July 2013 Teranet House Price Index

JULY 2013

12-MONTH HOME PRICE INFLATION FALLS TO 1.8% IN JUNE The Teranet-National Bank National Composite House Price Index™ rose to an all-time high in June, as did the indexes of six of the 11 markets covered by the composite index: Winnipeg, Hamilton, Toronto, Montreal, Quebec City and Halifax. However, the composite index was up only 1.8% from a year earlier, the smallest 12-month gain since November 2009. By way of comparison, the Case-Shiller home price index of 20 U.S. metropolitan markets was up 12.1% from a year earlier in April (the latest available reading). In Canada, the price rise over the 12 months ending in June exceeded the cross-country average in seven of the 11 metropolitan markets: Hamilton (7.0%), Quebec City (5.6%), Calgary (5.5%), Winnipeg (3.9%), Edmonton (3.0%), Toronto (3.6%) and Halifax (2.3%). The price rise lagged the average in Montreal (1.4%) and Ottawa-Gatineau (1.1%). Prices were down from a year earlier for a fourth straight month in Victoria (−4.6%) and for an 11th straight month in Vancouver (−2.8%). Teranet – National Bank National Composite House Price Index™ Contact Us For general enquiries: info@housepriceindex.ca For licenses covering all index-linked products, please contact: Simon Côté 514 879-5379 Website www.housepriceindex.ca

In June the composite index was up 1.0% from May. Though this increase may seem large, it is somewhat less than the average June gain of 1.2% over the last 12 years. (May, June and July are generally the months in which upward pressure on home prices is strongest. In 15 years of index data collection, the composite index has not declined in any of these three months.) In June of this year, prices were up from the month before in all markets surveyed. The increase exceeded the national average in three markets: Hamilton (1.8%), Toronto (1.4%) and Calgary (1.4%). In Halifax, Ottawa-Gatineau and Vancouver the rise was 0.9%, in Winnipeg 0.8%, in Montreal 0.6%, in Quebec City 0.5%, in Edmonton 0.3% and in Victoria 0.1%. The rise in Victoria ended a run of four straight monthly declines. Teranet – National Bank House Price Index™ The historical data of the Teranet – National Bank House Price Index™ is available at www.housepriceindex.ca. Metropolitan area Index level June % change m/m % change y/y Calgary 169.21 1.4 % 5.5 % Edmonton 171.79 0.3 % 3.0 % Halifax 143.90 0.9 % 2.3 % Hamilton 142.99 1.8 % 7.0 % Montreal 151.80 0.6 % 1.4 % Ottawa 142.71 0.9 % 1.1 % Quebec 179.19 0.5 % 5.6 % Toronto 150.30 1.4 % 3.6 % Vancouver 168.42 0.9 % -2.8 % Victoria 133.96 0.1 % -4.6 % Winnipeg 195.23 0.8 % 3.9 % National Composite 6 156.01 1.1 % 1.6 % National Composite 11 157.00 1.0 % 1.8 % 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 atwww.housepriceindex.ca 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.

May 2013 Housing Starts and Permit Data - Vancouver CMA

Here is the chart for housing starts, completions, and under construction for Vancouver Census Metropolitan Area (CMA) to May 2013:

Below we can see a continued high level of multi-unit construction compared to detached construction. The long-term trend for detached construction has been down.

The last three years have seen an increasing amount of starts and under construction volume, the former of which now looks to have crested. Completions are trending upwards, as expected -- completions typically lag starts, so if starts are trending higher that will likely mean completions will trend higher as well. 12 months of completions are now 30% above the trough in 2011. (The actual trough was in early 2011.) With this increased level of completions, and what looks like either a plateaued or further-increasing level of completions into this year, we can expect increased competition among sellers continuing through 2013, as compared to 2012.

Despite recent resale malaise starts remain healthy -- at least not morbid -- pointing to continued construction activity -- and new supply -- over the coming quarters. Units under construction remain high.

Completed and unabsorbed for single and semi detached dwellings have eclipsed the highs seen during the last recession. I have plotted the completed and unabsorbed inventory as a percentage of the last 12 months of completions, to give a rough gauge of what percentage of single detached houses are unabsorbed compared to the completion rate. A high number of completed and unabsorbed is not necessarily cause for alarm if the total construction volume is high as well. The latter graph partially accounts for this.

Completed and unabsorbed as a percentage of a year's completions is as high as during the 2008-2009 recession.

Next, 12 months of Lower Mainland and BC permit data, both number of permits and value:

Notice the divergence of permits since mid-2010 between Vancouver and the rest of the province. Vancouver's population growth has remained more robust than the rest of the province of late, and it looks like one of the reasons for this has been increased residential construction activity.

BC Employment by Sector June 2013

Below are some graphs highlighting Vancouver's and BC's employment over the past 15 years in various sectors. But first here are the historical employment, participation, and unemployment rates (CANSIM tables 282-0117 and 282-0087)

The participation rate has dropped of late: as unemployment has slowly dropped since the recession the employment rate has remained low.

