound in real estate after the slump, and projections for record sales and prices this year. Ottawa is now considering tightening some rules. Said Mr. Jarislowsky: “They have basically encouraged people to buy houses based on cheap mortgages. That has created the opposite effect of what was desirable.”

Then, there is what Peter Foster of the National Post calls the Canada Moral Hazard Corporation:

There has been much official chest swelling over Canada’s relatively strong performance during the financial crisis, but perhaps Canadians shouldn’t — if you’ll excuse the mixing of metaphors — be counting their chickens until they are sure that there are no black swans present. And in fact there does seem to be one dark, plump, bird looming around the back of economic barnyard: the Canada Mortgage and Housing Corporation. Or is that a turkey that should be renamed the Canada Moral Hazard Corporation?

The CMHC was never given a cutesy acronym like its U.S. equivalents, Fannie Mae and Freddie Mac. But why not “Morrie Haz,” acknowledging that it has always been an instrument of moral hazard, the situation where insurance makes the insured-against event more likely?
As we know, Fannie and Freddie — which were privately-owned but “government-sponsored,” which meant they inevitably got bailed out — were front and centre in the U.S. housing market meltdown, which in turn precipitated the global financial crisis.

There are increasing concerns that the Canadian housing market is headed the same way as that of the U.S., stoked by the same factors: artificially low central bank interest rates, and the government insurance/promotion of risky mortgages.

This policy double whammy explains the growing calls for somebody — banks? CMHC? Carney? Flaherty? Anybody else? — to tighten mortgage regulations. These requests appear puzzling until we realize the role of the CMHC in encouraging perverse behaviour.

In a free market, if banks felt a housing bubble building, they would simply tighten standards themselves, either by demanding higher credit qualifications, hoisting rates, or shortening amortization periods. Hoisting rates is out of the question, since rock bottom mortgage rates are now considered by the Bank of Canada to be essential to national economic recovery and protection of our export industries. That leaves Morrie Haz waiting there to insure mortgages, and gives the banks every incentive to hand out any loan that can get insurance. However, they obviously grasp that such cosmic policy fecklessness will ultimately come back to haunt them.
A couple of weeks ago, Peter Routledge of credit analyst Moody’s pointed out that the overheating of the housing market was goosing an unsustainable increase in household borrowing more generally. “As witnessed in the United States,” he wrote, “this movie does not end well.” Specifically, once the punchbowl of low interest rates disappears, households find themselves in trouble, and so do their bankers.

Mr. Routledge noted that Canadian banks likely wouldn’t wind up in the same depths as their U.S. counterparts, but that is only because their riskiest mortgages are backstopped by CMHC. But this makes the systemic threat to the Canadian economy greater.

The U.S. crisis was massive but did not fall entirely on Fannie and Freddie. It was shared with other financial institutions. Nevertheless Fannie and Freddie both failed and had to be taken into government “conservatorship.” Mr. Routledge suggests that the situation is more “secure” in Canada, but as a recent report from the Fraser Institute points out, what this really means that the Canadian system features “massive taxpayer exposure.”

Mr. Routledge suggested that CMHC should tighten its insurance criteria, and this week he was seconded by former Governor of the Bank of Canada David Dodge.

The Fraser study, by Neil Mohindra, confirms that the taxpayer risk from a housing collapse is greater in Canada than elsewhere. He notes that a stunning 90% of all insured residential mortgages in Canada are covered by the CMHC. This amounts to an estimated $480-billion for which Canadian taxpayers would be on the hook if the housing market tanked (although any loss would obviously only be a fraction of this amount).

The study suggests that the CMHC’s activities should be privatized, but that possibility appears a long way down the road, both for practical and political reasons. The biggest problem is that nobody is going to want to privatize a property which harbours a potential time bomb.
The whole thrust of CMHC insurance is to encourage banks to make riskier loans. Normal insurance provisions are based on actuarial principles. CMHC insurance is based — like the activities of Fannie and Freddie — on promoting home ownership. Mixing social and economic objectives usually ends in taxpayer tears.

There is no indication that the Canadian mortgage market has been subject to the lunacies of the U.S., where — for a while — anybody with a pulse could get a home loan. Still, high ratio mortgages — that is, ones with down payments as low as 5% — inevitably carry a hefty risk of default when a bubble bursts. That default then becomes the CMHC’s problem.

As such, notes Mr. Mohindra, Canada is not a model for anybody. Morrie Haz has always been an accident waiting to happen.

