Monday, January 30, 2012

From the Canadian Press

Canada will likely avoid a crash or serious correction in its “somewhat pricey” housing market, with the possible exception of Vancouver, says a new paper from the Bank of Montreal.
The analysis by BMO economists suggests alarms about Canada’s housing market by international observers, from the International Monetary Fund to The Economist magazine, are exaggerated or simplistic.
“The main takeaway is that the national housing market appears somewhat pricey, but is far removed from a bubble,” said economists Sherry Cooper and Sal Guatieri in the report released Monday.
“In our view, the (market) is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a ‘pin’.”
Even Toronto’s hot condo market–one of the subjects of many of the warnings–is more likely to cool rather than collapse, BMO said, noting that a sharp decline in construction for rental units is stimulating demand for condos.
The report estimates that half of new condos in the Toronto area are purchased by investors, and about 22% are rented.
The one exception to the sanguine view appears to be Vancouver and parts of British Columbia, where home prices and demand from an influx of non-resident Chinese investment is elevating prices and construction. Home prices in Vancouver have climbed by 159% over the past 10 years, more than 50% higher than the national average.
“Bottom line is, we expect the Canadian housing market to cool down rather than bust over the next couple of years, with the possible exception of Vancouver and parts of B.C. which will likely experience further correction,” said Guatieri in an interview.
By cooling, he predicted that prices, sales and start-ups will essentially be flat this year and likely next.
Housing has become an area of concern for policy-makers over the last few years as Canadians continued to dip into the mortgage market to take advantage of historically-low interest rates. As a consequence, household debt to disposable income has shot to over 153%, the highest in ever and close to the levels reached in the U.S. before the subprime crash.
Earlier in the month, Finance Minister Jim Flaherty said he was prepared to intervene for the fourth time in six years if there is no let-up in borrowing.
The BMO economists say the government, and the Bank of Montreal, are correct to worry about a continuation of the trend, but that is not likely. In fact, except for a few hot spots, that cooling trend has already begun with prices rising only by 0.9% last year. Home starts have also dipped well south of the over 200,000 level.
Nor is it likely that Canada will fall into another recession, or that interest rates would rise so quickly that a significant number of households would be unable to meet mortgage payments.
Canadian households are not as vulnerable as their American counterparts, the economists say.
Canadian home ownership equity is 67% in Canada, compared to 39% in the U.S., and even debt-to-income ratios are far better in Canada when the cost of health care U.S. households must pay is factored in.
The report argues that many of the measures used by alarmists to suggest housing is due for a severe correction are exaggerated or simplistic.
On the important measures which gauge affordability, households are on firm ground. House prices to family incomes are elevated from 10 years ago, but not excessively so, at a ratio of 4.9 versus 3.2 a decade ago.
The exception again is Vancouver at 10, nearly double what it was a decade ago. Also elevated is Toronto at 6.7 versus 4.3.
“Let’s assume the worst case scenario and house prices fall by 10%, would that affect anything?” asked Guatieri. “There has been such an increase in house values, that I don’t think it would pose a serious problem for Canadians or the economy.”
Guatieri said the situation would become a problem if home prices and household debt continued to outstrip income growth, but trends on both fronts are moderating.
Originally published on


Wednesday, January 25, 2012

Teranet House Price Index - January 2012



Canadian home prices in November were down 0.2% from the previous month, according to the Teranet-National Bank National Composite House Price Index™. The retreat came after two months in which prices had been flat from the month before, and is the first in the index since a brief correction during the three months ending November 2010. Prices were down in eight of the 11 metropolitan markets surveyed, one more than in October. Calgary and Victoria stood out with declines of 1.6% and 0.9% respectively. The deflation was much smaller in the other six markets: 0.3% in Hamilton, 0.2% in Vancouver, Toronto, Ottawa and Quebec City, 0.1% in Winnipeg. Prices were up from the previous month in Edmonton (0.1%), Montreal (0.4%) and Halifax (0.5%). The simultaneous monthly declines in Toronto, Hamilton and Winnipeg are noteworthy in that these three markets are considered tight.

Teranet – National Bank National Composite House Price Index™

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The 12-month gain of the composite index in November was 7.1%, a slight acceleration from 7.0% in October. However, the acceleration was due entirely to the base effect of a larger price decline (−0.4%) from October to November of the previous year. Since prices began rising again in December 2010, the recent acceleration trend in 12-month changes could come to an end with next month's report on December 2011 prices. The November 12-month change varied widely among the country's major markets: 10.8% in Toronto, 9.1% in Vancouver, 7.5% in Winnipeg, 7.2% in Montreal, 6.0% in Quebec City, 4.4% in Hamilton, 4.2% in Ottawa-Gatineau, 2.8% in Halifax, 1% in Hamilton, 0.5% in Calgary. Victoria prices were down 0.3% from a year earlier.

