Wednesday, July 04, 2012

Greater Vancouver Market Snapshot June 2012

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to June 2012.


June continued with relative weakness compared to not only 2011 but also past years from 2005 (except the residual emerging from the recession of 2008-2009). June sales are the lowest since the early part of the turn of the century.

This June was another weak report, and I have been stating this for the entire year. Sales year-to-date are bad and this has direct effects on incomes of those who depend on resale turnover for income. This level of sales, if they continue to be weak, is going to translate into higher months of inventory for the rest of the year (MOI is typically higher in the latter half of the year; an MOI of around 6 normally translates to flat prices) and concomitant price drops already starting to rear their heads in the posted MLS benchmark prices and medians. Prices (as measured by the Teranet HPI) will likely be year-on-year negative by the end of the summer.

As a consistent reminder, there are some worrying clouds on the horizon: population growth is falling, dwelling completions are set to increase in the latter half of the year, and banks are beginning to implement stricter mortgage guidelines to be implemented first next Monday in the form of changes to government-underwritten mortgage insurance qualification criteria and second, to commence over the coming quarters, via implementation of stricter mortgage lending guidelines under OSFI's new directives. Further stress in current conditions can be attributed to China's slowing economic growth. On the other hand mortgage rates remain low, near net zero real territory, and it is possible for rates to remain low for a prolonged period (i.e. years). It is possible that Asian economies are due for another round of investment spending through coordinated government stimulus measures -- not only in Asia but also in other jurisdictions -- and that can plausibly lead to a renewed bout of current account flows into Vancouver-area property investments.

That we are comparing sales levels to those seen 10 years ago should be little surprise, in my view. I'm probably beating a dead horse here, but slower population growth does, and must, lead to lower sales and higher for-sale inventory. In the past inventory has been relatively poor at reacting to the cyclical nature of population growth in an capital-investment-heavy economy such as BC's. There is strong evidence that as an increase in residential building activity gathers pace, population growth increases are caused by this higher level of activity. In the wake of this activity completing, however, population growth drops. We are now seeing population growth drop. It is unclear how far this growth will fall -- spare capacity differentials in other parts of the country typically act as migration sinks and right now only the prairie provinces can claim this. Alberta, due to its proximity to BC, is the predominant source of interprovincial migration. Growth in manufacturing in Ontario -- BC's second-ranked migration source -- has been sluggish and the province is facing some overcapacity in the construction industry as well. In the next few quarters there looks to be little impetus to cause significant migration between Ontario and BC as was the case in decades previous.

Given the different dynamics of the Canadian economy compared to previous decades, I do not expect population growth to fall as drastically as was the case in the early-2000s. Nonetheless, given high house prices, I do not expect a marked rebound in population growth or interprovincial in-migration in the coming years. If this scenario were to manifest itself, that would translate to medium-term population growth approximately 20,000 below the longer-term trend, which translates to a decrease of about 8,000 dwellings formed annualised. In terms of direct impact on GDP that would be on the order of $2BB less activity, or 1% of BC's total.

Does that mean that population growth is the cause of price weakness? Not really; in this blog's view prices are detached from rents and incomes and these measures have been shown in other jurisdictions to be strong indicators of long-term price trends; changes in population growth, absent any exogenous shock, should then be viewed as nothing more than the inevitable means by which prices correct.

As a final aside, it cannot be stressed enough that there are severe risks to a significant recession in BC due to weakness in housing activity and lower prices. This has been well documented in other jurisdictions that have seen increased prices in short periods of time, as measured by price-income and price-rent ratios, and have inevitably experienced significant economic weakness when prices fall. While many may think Vancouver is certain of experiencing this fate, I nonetheless, mostly for posterity, take the view that such events are probable but not certain. Indeed for those who think a crash of the magnitudes implied by a reversion of price-rent ratios are inconceivable or improbable to the point of being assumed zero, I think that borders on negligence. It is incorrect to think that we can assign a zero probability to such an event occurring; if this blog's thesis is correct it will have turned out the probability of a crash was always high and not a so-called "nobody could have seen this coming" moment.

If the inconceivable does occur and prices fall substantially Vancouver has two paths it can take: refuse introspection and blame exogenous factors for its ills, or understand its inherent and chronic propensity for land speculation is a net impediment to its long-term economic growth. I am not optimistic the latter will be the view held in popular discourse.

Anyways, there you have it. Another weak report for resale housing activity in the Vancouver area.

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