According to Moody’s Mr. Routledge, “If policymakers deploy the appropriate tools early rather than late in this period of household credit expansion, perhaps the Canadian movie will end differently.”

But Finance Minister Jim Flaherty knows that ending the party is not going to be popular, which is where inevitable political self-interest compounds those practical problems. Meanwhile CMHC isn’t just a provider of potentially reckless insurance and the depository of last resort for mortgage assets the banks don’t want. Yesterday a representative of Diane Finley, Minister of Human Resources and Skills Development, who is also responsible for CMHC (go figure), was in Montreal handing out stimulus slush under Canada’s Economic Action Plan.

Mr. Flaherty doesn’t want to see a bubble, much less a bomb. But when it comes to which movie we’re coming to the end of, maybe he should check out The Hurt Locker. Just in case.

Of course, lenders like ING, oppose any clampdown to rein in mortgage borrowing. Sound familiar? I agree with Stephen Jarislowsky and I also fear that this movie isn’t going to end well. Enjoy the Vancouver games, because I feel a post-Olympics winter chill headed our way.

Read more:

Monday, February 15, 2010

Federal government set to restrict mortgages

Federal government set to restrict mortgages

We will soon see what the changes will be.

From CBC:

Sources say the measures will discourage reckless real estate speculation, such as borrowing heavily for an investment property that is not the investor's primary residence. Flaherty is also set to deter households from taking on more mortgage debt than they can afford to repay when interest rates rise, as they are expected to do later this year.

The finance minister is also expected to discourage people from raising cash by refinancing their homes with larger mortgages — again because they may not be able to make the payments at higher interest rates.

The Canadian Press reports that Flaherty will implement a debt affordability or income test that applicants must pass to qualify for mortgages insured by the Canada Mortgage and Housing Corp.

Read more:


National Post article outlining the changes:

Thursday, February 11, 2010

City of Vancouver Permit Update

I produced some graphs about 10 months ago showing the trend of permits in the City of Vancouver. Here is an update to November, 2009. I do not yet see data from December or January on the City's website.

First all residential dwelling permits graphed since 2007.

Here are the permits parsed for 1-2 dwelling units only (i.e. SFHs):

Note there is an increase in permit value in the later half of 2009. I am unsure why that occurred.

We turn our attention to the proverbial elephant in the room, multi-unit buildings (i.e. condos):

And a quick look at all permits' value, residential and commercial:


  1. There should be no doubt in anyone's mind that the City of Vancouver has become reliant upon permit revenue to fund its ongoing operations. That the City has announced severe cuts to operations -- layoffs -- should come as no surprise after looking at these data.
  2. This is the strongest evidence I have seen that there was a severe building recession through most of 2008 and into early 2009, though we all pretty much knew this to be the case without these data. The total number of permits issued through this recession is significantly below what is required to feed the City's average population growth rate of the last decade.
  3. Permits for SFHs eked out a rebound in the second half of 2009. I am not surprised by this at all given how low mortgage rates were and continue to be. I would expect a continued higher level of permit applications for SFHs through at least the first half of 2010.
  4. The proverbial elephant in the room is multi-unit permits. While there was a slight resurgence in permits for condos in the latter half of 2009, it is significantly subdued from those heady days earlier in the decade.
  5. The majority of laid off construction workers must look elsewhere for employment in the coming year.
  6. Laneway housing started to be reported in November 2009. There were a handful of permits issued: 9. I will be interested to see how successful this scheme becomes in the coming year.

Tuesday, February 09, 2010

MLS to be Opened Up?

Article from the Globe and Mail.

The democratization of the MLS data would be the best thing to happen for real estate buyers since the data became available online in 1996.

Sunday, February 07, 2010

Construction employment

Housing starts have really fallen off a cliff in the past year. However, we have not yet seen the last of the construction lay offs. Why not? Because construction employment relates to units under construction, not starts. Units under construction has fallen, but still has some way to go--we're maybe half way there. I predict it will bottom out below 10K/year. This means we still have a lot of construction jobs to be lost.

As for construction employment, it has dropped by around 20 percent since the peak. I think it has a long way to go--I would not be surprised at seeing 2001 levels again by the end of 2010.

That alone, all else equal, would be enough to push the unemployment rate back above 10 percent.

These rates do appear to have plateaued at current levels. However, once the Olympics are done and we see the continued completion of construction projects through the spring and summer, I would not be surprised at all to see 10 percent unemployment in BC by the end of the year.