In December, the seasonally adjusted ratio of new listings to sales (as reported by CREA) showed market conditions generally balanced in the country as a whole. The exceptions were tight markets in Toronto, Hamilton and Winnipeg and a buyer's market in Victoria.

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
Calgary153.81-1.6 %0.5 %
Edmonton163.650.1 %1.0 %
Halifax131.320.5 %2.8 %
Hamilton130.41-0.3 %4.4 %
Montreal144.430.4 %7.2 %
Ottawa137.71-0.2 %4.2 %
Quebec165.69-0.2 %6.0 %
Toronto138.55-0.2 %10.8 %
Vancouver169.81-0.2 %9.1 %
Victoria140.64-0.9 %-0.3 %
Winnipeg179.23-0.1 %7.5 %
National Composite 6148.14-0.2 %8.0 %
National Composite 11149.11-0.2 %7.1 %
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.

Sunday, January 22, 2012

It Is Now Lonelier at the Top

In August last year I prophesised that Vancouver would eclipse Sydney as the English-speaking world's least affordable housing market as measured by Demographia by means of the median price to medium income ratio. I had also opined that, if conditions were to deteriorate in Asia, that Vancouver could eclipse Hong Kong. My predictions were as follows:

Hong Kong 11.4
Vancouver 10.5
Sydney 9.4
Melbourne 8.8
Plymouth&Devon 7.4
San Francisco 7.1
London 7.1
Adelaide 7.0
San Jose 6.6
Brisbane 6.5

Well now we get word that Demographia's 2012 survey says:

Hong Kong 12.6
Vancouver 10.4
Sydney 9.2
Melbourne 8.4
Plymouth&Devon 7.4
San Jose 6.9
London 6.9
San Francisco 6.7
Adelaide 6.7

Hong Kong appears to have accelerated its unaffordability rankings alongside Vancouver. Other areas of the world -- the UK, Australia, and the US -- have deteriorated slightly. It is appearing that the sheen has fallen off Australia:
Home prices in the eight capitals of Australia’s states and territories fell 3.7 percent in 2011 through November and were on pace for the biggest annual decline in at least 12 years on concerns that Europe’s debt crisis may damp the nation’s economic growth, according to figures released Dec. 30 by RP Data, a real estate researcher.
Vancouver is in rarefied territory, alongside a territory heavily tied to and invested in the fortunes of Mainland China. On the eve of Chinese New Year we should remember the year that was, and look forward; only one lone city stands between Vancouver and housing supremacy. Perhaps the year of the dragon bodes auspiciously!

Friday, January 13, 2012

Mortgage Rate Update January 13 2012

A key element to watch are mortgage rates to determine affordability, these days with inflation low it looks like mortgage rates are heading down again, perhaps with a slightly larger spread to risk-free than in the past. Here are the 1, 3, and 5 year conventional mortgage rates as reported by the Bank of Canada:
The 5 year rate, as reported by BMO today, is now below 3% for the first time. The issue facing the Bank of Canada and the Canadian economy is what happens if credit growth increases further. Canada's household debt-income ratio has been moderating of late but there are significant risks if credit begins to increase again with historically low mortgage rates.
As mentioned by the Bank of Canada in its most recent financial system review:
Despite the rebound in the growth rate of mortgage credit in October, the Bank expects a gradual moderation in the underlying trend in household debt accumulation over the medium term as activity in the housing market slows and as lower commodity prices and heightened volatility in financial markets weigh on the wealth and confidence of Canadian households. Since the growth of personal disposable income is also projected to be moderate, the gap between credit and income growth is expected to narrow but remain positive, implying that further increases in the aggregate household debt-to-income ratio are likely.
Ultimately a decision needs to be made: is it in any way acceptable that debt-income ratios continue to increase, or is it necessary for the government to step in and ensure this ratio does not grow, and even starts to reverse? These are difficult decisions, it could mean that Canada's growth rate would need to be reduced to deleverage debt to more sustainable levels in the interim and could temporarily tip the economy into recession. 

In order to facilitate deleveraging in a low interest rate environment there are several things the government can do, including reducing loan amortizations to 25 years from the current 30, and even as far as issuing quotas on available loans. No matter what methods that are announced to maintain or reduce household credit, if any, and there are signs that debt is increasing faster than incomes, I am speculating the government will employ mechanisms that ensure debt levels are contained. 

In the past when the government has announced tightening of credit conditions through its mortgage insurance arm (CMHC), it has done so within the first 5-6 weeks of the calendar year. Further curbs through mortgage insurance guidelines are not a guarantee that households will curtail their lending; more deterministic methods of capping loans may be required. We shall see!

