August 2007 CMHC Housing Now Report

Let's round out this busy week with some hard data on Vancouver's new home market for the month of August 2007.

Housing starts were well above average, at 1855, during August with developers focusing on starting new multi-family units around the Lower Mainland.

Housing unit completions were above average in August as well with 1386 new units coming available in the Vancouver CMA during August.

Units under construction hit an all time high at 22,421 units under construction in the Vancouver CMA during August. Labour shortages are contributing to the problem of projects taking longer than expected to complete so they stay under construction longer than usual.



Some interesting highlights from the report:

Units under construction in Vancouver City during August 2006 = 7167 and during August 2007 = 5149. That is a big decrease year over year. New projects are being focused in the suburbs.

Units under construction in:
Langley = 1368
Maple Ridge / Pitt Meadows = 1464
New West = 1317
Tri-Cities = 2789
Richmond = 2086
Surrey = 3311
Burnaby = 2608

A number I have been paying attention to in the report lately is the Completed but Not Absorbed metric. It has been increasing drastically representing a fairly severe slowing in new home demand.

Units completed but not absorbed (August 2007 = 1140; August 2006 = 783):
Surrey: 352
Langley: 141
Maple Ridge / Pitt Meadows: 80
Vancouver: 194
Burnaby: 72

One thing to watch here during this fall/winter is the beginning of some competition between developers wanting to unload completed inventory. They will compete with each other and with existing homes for sale in order to avoid carrying the inventory for a long time. This is especially the case when the pipeline is already full of projects just months away from completion.

2008 will surely be interesting.

September 2007 Renewal Gap - Mortgage Data Data

All types of mortgages now being renewed are being renewed at higher rates than the previous term. All adjustments are negative unless the mortgagee decides on a longer amortization to minimize the cash flow pinch.


Every six months, 6% to 7% of all mortgages are renewed. This distribution is pretty consistent across Canada.


BC has the highest proportion of variable rate mortgages, which is pretty scary. The payments on variable rate mortgages do not reset to a higher level when the interest rate increases and so many variable rate mortgage holders end up with a negative amortization (their payment is smaller than the interest charged) during a rising rate environment like the past couple years.


40% of mortgage holders intend to renew for 4-5 years. I would think this is pretty typical across Canada.

Interesting and lastly, check this article out in the National Post.

Homes of Insanity Comparison

I haven't had the stomach to do another instalment of "Home of Insanity" for a couple months now but I thought I'd give it a shot. Lately, I have noticed extremely divergent asking prices for homes of similar quality and likewise have noticed similar prices for homes of extremely divergent quality.

Featured here, our Home of Insanity is located in 'Langley Meadows' subdivision near Willowbrook Mall and other Langley shopping. When I was growing up, in the area, Langley Meadows was affectionately known as "Langley Ghettos" because the homes are on small lots and they are typically of a somewhat substandard quality and were inhabited by the lower income strata at the time. They were largely built during the late 70s and early 80s. Many of the builders who built the homes went bankrupt during the 1981 crash as the homes they built, at the time, were selling (pre-bust) for $150,000ish and sold only a couple years later for $75,000ish (post-bust). The homes were aimed at the first time homebuyer and were built with affordability in mind - clearly that isn't the case any longer.

Let's have a look at one of the more pricey homes in the neighbourhood.

MLS# F2722600 - 2825 WOODLAND DR, Langley, BC - Asking Price = $459,900

Small lot, unfinished basement, moderately updated but nothing special and all for a monthly mortgage payment of $3000 + $200 / month property tax + $200 / month maintenance. Why buy when you can rent the whole thing for less than $2000 / month.

The divergence here exists between the least expensive home in the neighbourhood with MLS# F2716966. 2610 WILDWOOD DR, Langley, BC - Asking Price = $389,900

Same size lot, slightly larger house, finished basement, why is the asking price $70,000 less?

A couple blocks away we can find some new construction on simlar sized lots for a houe that is 50% larger and brand new. How much more is the larger, brand new house compared to the 30 year old house? $50,000, $75,000 or $100,000?

How about $30,000 more and that'll get you a new house with new appliances, a warranty, and a lot less maintenance for the first few years? Albeit with a jungle of a lawn to start! I think the developer is having a difficult time unloading these units.

MLS# F2708200 - 19930 73A AVE, Langley, BC - Asking Price = $489,900

Truly insane.

US Housing Market News

Here is some news from the US:

1) The S&P Case-Shiller House Price index posted its largest decline in 16 years. Wall Street Journal. S&P Press Release.
2) The National Association of Realtors released existing home sales for August. The national inventory of existing homes for sale reached 10 months of supply. This does not include new homes. Here is Calculated Risk's take.

The data out of the US housing market continues to surprise to the downside even for many of the most bearish prognosticators and certainly it seems to have quite a ways to go yet. Every month we hear a new person boldly declaring that "housing has hit bottom" but every month they are proven wrong. I think, based on past downturns, we have 2-4 more years to go before recovery begins.

Before it's all said and done Vancouver may have the title of most expensive single family homes in North America.

