(Warning this is an analysis post; if you want the conclusion skip to the last paragraph. The two of you who actually care about this stuff, please read on.)
This is a third post on population growth and construction activity in BC. This one attempts to round out the core numbers of household formation versus housing supply.
The first post highlighted an empirical relationship between housing starts and population growth and noted that population growth is cyclical.
The second post highlighted that, based on said empirical relationship and household size data, decreases in average household size has accounted for about 25% of residential construction activity (based on units produced) in the past 13 years.
An important point is that there can be additional dwelling formation beyond completions minus demolitions: dwellings can be formed by re-purposing a set of existing dwellings to be a larger or smaller set of dwellings, or by failing to include dwellings in the completions data (for example a "single family" dwelling is actually a 2 or 3 unit dwelling but not reported as such).
Another point is that dwelling completions need not necessarily be occupied. (Dwelling counts include actual dwelling counts as well as those "occupied by usual residents") They can remain vacant (so goes the rumour) or they can be used as vacation or second homes. It should be noted such homes can be either rented or occupied; to wit imagine someone living in Vancouver renting a suite in the Peace region for work reasons. There can be many reasons why dwellings can grow faster than household formation would suggest, and can be either sustainable or unsustainable.
This post analyses household formation, population, (estimated) demolitions and housing completions. Attempts are made to measure how accurately completions align with household formation.
The data are as follows (source: BC Stats and CANSIM 027-0008)
Year Population Households Completions Net Completions*
2000 4039230 1572086 - -
2012 4615096 1876404 - -
Change 575866 304318 334599 301139
* "Net Completions" assume 10% demolition rate
This is broadly consistent with analysis performed by CMHC on the household formation/completions discrepancy in their spring 2013 housing market outlook publication (PDF). Based on this cursory analysis, once accounting for demolitions (about 2500/year) and assuming completions are the sole source of dwelling formation, completions align well with household formation.
Another dataset is the semi-decennial census dwelling and population counts (source Statistics Canada Census data):
Year Population Dwellings Dwellings** Completions Net Completions*
2001 3908000 1643969 1534335 - -
2011 4400000 1945365 1764637 - -
Change 492000 301396 230302 291837 262653
** Occupied by usual residents
Here we can see that net completions are broadly in line, though slightly ahead of, "usual resident" dwelling formation. Census collection methods will do actual on-the-ground dwelling counts so would tend to capture all forms of dwelling formation. Given the uncertainty in demolition rates we don't have enough evidence to support overbuilding, however the change in the total number of dwellings indicates another source of dwelling formation beyond summing completions minus estimated demolitions.
Percentage of dwellings occupied by usual residents dropped from 93.3% in 2001 to 90.7% in 2011; this drop has added about 51,000 dwellings over the 2001-2011 census interval.
As mentioned, there are other forms of dwelling formation not included in CMHC completions data, namely unit conversions and unreported dwellings (e.g. basement suites). It is unclear how significant including these adds to dwelling supply. If such modes of dwelling formation is on the order of net thousands, that would indicate dwelling supply has outpaced household formation.
In conclusion, should CMHC-reported completions have been the sole means of dwelling formation in the province, and demolitions are accounted for, dwelling growth has been broadly consistent with household formation over the past 13 years. Census data indicate diverging dwelling units compared to those occupied by usual residents of approximately 55,000 over the period of 2001-2011, or about 19% of construction activity on a per unit measure. Once other sources of dwelling formation, such as unregistered basement suites or unit conversions, are considered and assumed a significant contributor, that would indicate that there are now relatively more dwellings in BC than there are households than was the case 13 years ago. For reasons discussed this does not necessarily mean an oversupply of dwellings.
Friday, August 30, 2013
Thursday, August 29, 2013
Population Growth and Residential Construction Activity in BC Part 2
A followup to yesterday's post on population growth and residential construction activity in BC is in order when thinking about the future path of household formation, household size, and construction activity. We have the basic function of construction activity versus population growth over the past decade:
Since 2000, every person growth in population has resulted in an additional 0.33 dwelling completions. If population were to remain fixed, annual completions would be 9,500.
More interesting is to dig a bit deeper into this "baseline" 9,500 completions. Based on historical demolitions data (CANSIM 026-0012 1965-1999 **terminated**), demolitions are about (10±2)% of housing starts (and completions). What this means is that even with no population growth there is a net 8,500 annual increase in dwellings, which can only mean that household size is shrinking and/or there is oversupply.
Indeed household size has been shrinking since 2000, with average household size falling from 2.580 to 2.473. If we account for the base population's change in household size in a year, this results in a net demand averaging 6,200 per year, which is on the same order, albeit slightly smaller than the estimate of 8,500.
There are reasonable error bars on the estimates, so we can state that, after accounting for demolitions and more importantly changing household size that housing completions have broadly aligned with population growth over the past decade.
More interesting, though, is looking forward to the next 13 years (and longer). The important takeaway from this post should be that shrinking household size has added approximately 6,200 additional residential construction units per year, or about 25% of total residential construction activity, since 2000. If household size were to plateau that would mean a 23% drop in average construction activity compared to the past 13 years (or significant oversupply). BC Stats projects household size to drop from 2.53 in 2006 to 2.37 in 2035. Under this scenario, using BC stats population projections, this would mean the projected decreasing household size will add 3,400 additional residential construction units per year, which would mean, all else equal, a 13% decrease in average construction activity from the previous decade.
