Teranet HPI - February 2014

HOME PRICES UP 0.3% IN FEBRUARY In February the Teranet-National Bank National Composite House Price Index™ was up 0.3% from January. For the second month in a row, prices for Canada as a whole rose to an all-time high, though new records were set in only two of the 11 metropolitan markets surveyed - Vancouver (for a fourth straight month) and Calgary (for the first time since September 2007). Since in February 2013 the index was down 0.2% from the month before, the increase of February 2014 resulted in an acceleration of 12 month home price inflation to 5.0% from 4.5%. The gain from a year earlier was well above the cross-country average in two of the 11 markets, Calgary (9.6%) and Vancouver (7.7%). It was slightly above the average in Toronto (6.1%) and Edmonton (5.3%), equal to the average in Hamilton (5.0%) and below it in Winnipeg (3.5%) and Montreal (1.9%). In Halifax (−4.7%) and Ottawa-Gatineau (−0.6%), prices were down from a year earlier for a second consecutive month. In Victoria (−3.4%), home prices have been down from a year earlier for 12 months now. Quebec City posted its first 12 month deflation in 15 years (−2.0%). It is the first time since October 2009 that there is price deflation in at leat four of the regions covered. 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 February the east-west dichotomy became more pronounced than ever. Home prices were up from the month before in all five markets of Western Canada - Calgary (1.1%), Vancouver and Victoria (0.9%), Edmonton (0.6%) and Winnipeg (0.5%). The rise in Victoria ended a run of four consecutive monthly declines. For Vancouver it was the 10th consecutive monthly increase. In the six markets of central and eastern Canada, the only monthly rise was in Montreal (0.7%), the second advance after six months of flat or declining prices. Prices were down 0.1% in Toronto, making February the fourth month without a gain in the last six. For Ottawa-Gatineau (−0.8%) it was the sixth decline in a row, for Quebec City (−1.7%) the sixth in seven months. For Halifax (−1.7%) it was the third decline in a row. 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 February % change m/m % change y/y Calgary 174.34 1.1 % 9.6 % Edmonton 173.18 0.6 % 5.4 % Halifax 135.69 -1.7 % -4.7 % Hamilton 145.97 -0.5 % 5.0 % Montreal 149.97 0.7 % 1.9 % Ottawa 139.29 -0.8 % -0.6 % Quebec 173.53 -1.7 % -2.0 % Toronto 154.67 -0.1 % 6.1 % Vancouver 178.47 0.9 % 7.7 % Victoria 134.70 0.9 % -3.4 % Winnipeg 194.84 0.5 % 3.5 % National Composite 6 159.99 0.3 % 5.6 % National Composite 11 160.41 0.3 % 5.0 % 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. By: Marc Pinsonneault Senior Economist Economy & Strategy Group National Bank of Canada Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report.

January 2014 Residential Construction Activity - Vancouver CMA

Below are CMHC starts, completions and under construction for Vancouver CMA to January 2014. Starts and completions are displayed as 12 month sums (included February preliminary housing starts):

Here is single detached under a microscope, including completed but unabsorbed units:

While single detached starts and completions are below levels seen before the recession, units under construction and unabsorbed inventory are both higher. These datasets do not indicate where single detached units are being built, but many if not most will be on previously unoccupied land, the remainder will be infill. Rumours of "strength" in "single family" house prices in certain areas do not align well with these data.

Another point to make is that CMHC-reported "single detached" will include houses with secondary suites. Houses with occupied secondary suites that were counted as "single detached" by CMHC and municipalities are counted as multifamily by Statistics Canada when performing census dwelling counts. Interestingly those same dwelling counts will count laneway houses as "single detached" (which of course they are since they share no walls, ceilings or floors with anyone but the mice).

Price Changes, Sales and Inventory

A recent foray of activity in recent business news feeds has uncovered a slightly revised outlook on Canadian housing from investment shop PIMCO. Articles can be traced through Luke Kawa's article. What it seems to have boiled down to is an expectation that national prices could fall -20% to -10% in real terms (I'm assuming a 2% inflation rate) over about five years, though this could possibly happen faster. Taking the view that such a correction is going to occur over five years we can infer what this will mean for sales and inventory.

In Vancouver, sales and inventory have a relationship to price changes. Here is a graph showing annualized price changes versus the ratio of for-sale inventory to monthly sales (months of inventory AKA MOI) since 2005:

The relationship between MOI and price changes is clear however the variance is substantial. Using a baseline assumption of MOI of 7 leading to flat nominal prices and an MOI of 10 leading to -5% nominal annualized price changes, we can determine what level of increased inventory and decrease in sales is required to elicit the price drops conducive to PIMCO's -20% to -10% real call. (This is not to say that Vancouver will be in-line with the national average but the analysis is here as an example.) I have colour coded the results. Results are based on changes from current sales and inventory levels (that are around MOI=6.5).

MOI resultant from changes in sales and inventory from current levels:

Nominal annualized price changes based on inventory and sales changes

Real price changes over five years based on inventory and sales changes

The above charts are concentrating on the scenarios discussed by PIMCO. This is not to suggest that their estimates are realistic; price increases are certainly possible but not considered in the charts.

We can use the charts as follows:

To get a -10% real drop over five years, that would require:

• an average increase in inventory of 10% with a 0% change in average sales
• an average increase in inventory of 5% with a 5% change in average sales
• an average increase in inventory of 0% with a -10% change in average sales

To get a -20% real drop over five years, that would require:

• an average increase in inventory of 30% with a 0% change in average sales
• an average increase in inventory of 15% with a -10% change in average sales
• an average increase in inventory of 0% with a -25% change in average sales

An interesting observation is how little sales and inventory need to move (inventory up 15% and sales down 10%, say, albeit for a prolonged five year duration)  to change a slightly-increasing market (the current scenario) to one that will be down -20% in five years.

Greater Vancouver Market Snapshot February 2014

Below are updated sales, inventory, months of inventory, and sell-newlist ratio graphs for Greater Vancouver to February 2014. (See REBGV news releases.) (Click on images to enlarge.)

The scatterplot of 6 month price changes and months of inventory is below. The most recent datum is the orange dot at about (MOI=6.2,price_change=5%) . The trend is roughly in line with past years.

My estimates for February were for inventory of 13637 (actual 13412) and sales of 2527 (actual 2530) based on estimating average changes from January of years 2005-2013. Using the same technique estimates inventory and sales for March of 14565 and 3127 respectively (MOI=4.7).