Thursday, February 24, 2011

Teranet Index - December 2010


Home prices up 0.3% in December

Canadian home prices in December were up 0.3% from the previous month, according to the Teranet-National Bank National Composite House Price Index™. The advance followed three consecutive monthly declines that had ended an unbroken run of 16 increases. December prices were up from the previous month in five of the six metropolitan markets surveyed. A 0.1% rise in the Calgary market was the first gain in five months. The rise was 0.5% in Vancouver and Montreal, 0.2% in Toronto. Halifax prices jumped 3.6%. We note that the composite index would have advanced 0.3% even if Halifax had been flat. The 0.4% monthly decline of Ottawa prices was the fourth in a row.

Teranet – National Bank National Composite House Price Index™

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The 12-month gain in the composite index slowed in December to 4.1%. It was the sixth month in a row of deceleration. Halifax was the only market to show an acceleration of its 12-month rise, to 8.5% in December from 2.7% in November. The 12-month increase was 4.0% in Toronto, 5.1% in Vancouver, 6.3% in Ottawa and 6.4% in Montreal. Calgary prices were down 2.9% from a year earlier, for a third consecutive month of 12-month deflation.

Data for January from the Canadian Real Estate Association show generally balanced conditions in major urban markets. Toronto and Vancouver could even be considered rather tight markets. The federal minister of finance announced January 17 that the maximum amortization period for an insured mortgage will be reduced to 30 years from 35 years effective March 18. This prospect could influence the resale market between now and the effective date.

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
Calgary154.360.1 %-2.9 %
Halifax132.563.6 %8.5 %
Montreal136.220.5 %6.4 %
Ottawa130.51-0.4 %6.3 %
Toronto124.430.2 %4.0 %
Vancouver156.620.5 %5.1 %
National Composite137.510.3 %4.1 %

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.

Monday, February 14, 2011

San Diego Affordable Again

I have found Rich Toscano's posts over at Prof. Piggington's interesting over the years. Rich had correctly called the San Diego bubble -- the first major US market to experience price weakness -- and has been tracking its distress all the way down.

As a bit of an epilogue to San Diego's terrific bubble experience, Toscano has summarized the city's housing market conditions in his latest post Shambling Towards Affordability: Year-End 2010 Edition.

Why is Toscano such a great read? He has continually concentrated on the true "fundamentals" of real estate investing, including:
  • price to income ratios
  • price to rent ratios
  • construction and real estate sector employment
  • loan arrears
  • rent and wage growth
  • months of inventory
Save a handful of bloggers like CalculatedRisk and others, understanding what truly drives house prices in the long term seems oddly absent from discussion. Toscano has presented both relevant fundamental data as well as poignant analysis of them. Some of Toscano's important contributions have been:
  • Even through the severe recession, he quickly understood rental growth continued to track CPI inflation even as wages and house prices were dropping and inventory was high.
  • Prices per square foot closely tracked the Case-Shiller house price index, allowing a 3 month sneak-preview into apples-to-apples price movements. (The CS-HPI is released with a 3 month delay.)
  • Construction and real estate-related employment distress portended a significant increase in foreclosure activity.
  • Higher quality houses tend to be more "downwards sticky" compared to lower quality stock; likewise detached property prices fell slower than condos and apartments.
The biggest takeaway from Toscano's work is that, in San Diego -- a city with a growing population, a reasonably diverse economy, and desirable climate -- fundamentals eventually mattered. As 2010 drew to a close, San Diego's house price bubble has been summarily bookended with prices approaching fundamental values again, a process that took 5 years from their peak in 2005.

San Diego and Toscano ftw.

Wednesday, February 09, 2011

Roubini Global Economics - Will New Regulations Bring Continued Rebalancing for Canadian Housing?