Another factor to consider is the utilization of existing dwellings as the household size has dropped. While I don't have data to support one way or another, it may be true that existing dwellings are not being utilized to their full capacity (think empty nesters who haven't downsized yet). If this is true that means, once turned over, these dwellings will act as "phantom" supply that would further decrease residential construction demand.
Wednesday, August 28, 2013
Population Growth and Residential Construction Activity in BC
(This is the first in a three part series analysing population growth and construction activity in BC. See the second and third parts.)
There is an obvious correlation between housing activity and population growth. Since the 1980s one can see the ebbs and flows of population growth, alongside housing starts and completions, have been a normal occurrence in BC's history. The second graph puts population growth in a longer historical perspective for posterity.
There is an obvious correlation between housing activity and population growth. Since the 1980s one can see the ebbs and flows of population growth, alongside housing starts and completions, have been a normal occurrence in BC's history. The second graph puts population growth in a longer historical perspective for posterity.
The best correlation is between housing completions and population growth, however there are two behaviours, one pre-2000 and another post-2000. Pre-2000 there were approximately 0.22 completions per person of growth, with a 1 quarter lag (ie population growth rises and falls one quarter before completions). Post-2000 there were approximately 0.33 completions per person of growth with a 3 quarter lead (ie population growth rises and falls three quarters after completions).
Some clues as to why there is a difference should be evident by observing the fraction of detached completions of the total has been dropping since the early 1990s in Vancouver that makes up the majority of residential construction activity in the province.
Notes:
- Though it's not immediately evident from the data, by visual inspection, there is arguably a "baseline" 10,000 units built each year to maintain the existing stock of housing for the existing population. That is, if population growth were zero there would still be a turnover demand of around 10,000 units per year.
- The number of completions per person of growth after 2000 corresponds to 0.33, or about 3 people per completion. Before 2000 this was 4.5 people per completion. It looks as if the shift to multi-unit construction at least partially accounts for this difference.
- As a rough rule of thumb, if population growth is 30,000 this results in annual housing demand of 20,000. Over the course of BC's history since the 1960s, 30,000 is a typical nadir. Most recent population growth has been around 40,000, which corresponds to a demand of about 22,000-25,000 units. Current completion rate is near the high end of this range but the number of starts suggests the number of completions will not markedly deviate from current population growth.
- Population projections typically do not account for the variability in year-to-year population growth but concentrate on averages. Population growth has averaged 60,000 and completions have averaged 28,000 since 1965. Growth projections are about 55,000–60,000 until 2035 based on BC Stats analysis. Population growth cycles with a period of about 10–15 years.
I track population growth closely as it aligns with residential construction activity, GDP growth, and new and used housing sales and for-sale inventory.
Monday, August 26, 2013
Q2 Landcor Report
The Landcor Report - Q2 2013 Sales Summary August 26, 2013
We know a guy who likes to walk at night. When he’s feeling grumpy or “ticked off at the world” he heads into the big, dark, heavily forested park near his home and hits the twisty trails, his lanky dog gamboling along beside him. On a moonless night, the trails are as black as the inside of a duck’s gut. The dog manages easily, the guy, not so well, especially when he deliberately hits those paths without a flashlight, walking faster than the last time, navigating by memory, the crunch, crunch, crunch sound and feel of the gravel underneath.
Our guy claims the physical effort and intense concentration burns off irritants: “When I reach the end, I feel like a new man.” Or thoroughly buggered up if and when our near-blind speed demon slams into -- and over – any tree that inconsiderately fell across the path between now and the last daytime visit. Whap! Up and over, brain over butt, down hard. Wham!
To the ancient Greeks, we don’t go ‘forward’ into the future. We walk backwards; we can only ‘see’ what’s already happened, the past. We steer by educated guesswork at best. So what does Greek wisdom, gimped knees and crazy-fast walking in the dark have to do with real estate in British Columbia, or anywhere else?
We live in interesting, rapidly changing times. Urbanization, globalization, climate change, the Internet; what happens in Beijing or Brussels or wherever can have a near-immediate ‘butterfly effect’ on small-town Canada and the butterflies are everywhere, their wings are huge and in constant motion. Flash floods in Alberta and Ontario, ‘flash crashes’ on Wall Street, win the 6/49 lottery, another 9/11, crunch down the gravel path to the end, blissful and unscathed . . . or suddenly flail into the ditch.
Even stable, comparatively safe and blessedly bland BC ripples with uncertainties, ranging from the relatively minor (e.g. mortgage rates, provincial deficits, the LNG slight of hand) and to the major, capped by the long-anticipated 9.0 plus Richter scale, mega-thrust coastal earthquake which will (we predict) cause a real shake up in local housing markets (and everything else).
Late . . . Too Late? . . . Night Reading
Every day, there’s much written about the Canadian housing market. One of the interesting overviews comes from Ontario-based specialty corporate bond manager Canso Investment Counsel www.cansofund.com and its recent (July/13), well-researched and rather disquieting Canso PX report titled simply The Canadian Housing Market.
The report’s preamble compares the US and Canadian housing markets as two competing racecars. Initially, the Yanks zipped far ahead of the lumbering Canucks. But when they almost blow their engine, whether through choice or not, the Yanks slowed down. Meanwhile the Canuck team switched to ‘CMHC fuel’ boosted with additives such as longer amortization and 100-percent financing to scream past the Yanks who stopped, reworked their engine, switched back to a low-octane blend and now gingerly yet safely poke along.
