Wednesday, October 26, 2011

August 2011 CMHC Data - Vancouver CMA

A long hiatus presenting CMHC data from the Vancouver area has ended and here are mohican/VHB's charts for housing starts, housing completions, and under construction, as well as graphs showing how they compare to population growth.


There was a severe, though brief, construction recession in 2008-2009, as indicated by the dropoff in starts. Note that since we are averaging 12 months of data, the troughs will be lagging by about 6 months (i.e. "group delay"). 12 months of completions look to have bottomed in July 2011, putting the actual bottom in about January 2011. The nadir of completions coincides with the start of a run-up in prices around that time.

Starts are climbing again; recent employment reports indicate robust construction employment, as we would expect as starts are booked and under construction trends up.

12 months of completions has been smoother than starts as projects are likely delayed rather than hurried. The amount of under construction between mid-2005 and mid-2009 indicates there was a significant backlog that has now been mostly worked through.

Despite higher prices and robust population growth from 2002-2011, new people per completion has averaged 2.1 as opposed to 2.8 from 1992-2001. This may be in part due to the change of construction mix -- more condos and less detached dwellings. At the same time, if detached houses have become larger than in previous decades, the number of bedrooms -- a potential method of determining total dwelling capacity -- may have increased in detached dwellings to partially offset the lower bedroom count in condos. As a start into this, I pulled the data from 2008-2011 on starts and completions by dwelling type (single detached and row/apartment/other) and graphed below. I then estimated 1.6 bedrooms per multi and 4 bedrooms per single-detached.

The dataset isn't large but one interesting point is that new single detached construction is trending down (i.e. starts < completions) whereas multi-unit construction is trending up. I was hoping to get a sense on how much of a lag the various construction methods produce; based on the graph it looks like detached construction starts lag completions by about 7 months. With less certainty it looks like the multi-unit construction minimum lags by about 19 months; this seems low so I hope I can get more data to fill this in.

The amount of under construction has increased above 12 months of starts starting in 2005. It is unclear why under construction has increased so significantly, though it could indicate increased speculative activity and favourable presale contract terms for developers -- the investors of the units under construction are willing to put up with longer project schedules or other delays. It may also be that multi-unit highrises have longer build times. This produces an interesting dynamic, namely that to accommodate future population growth estimates, larger projects must be more forward-looking.

To analyse this further I cross-correlated the 12-month starts and completions monthly data on 10-year forward sliding window and looked for peak correlation. The results indicate that under construction times are increasing, thus an increased time to build for new dwellings. This makes sense given that multi-unit construction is now taking a larger share of total construction, currently making up around 3/4 of all dwelling units. (If you go by my 4 bedroom 1.6 bedroom breakdown, that's an average of 2.2 bedrooms per dwelling, however multi would only compose 55% of new bedroom stock.)

In summary, new dwelling formation in the past decade has produced more dwellings per new entrant than in past decades. It is unclear how the condo-detached mix has contributed to allowing for a higher dwelling construction rate and how much is nascent oversupply. Further work breaking down starts by dwelling type by comparing to previous decades can help answer this. In addition, the concentration on dwellings with longer construction times may have implications for dwelling supply stability -- longer lags lead to more fluctuations in dwelling starts.

Tuesday, October 25, 2011

More on BC Population Growth Q2 2011

A quick follow-up to a previous post made on BC population growth. No pretty graphs this time, just some numbers and some "analysis":

Population growth

Net International average 1992-2010: 9905
Net International average 2003-2010: 10858
Net international 2011: 7049
Net pop growth average 1992-2010: 13939 (net population change 1.6% YOY)
Net pop growth average 2003-2010: 14279 (net population change 1.3% YOY)
Net pop growth 2011: 9211 (net population change 1.1% YOY)

Net International average 1992-2010: 10270
Net International average 2003-2010: 11024
Net international 2011: 9525
Net pop growth average 1992-2010: 16691 (net population change 1.6% YOY)
Net pop growth average 2003-2010: 17135 (net population change 1.3% YOY)
Net pop growth 2011: 12281 (net population change 1.3% YOY)