RGE's Wednesday Note - Will New Regulations Bring Continued Rebalancing for Canadian Housing? - February 9, 2011
By Tetiana Sears and Rachel Ziemba

Though Canada managed to avoid a U.S.-style housing crash, the Great White North may face its own set of difficulties, as the same ample credit extension, low interest rates and government incentives that helped the housing market rapidly recover the losses incurred during the 2008-09 downturn are contributing to increased household indebtedness, which we note in our latest North America Focus. The ratio of debt to disposable income reached a record high of 148% in Q3 2010. As underlying macroeconomic trends (e.g., the open output gap and weak core inflation) warrant an extended pause in the Bank of Canada’s tightening cycle, Canadian authorities have turned to regulatory means to dampen excessive credit practices and ultimately decrease households' vulnerability to rising debt service payments.

To this end, in January the Canadian Department of Finance announced new regulations for mortgages, including a reduction in the maximum amortization period to 30 from 35 years for government-insured mortgages with a loan-to-value ratio greater than 80% and a reduction in the maximum size of a home equity loan to 85% from 90% of the property value. The government also restricted its support for home equity lines of credit (HELOCs) to safeguard its balance sheet from any future problems with structured products. This course of action, which follows similar measures in early 2010, was taken to encourage Canadians to maintain equity in their homes and limit the creation of debt-backed products by keeping them off of the public balance sheet.

The shortening of the amortization will raise the qualifying income of those seeking mortgages approved by the Canada Mortgage and Housing Corporation (CMHC), and some homebuyers (mostly first-time) will be priced out of the market or will choose a more affordable house. The reduction in the HELOC should temper renovation activity and spending on durable goods, dampening consumption. Although the total impact of the new regulation will only be marginal, it will contribute to a decrease in housing demand through this year, along with slower job growth and higher debt-servicing costs. All in all, the softening of the housing market could be a drag on economic growth.

The most recent Canadian housing data (housing starts for January and building permits for December) suggest that Canadian homebuilding activity is stabilizing at the levels of late 2010 as domestic, U.S. and global momentum combine to help bring the market in for a soft landing. This week’s data on new-home construction continued to build on our base case scenario, given stricter lending standards and mortgage origination rules in Canada. Although we don’t see any evidence of a sharp correction, there are risks of some volatility in the housing market in coming months as new mortgage regulations are implemented in March. Despite this likely transitory increase in mortgage applications, the broader trend of cooling housing market activity appears to be well entrenched. Although both new and existing home sales picked up in Q4 2010, the overall pace has notably moderated from late 2009-early 2010. Higher prices, rising debt and slow growth in wages will keep trends modest.

Canada’s growth momentum picked up in late 2010, along with growth south of the border, as exports and mining demand and services picked up. Labor market data, a lagging indicator, suggest that this stronger momentum could carry into Q1, posing upside risks to RGE’s current forecast of 2.3% growth for 2011. Should economic growth surprise on the upside, housing market activity could be more resilient.

Stronger growth would remove support for the central bank’s dovish bias and suggests that the gradual increase in benchmark and long-term interest rates would boost debt service costs. On balance, rising debt payments will be only partly offset by income growth as debt is outpacing wage growth, and we expect that January’s job gains are not sustainable. As the Canadian economy faces these opposing forces, housing market activity should continue to rebalance and is likely to stabilize in the latter part of 2011 at a pace of growth lower than that of 2010. Regulators have to hope the pace remains gradual.

Canadian policy makers are by no means the only ones struggling with the dilemma of whether to worry about frothy asset markets. Capital flows into many emerging market economies, particularly in Asia, have stoked domestic housing markets—with dollar-pegged and RMB offshoring epicenter Hong Kong particularly affected. Other advanced economies, like the Nordics and Switzerland (which have stronger balance sheets than the eurozone periphery) have also experienced strong housing price appreciation, as RGE noted in a recent Europe Focus. They have attracted significant capital inflows during the economic recovery, and the well-capitalized banks took advantage of low interest rates to increase lending, supporting the recovery of the housing market and domestic demand.