Giddy with the speed and excitement, the Canadians add “a secret ingredient called IMPP” (Insured Mortgage Purchase Program) to the fuel blend and to the wonderment of the world, go flat out, engine
howling.
The preamble ends: “No one listens to the few Canadian team members worried about the risk of an explosion. They believe the safety of the car and driver are being sacrificed for fame and fortune. Winning races has become everything.” Augmented with charts provided by “the stalwart analysts at the Bank Credit Analyst” and sourced from StatsCan, CMHC, Genworth Canada and others, the Canso report succinctly details the history and fundamentals of the market, the ‘whys’ behind the creation of the high-octane blend now driving the market, consumer debt, securitized’ mortgage pools, feckless bankers and fool-hardy
borrowers, “streamlined” automated appraisals, the now “massive” participation of Ottawa in the mortgage markets, the thoughtless rahrah role of the media as cheer leaders for bloated, burgeoning markets versus the contrary and cold actual indicators and many other inputs.
Simply and clearly put, the report shows how, year by year, the overwrought, overbought vehicle called the Canadian housing market is now lifting up on two wheels, juddering, barely in control and heading for the immovable wall.
In summation, the report’s authors “hope very much to be proven wrong but the analysis is clear. Canada borrowed its way out of the 2009 Recession by stoking our residential housing market to absurd levels. We [now] cannot afford the houses we are now living in.”
Not Having Read the Report . . .
In July the Canadian Real Estate Association (CREA) reported that although average home prices and sales in Canada have fallen year-over-year, the figures appear to have bottomed out three months ago and have risen since.
BMO Capital Markets senior economist Robert Kavcic and TD Economics economist Diana Petramala were quoted, respectively, as saying the rebound has “all but erased any threat of an eminent melt in prices” and the “existing home market has almost fully shaken off” the effects of Ottawa’s tightened mortgage-insurance
rules implemented almost a year ago, thus easing concerns of a “deeper correction” in the offing. (But with the eyes-backward caveat of rising mortgage rates that Petramala warns “may temper demand in the months ahead.”)
Meanwhile, in two thirds of the cities examined by CREA, year-over-year sales were up with more of the action in western markets such as Winnipeg, Saskatoon, Calgary, Edmonton, Metro Vancouver and the Capital Regional District (CRD) a.k.a. Victoria and area.
Landcor Data Agrees, with Caveats In BC’s two bellwether markets --Metro Vancouver and the CRD –
most prices, values and volume are down year-over-year but have shown a healthy rebound in the last quarter, not enough to motor past the y-o-y loss but coming on stronger. Sales volumes almost doubled, from 6,261 sales in Q1/13 to 11,538 in the second quarter and nearing the 12,527 quarterly sales one year ago, prices are coming back as buyers return.
As always, the only exception is Metro Vancouver SFD that continues to post steady price gains on the y-o-y and quarterly basis. Last year, the average price for single-detached product was $849,441. Last quarter, and despite Ottawa’s attempt to cool the national housing market, a Metro Vancouver manse average sale price was $873,510 and what is a heady 6.21-percent jump over the last quarter. The smaller BC regional markets largely show the same pattern:
Q2/13 figures are down on the year-over-year comparable but have somewhat rebounded over the first-quarter figures with SFD in most all markets showing the best legs. However, some product categories are still getting kicked in the rump. Examples: condos in the Fraser Valley matrix and attached/ townhouse product in the BC North/NW. (FYI but northern BC has very few condos; a few sales skew the figures enormously.)
In a recent (August 11/13) article in The Canadian Press, the mixed signals were weighted and although some data such as home prices and starts suggest that the “soothing” soft landing that Ottawa, economists, banks and not a few worried homeowners “are fingers-crossed hoping for, others [data sources] suggest the real
message is: the crash is coming.”
In early August, Statistic Canada reported that national residential building permits fell 12.9 percent in June with multi-unit (a.k.a the ‘starter home’ for many first-time urban buyers) fell by 18.8 percent. In turn, The Canadian Press cited research from RealNet Canada which is “even more frightening” in that in bellwether
markets such as Greater Toronto Area (GTA), Metro Vancouver and Calgary, building permits have “already crashed through the floor, plunging 51, 52 and 30 per cent respectively.”
Another Camp Weighs In
More about Ottawa but when housing construction cools and homebuilding and ancillary jobs fall away, entities such as the Canadian Association of Accredited Mortgage Professionals (CAAMP) believe that the feds should take their focus off of mortgage-rule tightening and do more to bolster first-time homebuyers, in turn helping the economically crucial home-construction industries. For examples, index the RRSP homebuyers’ plans and/or stretch amortization from its current 25-year maximum and back to 30 years
for qualified first-time homebuyers, thus allowing lower yet longer monthly payments . . . which, with the echoes of the sub-prime mess in the United States still ringing, might be double-edged.
On a positive note, an April, 2013 CAAMP/Maritz online survey of 2,000 homeowners nationwide revealed that almost 70 percent prudently took advantage of the lower-interest rate environment, 18 percent have increased their payments, 16 percent are making lumpsum payments to reduce the loan principals and substantially cut the amortization periods.
More ‘stand back’ stats from national pollster Ipsos Canada, Bank of Canada and Bloomberg’s discovery that in 2012 an ‘astonishing’ and record 13.5 percent or more than one in 10 Canadian households were ‘highly indebted’ as in carrying debts equal to or greater than 250 percent of gross annual income. Most of this debt is realestate related which, because the markets are still generally solid, wipes away most of the sweat. As well, the Q1/2013 figure shows a reduction in the ‘highly indebted’ cohort to under 12 percent of all Canadian households.