Net International average 1992-2010: 11806
Net International average 2003-2010: 13721
Net pop growth average 1992-2010: 20077 (net population change 1.5% YOY)
Net pop growth average 2003-2010: 20725 (net population change 1.3% YOY)

Net International average 1992-2010: 6218
Net International average 2003-2010: 6524
Net pop growth average 1992-2010: 11222 (net population change 1.5% YOY)
Net pop growth average 2003-2010: 10949 (net population change 1.3% YOY)

Current Q1-2 2011 pace is 70% of the average Q1-2 population growth and 75% of the average Q1-2 net international since 2003. At current trends, there will be 10 000 fewer international immigrants than the average since 2003. There will also be 20 000 fewer net migrants (net international plus net interprovincial) than the average since 2003. That means an immediate demand drop of about 8 000-10 000 dwellings province-wide compared to previous. This is a further deterioration from a drop-off in net migration in 2010 compared to years 2005-2009. Some areas of the province, most notably the Okanagan, are already experiencing slower residential construction activity.

Lower population growth is usually, and logically, coupled with lower residential construction activity. As I highlighted previously, province-wide construction employment contribution still remains above the 15-year average and was the primary sector to take up up the slack from a quickly-deteriorating manufacturing employment base over the last decade. I am concerned that BC's construction workers and commensurate supporting infrastructure will have few places to turn if construction activity wanes.

Tuesday, October 04, 2011

Greater Vancouver Market Snapshot September 2011

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to September 2011.
Commentary: September 2011, continuing from previous summer months, has produced more tepid sales numbers than years past. A continued trend of higher months of inventory (MOI, the number of months it would take to clear month-end inventory at current monthly sales levels), a key indicator of market liquidity and impending price strength, is typical in the second half. Lest we forget that prices are still high by most validated measures and it will take a prolonged period of MOI well above 6 to bring them down to more historic levels. We are currently at about 7. Below is the predictor of price gains, based on half-over-half price change to months of inventory correlation:
What this shows is the change in prices in a month from 6 months ago based on actual data and “predicting” the price based on months of inventory from that month based on linear regression of half-over-half price change to months of inventory (with 3 month moving average).

What is interesting is that the model predicts much smaller movements in price than what we have seen since early 2009. If we assume that the post-2009 market is now more volatile (smaller MOI changes mean bigger price changes than before), we should be seeing more significant price drops into the fall.

I’m not exactly sure why the volatility has increased — my best guess is because of low interest rates (convexity change) — but if MOI starts piling on into the new year, there’s a good chance we could see a larger-than-expected downdraft in detached prices by the end of 2012.

I (and others on bearish real estate blogs) have stated repeatedly that low interest rates are no free lunch based on a simple discounted cash flows (DCF) analysis. There are some early indications that increased volatility in price movements will be the mode that leads to a correction in a low-interest-rate environment.

Central 1 B.C. Housing Forecast 2011-2013

Report available here (PDF). Excerpts (emphasis mine):

A key characteristic of the post-recession housing market has been the divergent housing strength between the Lower Mainland and most other areas of the province. While the Lower Mainland-Southwest and, to a lesser extent, the Capital region had shown relatively stronger post-recession sales activity, most other regions remained at recessionary levels. The impact of low interest rates was more benefi cial for real estate markets in larger, diversifi ed economies with a higher proportion of local area buyers. In addition, employment growth was generally weaker outside of the Metro Vancouver region.
On overvaluation in the Lower Mainland:
It has become fashionable to suggest that price levels in Lower Mainland-Southwest region of the province, and particularly Greater Vancouver, are set to correct substantially due to the significant price gains in recent years and a de-linking of home prices relative to income and rental rates. Central 1 does not subscribe to this view, but does expect price gains to slow considerably over the forecast horizon. While price levels may turn lower in the near term, the annual Lower Mainland-Southwest median resale price level in 2012 is forecast to surpass 2011 by 1.4% to reach $497,000. A further gain of 3.6% is forecast in 2013 Central 1 deems a significant price correction in the Lower Mainland-Southwest to be unlikely for various reasons. First, much of the price growth in the region has been attributed to disproportionately strong demand for higher priced single-detached product in localized regions such as the west side of the City of Vancouver and Richmond. In contrast, price gains have been less substantial in other markets and product types, meaning this has not been a region-wide price surge. Moving forward, demand will likely remain stable as economic growth, albeit slow, persists and mortgage rates remain low.