Thursday, January 12, 2012

The Soft Landing Platitude

Much talk about a so-called "soft landing" of house prices -- where prices do not significantly fall on an annualized basis and incomes and rents increase to return valuations historical affordability or earnings ratios -- has been around recently with various banks warning markets like Vancouver's may be in for a large correction.

To test what would be required to manifest a "soft landing" I have taken the July detached benchmarks from 1999 until 2010 and adjusted them for inflation. Then taking the July 2011 benchmark as a baseline, determined what annualized % gains or drops would be required to return prices to previous years' inflation-adjusted valuations. I have assumed 2.5% annualized inflation.

In other words: what annualized gain or loss would be required to return prices to a given past year's valuation in a given future year? The results are as follows:

The way to use this chart is as follows. Say you think (or hope) prices will return to a certain past year's valuation (year Z) some point in the future (year X). Find year X on the x axis of the above graph and then find the colour of the past year Z of interest to find out what annualized gain or loss is required for that condition to happen.

For example say I want to know what annualized drop is required to see 2004 prices in 2018. That would require a compounded 4% drop in prices starting 2012 until then (i.e. 4% drop from 2011 to 2012, 4% drop from 2012 to 2013, etc.). For a $800,000 property that means its value will be nominally $626,000 in 2018.

(The base condition of 2011 valuations is a straight line because if one assumes 2011 is the "new normal" then prices will appreciate each year at the inflation rate. Thus, for 2011 valuations to hold in 2012, there should be a 2.5% increase year-over-year.)

I have included the absolute price change graph as well for completeness. Many people will look at absolute, not annualized, returns so here you go:

I don't know exactly how pundits define "soft landing" but whether they realise it or not they are hoping that more recent prices are indicative of new valuations. If it turns out inflation-adjusted prices from years closer to the turn of the millennium are the end destination, as they turned out to be in many parts of the United States, I'm not seeing anything approaching a "soft landing".

Tuesday, January 10, 2012

November 2011 CMHC Data - Vancouver CMA

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.

The last few months have seen a continued dearth of completions and an increasing amount of starts and under construction volume. Starts will typically lead completions by about 12 months so we should expect to see increased completion volumes heading into the first and second quarters of 2012. Given that completions are still low compared to pre-recession levels I expect this to provide some constraints on new supply for the first half of 2012 ceteris paribus, however other factors including investor sales, lower population growth, and downsizing are likely to at least partially counteract, if not fully swamp, this. As 2012 progresses and completions increase this will naturally tend to increase supply.

Monday, January 09, 2012

Greater Vancouver Market Snapshot December 2011

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to December 2011.

And the detached benchmark price:

Commentary: December 2011 saw rather weak sales volumes; in some years weakness in December is attributed to snowy conditions; not so this year with only trace amounts of snow for the entire month. 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 at about 6, a level concomitant with flat prices.

Total inventory usually declines through the month as Realtors typically take vacations around this time and homeowners wanting, but were unable to, sell retrench for the more robust spring selling season. This year we have already started adding listings, I speculate due to those who are eager to sell sooner rather than later.

Below is the predictor of price gains, based on half-over-half price change to months of inventory correlation, and below that the scatter plot showing the raw actual data:

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).

December 2011 was weaker than past years in terms of sales, however inventory declined as it does every year and was not inflated as it was at the finish of 2008. There will nonetheless be a historically average base of listings going into January. Due to several factors -- higher prices, relatively subdued population growth, tightened credit conditions, and a predicted increase in dwelling completions -- I expect the first few months of 2012 to see lower sales volumes and higher listings than 2011. I do think benchmark prices will increase from current levels through the first half of 2012. If inventory continues to increase and sales remain subdued, however, I anticipate the price increases will be transitory.

Tuesday, January 03, 2012

Sell List Ratios in Vancouver

Thanks to PaulB and Larry, we now have almost two years of daily housing numbers. What a great service they have provided to us by reporting the daily numbers!

I have graphed the 2010 and 2011 daily numbers that I have. The numbers come from the monthly forum archives at VCI here. Those forum archive numbers came from PaulB and Larry Yatkowski, who post the numbers almost every day.

I chose a 21-day moving average here to smooth out some of the bumps in the curves. This is a 21 *calendar* day average, so it takes the average over all numbers that appear in a 21 calendar-day window. For January 2011, I included December 2010 to get the 21-day window going.

I will add 2012 to this as we go along. I think this will be helpful because we can compare the sell-list we are seeing to the historical normals as we go through the year. Of course, we only have two years of 'historical' here, but this still helps, I think.

If we want to see the historical values, we can look at the REBGV monthly reports to get sell-list ratios. I have these reports back to 2001. Here is what things look like. The 11-year average is in solid black and the number label for each month is the value for the 11-year average in that month.

With all this, I think we are ready to watch the 2012 data come rolling in. Who's got the popcorn?