Merrily We (Bank) Roll Along
There are approximately 1.94 million property titles of all types in BC; Federal Finance Minister Jim Flaherty has long been the Cassandra of the Hill, warning Canadians to save more, reduce debt, be fiscally prudent. Going by recent reports and surveys, Canadians have heeded the call, to a point, maybe. In its recent Wealthscapes study, Environics Analytics, a marketing and analytical service company, found the average Canadian household net worth grew by almost six percent last year and now tops $400,000, an historic high; credit the 5.4-percent gain in ‘liquid assets’ and 5.1-percent in real estate values.
Now consider our non-mortgage debt levels of 160 plus percent of annual disposable income, one of the highest ratios in the world (not factoring in per-capita government debt that grows yearly as governments of all levels trend deeper into the red.) Good news: a recent TransUnion Canada analysis found that after growing 3.5 percent year-over-year, non-mortgage consumer debt fell two percent in Q2/13 to $26,935 on average. This is the highest quarterly national drop since 2004 when TransUnion began to track such debt. Ontario households have gone farther, paying down household consumer debt by 3.6 percent; in Toronto, by five percent.
On the flip side and after falling in Q3 and Q4 of 2012, consumer debt in British Columbia actually rose 3.3 percent y-o-y, powered along by the 3.7-percent between Q4/12 and Q1/13. On average, the average
BC adult carries $38,619 (and growing) in personal debt and what is the highest level in Canada.
Wealthscapes lead author Peter Miron noted that Metro Vancouver households have the highest net worth in Canada: $662,000 as of last year. However, 83 percent or about $550,000 of this wealth is beholden to an “out of this world” real estate market making it the one large egg in what could be a fragile basket.
Interesting, the top three net-worth cities – Metro Vancouver, Calgary and the Greater Toronto Area –also ride high thanks to burgeoning real estate markets, so far.
When Homebuyers Weep
Interestingly, Ottawa’s decision not to extend mortgage-default insurance to properties valued at over $1 million has, reports The Financial Post (July 3/13), created a flurry of bids just under the mark as even some wealthy would-be homeowners struggle to secure the necessary financing under new government rules.”. (At present, would be buyers with less than a 20 percent down payment and borrowing from a financial institution must purchase mortgage-default insurance.
The Post also cites the rationale and figures behind the new Canada Mortgage and Housing Corporation (CMHC) threshold: in Q1 2013, a mere four percent of housing in CMHC’s total insurance-in-force
portfolio carried a loan amount of $550,000 plus; this also represents a one-percent decline year-over-year.
Ray Harris, president-elect of the Real Estate Board of Greater Vancouver was quoted as saying Ottawa’s new ceiling probably won’t ripple the Metro Vancouver market much as most buyers in that zone have deeper pockets and don’t need mortgage insurance. Despite the headlines of home prices gone wild in Metro Vancouver, million-dollar plus is what Harris calls “definitely just a sliver of the market” and meanwhile, there’s a lot of product available below the $1M threshold. For anyone (buyer or bank) willing to take on or back stop the responsibility of a $999,999 (or somewhat less) mortgage with the minimum allowed down payment, and do it in uncertain times and ‘dynamic’ markets . . .
Bullish on Canadian real estate in general and vis-à-vis foreigners’ interest in particular, global luxury realtor Sotheby’s International Realty Canada does note that, although luxury SFD sales in Canada remains strong, not so much with luxury condo products. Sotheby’s Canada seasoned CEO Ross McCredie was quoted as saying Ottawa’s stricter mortgage requirements did have a major effect on the high-end market in Metro Vancouver, yet he also believes “renewed confidence and market momentum” will prevail and “higher-end
buyers have adjusted” to the new landscape.
Already Tuned In
Agree or disagree but in his July 3/13 ‘Stats’ blog posting, financial author, gleeful gadfly and general economic pundit Garth Turner www.greaterfool.ca warns that “the flashing yellow signs are everywhere” that current and wannabe homebuyers in Canada are setting themselves up for a real hard fall. The worrisome problem, says Turner, is when mortgage rates rise, they’ll crimp these same housing markets; sales and values will fall. You got the cheap rate -- but now your place is worth less. Opines Turner: “Grabbing cheap rates to lock up houses that higher rates will knock down is a classic mistake. Then again, we’re a nation of debt
dummies.”
Equally off the mark, continues Turner, are investors buying condos in overheated, oversaturated markets such as Greater Toronto and Metro Vancouver. Turner cites The Globe and Mail article written by macroeconomist Sheryl King and what he calls an “upscale, erudite version of the pathetic drivel and anguished logic published daily”. In turn, King’s article (July 2/13) cites billionaire Warren Buffet’s maxim:
“You never know who’s swimming naked until the tide goes out.” The tide being the recent “hint” from US Federal Reserve that, as the US economy improves, its bond-buying campaign could soon wind down,
effectively putting the rise in interest rates. North of the border, the mouse follows the elephant with rising Canadian bond yields putting the prod to mortgage interest rates.