In addition, speculative demand in the region remains low. The proportion of units re-sold within six months of purchase can be used a proxy for speculative activity. In theory, speculators look to gain through capital appreciation over a shorter time-frame relative to home-owner occupiers. In a period of higher speculation, which is generated by strong market activity and price gains, this proxy generally rises. However, this metric has exhibited a declining trend since early 2008, currently hovers near 2% and operates near normal levels. In contrast, this proxy surpassed 10% in the late 1980s, and was closer to 6% in 2006 when markets were overheated. The lack of excessive speculation suggests that we are unlikely to see a speculation-induced bust in pricing.

Meanwhile, price levels will be further supported by supply-side adjustments. Sales activity and the flow of new listings are positively correlated – when demand increases, new listings tend to follow in the months that follow. The opposite is also true. This reflects the tendency of sellers to capitalize on strong markets and rising prices, and sit tight when market conditions weaken. In the absence of any major shock in the economy such as a large and unexpected increase in interest rates or another recession, Central 1 expects the recent slowdown in demand to be met by declining listings activity, which will mitigate growth in standing inventory of resale product.
On population growth:
Weak population growth through 2013 will be a limiting factor for housing over the forecast horizon. The provincial population is forecast to expand at a lackluster rate of 1.1% this year, and fare only slightly better in 2012 and 2013 with 1.2% growth. The slow pace of growth will reflect a drop in the number of landed immigrants to B.C. from international markets this year and increased net outflow of residents to other provinces, primarily Alberta, in 2012 and 2013. This interprovincial net outflow reflects the stronger rebound in Alberta’s economy and improved labour market conditions.
On interest rates:
Mortgage rates will remain low and edge up beginning in the latter half of 2012 and through the remainder of the forecast horizon. This reflects a compression of bond yields, which have recently declined sharply in the U.S., Canada, and Germany during the latest round of market concerns and volatility. The U.S. central bank has stated that it expects no rate increase until mid-2013 and only then if conditions warrant.
I do not necessarily endorse this view in full; nonetheless the data presented are worthy of review. Personally I would give greater weight to price-rent ratios but to each his own. House purchases come with obligations lasting longer than to 2013. Place your bets.

Monday, October 03, 2011

City of Vancouver Permit Update for August 2011

I have been producing some graphs starting in early 2009 showing the trend of permits in the City of Vancouver (here and here and here). Here is an update to August 2011. (August data are here (PDF).)

(Note on methodology change. I have plotted the 3 month moving average of permits to better show the underlying trend.)

Residential dwelling permits graphed since 2007:

Permits parsed for 1-2 dwelling units only (i.e. single family, single family with suite, and duplex):

Multi-unit building permits:

All permits' value, residential and commercial:


1. There has been a sustained rebound in multi-unit permits starting in late 2009 and continuing into 2011.
2. The detached construction market is hot right now.
3. As I stated earlier this year, "I would not be surprised to see detached permit applications rebound going into the first half of 2011." And... yes.
4. Laneway housing, though not explicitly tracked by me, continued its upward trend. As I mentioned last time, "I would expect to see a continued increase in laneway housing permits, barring any major pullbacks in the availability of credit." This has turned out to be correct.
5. Total construction value, including residential and commercial, is not high by historical measures.
6. Given increased multi-unit construction in 2010 and detached construction in 2011, I expect increased dwelling supply entering the market in early 2012.