San Diego Affordable Again

I have found Rich Toscano's posts over at Prof. Piggington's interesting over the years. Rich had correctly called the San Diego bubble -- the first major US market to experience price weakness -- and has been tracking its distress all the way down.

As a bit of an epilogue to San Diego's terrific bubble experience, Toscano has summarized the city's housing market conditions in his latest post Shambling Towards Affordability: Year-End 2010 Edition.

Why is Toscano such a great read? He has continually concentrated on the true "fundamentals" of real estate investing, including:

• price to income ratios
• price to rent ratios
• construction and real estate sector employment
• loan arrears
• rent and wage growth
• months of inventory
  

Save a handful of bloggers like CalculatedRisk and others, understanding what truly drives house prices in the long term seems oddly absent from discussion. Toscano has presented both relevant fundamental data as well as poignant analysis of them. Some of Toscano's important contributions have been:

• Even through the severe recession, he quickly understood rental growth continued to track CPI inflation even as wages and house prices were dropping and inventory was high.
• Prices per square foot closely tracked the Case-Shiller house price index, allowing a 3 month sneak-preview into apples-to-apples price movements. (The CS-HPI is released with a 3 month delay.)
• Construction and real estate-related employment distress portended a significant increase in foreclosure activity.
• Higher quality houses tend to be more "downwards sticky" compared to lower quality stock; likewise detached property prices fell slower than condos and apartments.

The biggest takeaway from Toscano's work is that, in San Diego -- a city with a growing population, a reasonably diverse economy, and desirable climate -- fundamentals eventually mattered. As 2010 drew to a close, San Diego's house price bubble has been summarily bookended with prices approaching fundamental values again, a process that took 5 years from their peak in 2005.

San Diego and Toscano ftw.

Roubini Global Economics - Will New Regulations Bring Continued Rebalancing for Canadian Housing?

By Tetiana Sears and Rachel Ziemba

Though Canada managed to avoid a U.S.-style housing crash, the Great White North may face its own set of difficulties, as the same ample credit extension, low interest rates and government incentives that helped the housing market rapidly recover the losses incurred during the 2008-09 downturn are contributing to increased household indebtedness, which we note in our latest North America Focus. The ratio of debt to disposable income reached a record high of 148% in Q3 2010. As underlying macroeconomic trends (e.g., the open output gap and weak core inflation) warrant an extended pause in the Bank of Canada’s tightening cycle, Canadian authorities have turned to regulatory means to dampen excessive credit practices and ultimately decrease households' vulnerability to rising debt service payments.

To this end, in January the Canadian Department of Finance announced new regulations for mortgages, including a reduction in the maximum amortization period to 30 from 35 years for government-insured mortgages with a loan-to-value ratio greater than 80% and a reduction in the maximum size of a home equity loan to 85% from 90% of the property value. The government also restricted its support for home equity lines of credit (HELOCs) to safeguard its balance sheet from any future problems with structured products. This course of action, which follows similar measures in early 2010, was taken to encourage Canadians to maintain equity in their homes and limit the creation of debt-backed products by keeping them off of the public balance sheet.

The shortening of the amortization will raise the qualifying income of those seeking mortgages approved by the Canada Mortgage and Housing Corporation (CMHC), and some homebuyers (mostly first-time) will be priced out of the market or will choose a more affordable house. The reduction in the HELOC should temper renovation activity and spending on durable goods, dampening consumption. Although the total impact of the new regulation will only be marginal, it will contribute to a decrease in housing demand through this year, along with slower job growth and higher debt-servicing costs. All in all, the softening of the housing market could be a drag on economic growth.

The most recent Canadian housing data (housing starts for January and building permits for December) suggest that Canadian homebuilding activity is stabilizing at the levels of late 2010 as domestic, U.S. and global momentum combine to help bring the market in for a soft landing. This week’s data on new-home construction continued to build on our base case scenario, given stricter lending standards and mortgage origination rules in Canada. Although we don’t see any evidence of a sharp correction, there are risks of some volatility in the housing market in coming months as new mortgage regulations are implemented in March. Despite this likely transitory increase in mortgage applications, the broader trend of cooling housing market activity appears to be well entrenched. Although both new and existing home sales picked up in Q4 2010, the overall pace has notably moderated from late 2009-early 2010. Higher prices, rising debt and slow growth in wages will keep trends modest.

Canada’s growth momentum picked up in late 2010, along with growth south of the border, as exports and mining demand and services picked up. Labor market data, a lagging indicator, suggest that this stronger momentum could carry into Q1, posing upside risks to RGE’s current forecast of 2.3% growth for 2011. Should economic growth surprise on the upside, housing market activity could be more resilient.

Stronger growth would remove support for the central bank’s dovish bias and suggests that the gradual increase in benchmark and long-term interest rates would boost debt service costs. On balance, rising debt payments will be only partly offset by income growth as debt is outpacing wage growth, and we expect that January’s job gains are not sustainable. As the Canadian economy faces these opposing forces, housing market activity should continue to rebalance and is likely to stabilize in the latter part of 2011 at a pace of growth lower than that of 2010. Regulators have to hope the pace remains gradual.