As mortgage rates rise, ‘investment’ condos lose their luster. Especially in major urban centers which are in an overbuilt environment vis-à-vis condominiums. King writes the average rent for a one-bedroom condo in downtown Toronto has risen by 10 percent over two years to what’s now $1,856 per month or $22,272 per annum. Average sale price for that condo: about $330,000 to yield a “healthy” 6.7 percent return on the
investment. Not bad, writes King, assuming one doesn’t factor in the carrying costs. For example, a five-year fixed 3.05 percent mortgage (20-percent downpayment, 25-year amortization) eats $1,265 per month. Now,
slice off the maintenance fees, taxes and so and, according to King’s calculations, the net income is a mere $535 per annum or a piddling 0.16 percent ROI. Add a bad tenant to the mix, one single month of
missed income, any minor repairs, special assessment or anything and that rental ‘investment’ is under water.
Wonders King: “Why would an investor take on the risk of owning a condo for virtually no annual return? The answer: They are not.”
If and when that fixed five-year 3.05 mortgage rate rises even another 50 basis points, King warns that the rental investor holding the above scenario, will be “into a position of negative carrying costs. . . . Here’s
hoping the spike in mortgage rates is short-lived.”
Getting Home Safe
Paths chosen and walked, the game of life made physical; exceed your earlier, personal goals and trust your feet are true, the path is open . . . and gamble that your skull is thick. Be alert, expect the best but anticipate, keep a wary (back of your head) eye open for the worst.
We know a guy who likes to walk at night. When he’s feeling grumpy or “ticked off at the world” he heads into the big, dark, heavily forested park near his home and hits the twisty trails, his lanky dog gamboling along beside him. On a moonless night, the trails are as black as the inside of a duck’s gut. The dog manages easily, the guy, not so well, especially when he deliberately hits those paths without a flashlight, walking faster than the last time, navigating by memory, the crunch, crunch, crunch sound and feel of the gravel underneath.
Our guy claims the physical effort and intense concentration burns off irritants: “When I reach the end, I feel like a new man.” Or thoroughly buggered up if and when our near-blind speed demon slams into -- and over – any tree that inconsiderately fell across the path between now and the last daytime visit. Whap! Up and over, brain over butt, down hard. Wham!
To the ancient Greeks, we don’t go ‘forward’ into the future. We walk backwards; we can only ‘see’ what’s already happened, the past. We steer by educated guesswork at best. So what does Greek wisdom, gimped knees and crazy-fast walking in the dark have to do with real estate in British Columbia, or anywhere else?
We live in interesting, rapidly changing times. Urbanization, globalization, climate change, the Internet; what happens in Beijing or Brussels or wherever can have a near-immediate ‘butterfly effect’ on small-town Canada and the butterflies are everywhere, their wings are huge and in constant motion. Flash floods in Alberta and Ontario, ‘flash crashes’ on Wall Street, win the 6/49 lottery, another 9/11, crunch down the gravel path to the end, blissful and unscathed . . . or suddenly flail into the ditch.
Even stable, comparatively safe and blessedly bland BC ripples with uncertainties, ranging from the relatively minor (e.g. mortgage rates, provincial deficits, the LNG slight of hand) and to the major, capped by the long-anticipated 9.0 plus Richter scale, mega-thrust coastal earthquake which will (we predict) cause a real shake up in local housing markets (and everything else).
Late . . . Too Late? . . . Night Reading
Every day, there’s much written about the Canadian housing market. One of the interesting overviews comes from Ontario-based specialty corporate bond manager Canso Investment Counsel www.cansofund.com and its recent (July/13), well-researched and rather disquieting Canso PX report titled simply The Canadian Housing Market.
The report’s preamble compares the US and Canadian housing markets as two competing racecars. Initially, the Yanks zipped far ahead of the lumbering Canucks. But when they almost blow their engine, whether through choice or not, the Yanks slowed down. Meanwhile the Canuck team switched to ‘CMHC fuel’ boosted with additives such as longer amortization and 100-percent financing to scream past the Yanks who stopped, reworked their engine, switched back to a low-octane blend and now gingerly yet safely poke along.
Giddy with the speed and excitement, the Canadians add “a secret ingredient called IMPP” (Insured Mortgage Purchase Program) to the fuel blend and to the wonderment of the world, go flat out, engine
howling.
The preamble ends: “No one listens to the few Canadian team members worried about the risk of an explosion. They believe the safety of the car and driver are being sacrificed for fame and fortune. Winning races has become everything.” Augmented with charts provided by “the stalwart analysts at the Bank Credit Analyst” and sourced from StatsCan, CMHC, Genworth Canada and others, the Canso report succinctly details the history and fundamentals of the market, the ‘whys’ behind the creation of the high-octane blend now driving the market, consumer debt, securitized’ mortgage pools, feckless bankers and fool-hardy
borrowers, “streamlined” automated appraisals, the now “massive” participation of Ottawa in the mortgage markets, the thoughtless rahrah role of the media as cheer leaders for bloated, burgeoning markets versus the contrary and cold actual indicators and many other inputs.
Simply and clearly put, the report shows how, year by year, the overwrought, overbought vehicle called the Canadian housing market is now lifting up on two wheels, juddering, barely in control and heading for the immovable wall.
In summation, the report’s authors “hope very much to be proven wrong but the analysis is clear. Canada borrowed its way out of the 2009 Recession by stoking our residential housing market to absurd levels. We [now] cannot afford the houses we are now living in.”
Not Having Read the Report . . .
In July the Canadian Real Estate Association (CREA) reported that although average home prices and sales in Canada have fallen year-over-year, the figures appear to have bottomed out three months ago and have risen since.