The labour rate spreads between the rest of BC and Vancouver CMA are graphed below. A positive number means the rest of the province has a higher number than Vancouver. In terms of unemployment Vancouver has typically been about 50bps lower than the rest of the province, but lately that differential has been negative.

Here are the contributions of the two major goods producing sectors (construction and manufacturing) as a percentage of total employment and total employment. These are seasonally unadjusted with 3 month moving average applied (CANSIM table 282-0111).

Construction employment as a percentage of total employment is once again waning. The service producing sectors (NSA) (12 month average):

Macroprudential Mortgage Rates

A comment in this Financial Post article "Rising rates creating increasing dilemma for homeowners" piqued my interest:

Jim Murphy, chief executive of CAAMP, wonders about what the impact of higher rates will be for new buyers when stacked on top of tougher rules.
His groups pointed out this month that sales for homes under $400,000 in the greater Toronto area were down 18% in May from a year ago. For homes priced above that level, sales were down just 5%.
“All of these changes have impacted the first-time buyer,” said Mr. Murphy. “Now we are seeing rising rates and that will have an impact too.”
Vince Gaetano, a principal at monstermortgage.ca, said the gap has become wide enough to convince him to go variable now.
Strangely enough, banks have not moved quickly to change their 5.14% posted rate — the percentage nobody actually accepts but which everybody qualifies based on.
“What has gone on is the discounting has shrunk. It’s absolutely sneaky and it’s done on purpose because they don’t want to move people away from not qualifying at all,” said Mr. Gaetano.
Another reason the banks don’t want to change the posted rate is it’s used to calculate any penalty on your mortgage. A higher posted rate would shrink your penalty, said Mr. Gaetano.
“It’s a very cleaver way for the banks to keep the handcuffs on people,” he says. “I still see people just break their mortgages outright. Variable is attractive too because of all the games banks play with breaking mortgages and penalties. With a variable mortgage, it’s three-months straight and simple.”

"Strangely enough" banks have kept their posted rate locked at 5.14%. Conspiracy! Or... let's check the data. Below a graph of posted and discounted rates with their spread:

From 2011 or so, save the last two months, there has been a consistent widening of posted-discount spread. The posted rate has been kept artificially elevated. Public shots have been fired by Flaherty towards banks stepping out of holding the posted line. This is almost certainly due to government policy of macroprudential credit controls targeted directly at housing market credit excesses.

Calls for a bank conspiracy seem a bit premature to me; more likely recent closing of posted-discount spreads are tickling memories of the way we were, when economies ran near full capacity.

Greater Vancouver Market Snapshot June 2013

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to June 2013. (see REBGV news releases.). (My "next month estimate" numbers are what I think next month will be. Also note these graphs update automatically so older blog posts from previous months will show the same graphs as the ones below.)

The scatterplot of price changes and months of inventory is below. As the Teranet data roll in, look for more points appearing the right-hand side. May 2013 reported was about -2% year-on-year, which is slightly higher than I expected but not what I would consider anomalous. This gives us some indication on how elevated MOI must become to elicit meaningful price drops.

Commentary:

June sales continued with relative weakness compared to most past years from 2005 however have continued a general improving trend to exceed last year. June sales are now off the lows of the past decade. A general improvement of sales can plausibly continue through the rest of the year, but will likely be below highs of the last decade.

To partially compensate for weekend framing effects I have plotted sales per working day on a month-by-month basis.

This June saw another weak report, though the trend of improving sales is encouraging. Cumulative sales for the year are still below recent past years and this has direct effects on incomes of those who depend on resale turnover for income. As the months progress it becomes more and more difficult to hit yearly sales targets in-line with those seen in the last decade. That stated a nascent resurgence in listings volumes is underway and if strength continues, the second half of the year will make up for the sluggish start.

As a recurring reminder, there are some worrying clouds on the horizon: population growth is falling, dwelling completions are set to increase over the next year if not longer, and banks have implemented stricter mortgage guidelines via changes to government-underwritten mortgage insurance qualification criteria and via implementation of stricter mortgage lending guidelines under OSFI's new directives, and it looks like they're not done tightening. Further stress in current conditions can be attributed to China's slower 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. several years). That stated, longer-term 5-year-term loan rates may have some room to move up in the coming year (as they did, at least acutely, with a vengeance in May and June) as the advent of the removal of accommodative overnight rates starts entering the purview of the 5 year time horizon.

Emerging Asian economies are starting to stall again after last year's stimulus from China has mostly run its course. I expect this will start wearing on foreign-derived income that could end up financing Vancouver-area property purchases. I expect further stimulus bouts in the years to come.

My estimates for June were for inventory of 17410 (actual 17289) and sales of 2406 (actual 2642) based on estimating average changes from May of years 2005-2012. Using the same technique estimates inventory and sales for July of 16823 and 2530 respectively (MOI=6.6). The spring is typically the nadir for MOI in recent years, the exception being 2009 that saw MOI decrease throughout the year. Taking a "hybrid" approach would suggest July's MOI to be higher than June's, mostly due to lower sales typical in the summer.