Canadian policy makers are by no means the only ones struggling with the dilemma of whether to worry about frothy asset markets. Capital flows into many emerging market economies, particularly in Asia, have stoked domestic housing markets—with dollar-pegged and RMB offshoring epicenter Hong Kong particularly affected. Other advanced economies, like the Nordics and Switzerland (which have stronger balance sheets than the eurozone periphery) have also experienced strong housing price appreciation, as RGE noted in a recent Europe Focus. They have attracted significant capital inflows during the economic recovery, and the well-capitalized banks took advantage of low interest rates to increase lending, supporting the recovery of the housing market and domestic demand.

City of Vancouver Permit Update for 2010

I have been producing some graphs starting in early 2009 showing the trend of permits in the City of Vancouver (here and here). Here is an update to December, 2010.

Residential dwelling permits graphed since 2007:


Permits parsed for 1-2 dwelling units only (i.e. SFHs):Multi-unit building permits:

All permits' value, residential and commercial:


Analysis:

1. There was a significant, though not full, rebound in multi-unit permits in late 2009 and into 2010. This is commensurate with the rebound in construction employment coming out of the recession.
2. The detached market is extremely hot right now. This is evident through significant price appreciation of detached-zoned lots in the City, notably (but not exclusive to) the west side.
3. Detached permits have been falling significantly since mid-2010. Seasonality in permit applications cannot be discounted; I would not be surprised to see detached permit applications rebound going into the first half of 2011. A builder friend of mine claims the City's permit office has a backlog it's working through.
4. The building recession in late 2008 through mid-2009 is now bookended.
5. The data presented here show what a severe housing recession looks like and hint at how dependent the City is on sustained permit revenue to fund its operations.
6. The permit data are coincidental with faltering sales, however the permit data are released with about a month's delay; sales are available with virtually no delay thanks to paulb over at vancouvercondo.info. It's worth remembering that with housing markets, prices are a lagging indicator.
7. Laneway housing continued its upward trend. Builders and the permit department are likely becoming more familiar with the process and relevant codes (and likely fine-tuning it as they go). I would expect to see a continued increase in laneway housing permits, barring any major pullbacks in the availability of credit.

Teranet Index - November 2010

JANUARY 2011

Third consecutive monthly price decline in November Canadian home prices in November were down 0.2% from the previous month, according to the Teranet-National Bank National Composite House Price Index™. This retreat followed monthly declines of 0.4% in October and 1.1% in September after a run of 16 consecutive increases. November prices were down from the previous month in four of the six metropolitan markets surveyed. Declines of 0.9% in Ottawa and 0.5% in Toronto were each the third in a row. The Calgary decline of 0.7% was the fourth in a row. Halifax prices were down 0.8%. Montreal prices were again flat from the month before. Prices in Vancouver were up 0.6%. After three consecutive months of decline in the composite index, Canadian home prices are still 4.8% above the pre-recession peak of August 2008. 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

The November result was reflected in a further deceleration of the 12-month rise of the composite index, to 4.9%. It was the fifth consecutive month of deceleration, leaving the 12-month increase the smallest since December 2009. Market by market, the 12-month changes range quite widely: increases of 7.2% in Ottawa, 7.1% Montreal, 5.9% in Vancouver, 5.1% in Toronto and 2.7% in Halifax, with a decrease of 1.5% in Calgary. Data from the Canadian Real Estate Association show generally balanced conditions in major urban markets in December. Toronto and Vancouver could even be considered sellers' markets. 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 November % change m/m % change y/y Calgary 154.21 -0.7 % -1.5 % Halifax 127.91 -0.8 % 2.7 % Montreal 135.56 0.0 % 7.1 % Ottawa 131.07 -0.9 % 7.2 % Toronto 124.21 -0.5 % 5.1 % Vancouver 155.90 0.6 % 5.9 % National Composite 137.07 -0.2 % 4.9 % 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 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. By: Marc Pinsonneault Senior Economist Economy & Strategy Group National Bank Financial Group Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report. 1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.

CMHC Rules Tightened - A LIttle

The Harper Government Takes Prudent Action to Support the Long-Term Stability of Canada’s Housing Market

Related Document:
Backgrounder: Supporting the long-term stability of Canada’s housing market
The Honourable Jim Flaherty, Minister of Finance, and the Honourable Christian Paradis, Minister of Natural Resources, today announced prudent adjustments to the rules for government-backed insured mortgages to support the long-term stability of Canada’s housing market and support hard-working Canadian families saving through home ownership.
“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” said Minister Flaherty. “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future.”

“The economy continues to be our Government’s top priority,” continued Minister Paradis. “Our Government will continue to take the necessary actions to ensure stability and economic certainty in Canada’s housing market.”
The new measures:

• Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
• Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
• Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

Our Government’s ongoing monitoring and sound underlying supervisory regime, along with the traditionally cautious approach taken by Canadian financial institutions to mortgage lending, have allowed Canada to maintain strong and secure housing and mortgage markets.
The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.