BMO Capital Markets senior economist Robert Kavcic and TD Economics economist Diana Petramala were quoted, respectively, as saying the rebound has “all but erased any threat of an eminent melt in prices” and the “existing home market has almost fully shaken off” the effects of Ottawa’s tightened mortgage-insurance
rules implemented almost a year ago, thus easing concerns of a “deeper correction” in the offing. (But with the eyes-backward caveat of rising mortgage rates that Petramala warns “may temper demand in the months ahead.”)
Meanwhile, in two thirds of the cities examined by CREA, year-over-year sales were up with more of the action in western markets such as Winnipeg, Saskatoon, Calgary, Edmonton, Metro Vancouver and the Capital Regional District (CRD) a.k.a. Victoria and area.
Landcor Data Agrees, with Caveats In BC’s two bellwether markets --Metro Vancouver and the CRD –
most prices, values and volume are down year-over-year but have shown a healthy rebound in the last quarter, not enough to motor past the y-o-y loss but coming on stronger. Sales volumes almost doubled, from 6,261 sales in Q1/13 to 11,538 in the second quarter and nearing the 12,527 quarterly sales one year ago, prices are coming back as buyers return.
As always, the only exception is Metro Vancouver SFD that continues to post steady price gains on the y-o-y and quarterly basis. Last year, the average price for single-detached product was $849,441. Last quarter, and despite Ottawa’s attempt to cool the national housing market, a Metro Vancouver manse average sale price was $873,510 and what is a heady 6.21-percent jump over the last quarter. The smaller BC regional markets largely show the same pattern:
Q2/13 figures are down on the year-over-year comparable but have somewhat rebounded over the first-quarter figures with SFD in most all markets showing the best legs. However, some product categories are still getting kicked in the rump. Examples: condos in the Fraser Valley matrix and attached/ townhouse product in the BC North/NW. (FYI but northern BC has very few condos; a few sales skew the figures enormously.)
In a recent (August 11/13) article in The Canadian Press, the mixed signals were weighted and although some data such as home prices and starts suggest that the “soothing” soft landing that Ottawa, economists, banks and not a few worried homeowners “are fingers-crossed hoping for, others [data sources] suggest the real
message is: the crash is coming.”
In early August, Statistic Canada reported that national residential building permits fell 12.9 percent in June with multi-unit (a.k.a the ‘starter home’ for many first-time urban buyers) fell by 18.8 percent. In turn, The Canadian Press cited research from RealNet Canada which is “even more frightening” in that in bellwether
markets such as Greater Toronto Area (GTA), Metro Vancouver and Calgary, building permits have “already crashed through the floor, plunging 51, 52 and 30 per cent respectively.”
Another Camp Weighs In
More about Ottawa but when housing construction cools and homebuilding and ancillary jobs fall away, entities such as the Canadian Association of Accredited Mortgage Professionals (CAAMP) believe that the feds should take their focus off of mortgage-rule tightening and do more to bolster first-time homebuyers, in turn helping the economically crucial home-construction industries. For examples, index the RRSP homebuyers’ plans and/or stretch amortization from its current 25-year maximum and back to 30 years
for qualified first-time homebuyers, thus allowing lower yet longer monthly payments . . . which, with the echoes of the sub-prime mess in the United States still ringing, might be double-edged.
On a positive note, an April, 2013 CAAMP/Maritz online survey of 2,000 homeowners nationwide revealed that almost 70 percent prudently took advantage of the lower-interest rate environment, 18 percent have increased their payments, 16 percent are making lumpsum payments to reduce the loan principals and substantially cut the amortization periods.
More ‘stand back’ stats from national pollster Ipsos Canada, Bank of Canada and Bloomberg’s discovery that in 2012 an ‘astonishing’ and record 13.5 percent or more than one in 10 Canadian households were ‘highly indebted’ as in carrying debts equal to or greater than 250 percent of gross annual income. Most of this debt is realestate related which, because the markets are still generally solid, wipes away most of the sweat. As well, the Q1/2013 figure shows a reduction in the ‘highly indebted’ cohort to under 12 percent of all Canadian households.
Merrily We (Bank) Roll Along
There are approximately 1.94 million property titles of all types in BC; Federal Finance Minister Jim Flaherty has long been the Cassandra of the Hill, warning Canadians to save more, reduce debt, be fiscally prudent. Going by recent reports and surveys, Canadians have heeded the call, to a point, maybe. In its recent Wealthscapes study, Environics Analytics, a marketing and analytical service company, found the average Canadian household net worth grew by almost six percent last year and now tops $400,000, an historic high; credit the 5.4-percent gain in ‘liquid assets’ and 5.1-percent in real estate values.
Now consider our non-mortgage debt levels of 160 plus percent of annual disposable income, one of the highest ratios in the world (not factoring in per-capita government debt that grows yearly as governments of all levels trend deeper into the red.) Good news: a recent TransUnion Canada analysis found that after growing 3.5 percent year-over-year, non-mortgage consumer debt fell two percent in Q2/13 to $26,935 on average. This is the highest quarterly national drop since 2004 when TransUnion began to track such debt. Ontario households have gone farther, paying down household consumer debt by 3.6 percent; in Toronto, by five percent.
On the flip side and after falling in Q3 and Q4 of 2012, consumer debt in British Columbia actually rose 3.3 percent y-o-y, powered along by the 3.7-percent between Q4/12 and Q1/13. On average, the average
BC adult carries $38,619 (and growing) in personal debt and what is the highest level in Canada.
Wealthscapes lead author Peter Miron noted that Metro Vancouver households have the highest net worth in Canada: $662,000 as of last year. However, 83 percent or about $550,000 of this wealth is beholden to an “out of this world” real estate market making it the one large egg in what could be a fragile basket.
Interesting, the top three net-worth cities – Metro Vancouver, Calgary and the Greater Toronto Area –also ride high thanks to burgeoning real estate markets, so far.
When Homebuyers Weep
Interestingly, Ottawa’s decision not to extend mortgage-default insurance to properties valued at over $1 million has, reports The Financial Post (July 3/13), created a flurry of bids just under the mark as even some wealthy would-be homeowners struggle to secure the necessary financing under new government rules.”. (At present, would be buyers with less than a 20 percent down payment and borrowing from a financial institution must purchase mortgage-default insurance.
The Post also cites the rationale and figures behind the new Canada Mortgage and Housing Corporation (CMHC) threshold: in Q1 2013, a mere four percent of housing in CMHC’s total insurance-in-force
portfolio carried a loan amount of $550,000 plus; this also represents a one-percent decline year-over-year.
Ray Harris, president-elect of the Real Estate Board of Greater Vancouver was quoted as saying Ottawa’s new ceiling probably won’t ripple the Metro Vancouver market much as most buyers in that zone have deeper pockets and don’t need mortgage insurance. Despite the headlines of home prices gone wild in Metro Vancouver, million-dollar plus is what Harris calls “definitely just a sliver of the market” and meanwhile, there’s a lot of product available below the $1M threshold. For anyone (buyer or bank) willing to take on or back stop the responsibility of a $999,999 (or somewhat less) mortgage with the minimum allowed down payment, and do it in uncertain times and ‘dynamic’ markets . . .
Bullish on Canadian real estate in general and vis-à-vis foreigners’ interest in particular, global luxury realtor Sotheby’s International Realty Canada does note that, although luxury SFD sales in Canada remains strong, not so much with luxury condo products. Sotheby’s Canada seasoned CEO Ross McCredie was quoted as saying Ottawa’s stricter mortgage requirements did have a major effect on the high-end market in Metro Vancouver, yet he also believes “renewed confidence and market momentum” will prevail and “higher-end
buyers have adjusted” to the new landscape.
Already Tuned In
Agree or disagree but in his July 3/13 ‘Stats’ blog posting, financial author, gleeful gadfly and general economic pundit Garth Turner www.greaterfool.ca warns that “the flashing yellow signs are everywhere” that current and wannabe homebuyers in Canada are setting themselves up for a real hard fall. The worrisome problem, says Turner, is when mortgage rates rise, they’ll crimp these same housing markets; sales and values will fall. You got the cheap rate -- but now your place is worth less. Opines Turner: “Grabbing cheap rates to lock up houses that higher rates will knock down is a classic mistake. Then again, we’re a nation of debt
dummies.”
Equally off the mark, continues Turner, are investors buying condos in overheated, oversaturated markets such as Greater Toronto and Metro Vancouver. Turner cites The Globe and Mail article written by macroeconomist Sheryl King and what he calls an “upscale, erudite version of the pathetic drivel and anguished logic published daily”. In turn, King’s article (July 2/13) cites billionaire Warren Buffet’s maxim:
“You never know who’s swimming naked until the tide goes out.” The tide being the recent “hint” from US Federal Reserve that, as the US economy improves, its bond-buying campaign could soon wind down,
effectively putting the rise in interest rates. North of the border, the mouse follows the elephant with rising Canadian bond yields putting the prod to mortgage interest rates.
As mortgage rates rise, ‘investment’ condos lose their luster. Especially in major urban centers which are in an overbuilt environment vis-à-vis condominiums. King writes the average rent for a one-bedroom condo in downtown Toronto has risen by 10 percent over two years to what’s now $1,856 per month or $22,272 per annum. Average sale price for that condo: about $330,000 to yield a “healthy” 6.7 percent return on the
investment. Not bad, writes King, assuming one doesn’t factor in the carrying costs. For example, a five-year fixed 3.05 percent mortgage (20-percent downpayment, 25-year amortization) eats $1,265 per month. Now,
slice off the maintenance fees, taxes and so and, according to King’s calculations, the net income is a mere $535 per annum or a piddling 0.16 percent ROI. Add a bad tenant to the mix, one single month of
missed income, any minor repairs, special assessment or anything and that rental ‘investment’ is under water.
Wonders King: “Why would an investor take on the risk of owning a condo for virtually no annual return? The answer: They are not.”
If and when that fixed five-year 3.05 mortgage rate rises even another 50 basis points, King warns that the rental investor holding the above scenario, will be “into a position of negative carrying costs. . . . Here’s
hoping the spike in mortgage rates is short-lived.”
Getting Home Safe
Paths chosen and walked, the game of life made physical; exceed your earlier, personal goals and trust your feet are true, the path is open . . . and gamble that your skull is thick. Be alert, expect the best but anticipate, keep a wary (back of your head) eye open for the worst.
Tuesday, August 20, 2013
Update on mortgage rates
Since the 5 year Government of Canada bond yield recently touched the psychological 2.0000% barrier I thought I'd update mortgage rates first from a historical perspective and second by looking at the "renewal gap" and relative payment ratios based on average mortgage rates to the end of July.
The 5 year Government of Canada bond yield:
The 5 year Government of Canada bond yield:
Residential mortgage rates, using "posted" and "average" rates. Average rates through July 2013 have not increased significantly, meaning the spread to risk-free has dropped by about 70bps on the chart below.
The five-year "renewal gap" is the interest rate differential (IRD) an owner would receive renewing a mortgage at various points in time, with the most recent mortgage rate held constant into the future. After 5 years this would obviously mean a renewal gap of 0 bps. The renewal gap does not yet capture potential mortgage rate increases (since the last reported average rate is still low), nonetheless even with the most recent increase in rates, and assuming rates do not significantly increase further, the renewal gap will remain negative for the remainder of the year, with a near-zero renewal gap manifesting in May 2014.
The chart below holds income and debt-service ratio (DSR) constant and looks at how much loan a borrower can afford over time, aligned with changes to maximum amortization lengths. This assumes uninsured borrowers can still secure 30 year mortgages. If the predominant maximum offered amortization length becomes 25 years I will adjust this, which would kick the blue line down to about 155.
Even with the most recent increase in rates, households with five year fixed mortgages still have room to refinance at terms more favourable than five years ago.
Sunday, August 18, 2013
Teranet House Price Index - August 2013
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The July composite index was up 0.7% from June. Though this increase may seem substantial, it is somewhat below the seasonal norm. Over the last 12 years, the average July gain has been 1.0%. (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 July of this year, prices were up from the month before in nine of the 11 markets surveyed. The increase exceeded the national average in four markets: Victoria (2.6%), Hamilton (1.8%), Toronto (1.3%) and Edmonton (0.8%). It lagged the average in Calgary (0.5%) and in Vancouver, Ottawa-Gatineau and Quebec City (0.3%). In Montreal prices were flat from the month before. In Winnipeg (−0.4%) and Halifax (−0.6%), prices were down on the month.Teranet – National Bank House Price Index™  The historical data of the Teranet – National Bank House Price Index™ is available at www.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.
1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.
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Thursday, August 15, 2013
Vancouver CMA Intraprovincial and Interprovincial Migration
Refrains I have heard, as long as I can remember, is families migrating away from expensive cities into other regions due to high housing costs. This would make sense simply from a "diffusion" perspective where areas of growing population will invoke migration to less populated areas. To capture this effect I have plotted intraprovincial (to other parts of the province) and interprovincial (to other provinces) migration by lumped population cohorts:
In terms of migration due to high housing prices, while there may be some effect, out migration in the early 2000s was heavily negative even with prices and affordability lower than today's. Other observations:
- There has been smaller intraprovincial out-migration of the 30-44 cohort since the recession. This meant that from 2009 through 2011 there would have been additional housing demand for this cohort
- The older cohorts, including those with school-age children, tend to have net migration out of Vancouver CMA.
- The fundamental mode of interprovincial migration patterns, regardless of cohort, is on the order of 15–20 years.
International migration graphs are below, with an interesting decomposition of the 15-29 year cohort:
Friday, August 09, 2013
BC Employment by Sector July 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)
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).
The participation rate has dropped of late: unemployment has slowly dropped since the recession and 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.
Construction employment as a percentage of total employment is once again waning. The service producing sectors (NSA) (12 month average):
Tuesday, August 06, 2013
Increasing Interest Rates
As interest rates threaten to increase it helps to realize that rising rates on amortizing loans affect borrowers in two ways. The first is that as rates rise, total payments increase. The second, and less talked-about, is that as rates rise, total principal paydown is delayed. To depict this I have graphed the percentage of principal paid down after five years of payments alongside the amount of interest paid over those five years:
A borrower will find that, after five years of payments with a higher mortgage rate, not only will they have paid more interest but also they will have paid less towards principal.
Friday, August 02, 2013
Greater Vancouver Market Snapshot July 2013
Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to July 2013. (see REBGV news releases.). (My "next month estimate" numbers are what I thought next month would have been using simple statistics from past years)
The scatterplot of price changes and months of inventory is below. The most recent datum is the brown dot at about 8 MOI and 2%. The trend is roughly in line with past years. June 2013 reported was about -3% 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:
July sales have continued a general improving trend to exceed last year and are now comparable to 2010 and 2011 levels. July sales are 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.
This July saw another weak report as compared to the last decade, 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 the 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. An interesting commentary from TD (PDF) points to some evidence supporting July sales strength being correlated with the recent increase in interest rates.
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, and indeed another investment foray was recently announced.
My estimates for July were for inventory of 16823 (actual 16618) and sales of 2530 (actual 2946) based on estimating average changes from May of years 2005-2012. Using the same technique estimates inventory and sales for July of 16365 and 2470 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 August's MOI to be higher than July's, mostly due to lower sales typical as the summer progresses, albeit this year's Julys sales were higher than June's which we can see hadn't occurred since at least 2005.
This July saw another weak report as compared to the last decade, 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 the nascent resurgence in listings volumes is underway and if strength continues, the second half of the year will make up for the sluggish start.
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. An interesting commentary from TD (PDF) points to some evidence supporting July sales strength being correlated with the recent increase in interest rates.
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, and indeed another investment foray was recently announced.
My estimates for July were for inventory of 16823 (actual 16618) and sales of 2530 (actual 2946) based on estimating average changes from May of years 2005-2012. Using the same technique estimates inventory and sales for July of 16365 and 2470 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 August's MOI to be higher than July's, mostly due to lower sales typical as the summer progresses, albeit this year's Julys sales were higher than June's which we can see hadn't occurred since at least 2005.
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