Update:

The California Association of Realtors released stats today. Highlights of C.A.R.’s resale housing figures for August 2007:
C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in August 2007 was 11.8 months, compared with 5.9 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
Thirty-year fixed-mortgage interest rates averaged 6.57 percent during August 2007, compared with 6.52 percent in August 2006, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.67 percent in August 2007 compared with 5.64 percent in August 2006.
The median number of days it took to sell a single-family home was 55.5 days in August 2007, compared with 50.9 days (revised) for the same period a year ago.

An interesting quote:

“Despite the overall increase in the statewide median price, prices declined in nine regions last month, falling 11.5 percent in the Central Valley region and 12.1 percent in Sacramento,” said C.A.R. President Colleen Badagliacco. “Price softness is even more pronounced when we look at different segments of the market. For example, the statewide median price in the entry-level price range of less than $500,000 fell 5.1 percent in August to $349,360 compared with $368,210 for the same period a year ago."

Mortgage Payments are BIG and TD Economics is smoking something!

Well I thought it was about time to revisit how much the average Vancouver area home buyer must earn to afford to purchase different types of fairly average accomodations. This calculator assumes a 32% ratio for all housing costs - this has typically been the criteria for CMHC backed mortgages in Canada. Click on the chart to enlarge it.





It is shocking to me to consider that a household must earn nearly $60,000 per year in order to afford the average condo in the Fraser Valley. That is even with an insane 40 year amortization mortgage. And I thought condos were supposed to be affordable for first time buyers and low income earners - phsssssh - so passe - only high income earners, loan application liars and ever-so-prescient real estate speculators can afford the basic condominium now. My former condo was affordable when I bought it but it sure wasn't when I sold it.

Go to the CMHC site and do the calculation for your situation. Tell us what you find. Is rent cheaper than the monthly payment? By how much? Or if you already own your home, would you be able to afford to buy it today with your current income if you had to.


UPDATE:

In the category - what are you smoking - another bank releases a milque-toast economic report on how Canada's housing market is undergoing a soft landing. I'd like to see the TD Economics department relocated to downtown Vancouver and we could see those poor economists struggle under the burden of a crushing mortgage payment double what they pay in Toronto for a similar property. Here are the comments about the Vancouver market that defy logic:


Vancouver – A balanced market within sight


Existing home prices are expected to post a 12% gain from last year. TD Economics forecasts that this softening in price growth will continue into 2008, where the yearly average resale home price gain is expected to come in at 7%. Okay brilliant TD economist, how much did wages rise or interest rates fall? Wages were up approx. 3% and interest rates rose thus making houses more unaffordable than ever. How exactly will we sustain another 7% rise in prices?

What lies beneath this outlook? We have profit goals as a bank for next year and the profits hinge on us reaching our lending goals so we were reluctant to release the real analysis that we did because we wanted to keep our job. Oops . . . I mean . . . First, a higher number of existing homes listed for sale. This dampens new home demand and helps ease relative demand pressures for existing homes. As more homeowners look to lock in price gains from recent years, listings are expected to continue feeding supply more than enough to meet demand.

The second main driver behind our forecast for softer price growth lies on the demand side: affordability. Not only is affordability poor on a level basis, it has been deteriorating significantly in the last couple of years. Hmmmm . . . . really - you don't say!? Typical mortgage carrying costs for a median-priced home in Vancouver required close to 10 percentage points more of the median market household income in 2006 than it did a year earlier. I guess no more food for junior and we are going to have to drive that old Honda for another 10 years. As the lagged effect of this significant deterioration works through the system, it will continue to dampen demand going forward.

Whereas sales might increase at most 2-3% from last year, new listings are expected to increase by twice as much in per cent terms. After exhibiting the characteristics of a strong seller’s market since the turn of the decade, Vancouver’s market is heading back towards more balanced conditions (see textbox for discussion of overall market balance measure). Indeed, the demand-supply ratio for Vancouver’s housing market is inching towards the balanced market range of 0.4-0.6. So how exactly will demand (sales) going to increase when you just said it would decrease? I don't understand.

On the new home market front, housing starts continue to downshift after having peaked in 2004. However, the number of starts should remain lofty throughout the forecast horizon. A lean inventory of completed but unabsorbed units, along with high construction costs, have helped continue an upward trend in new home price growth that is six years long and still running. Extrapolation at its finest - prices have gone up so they will continue to go up. Brilliant!

Residential construction continues to face challenges like a shortage of skilled trades, high land prices, and increasing competition for resources from the non-residential sector. This is illustrated by the recent increase in building permits that has not been accompanied by rising starts to match. In other words, builders have purchased permits, but have not broken ground. Unless sufficient resources can be made available to catch up with building intentions, this is likely to put continued upward pressure on new home prices and to further erode an already strained new home affordability. This is why framers and guys who pour concrete without high school education make more money than well educated financial planners who manage millions of dollars of other people's money! I'm not bitter!

In terms of resale home price growth, Vancouver was the first western market to cool from its peak of 20%. Thankfully, the easing from such a break-neck pace of growth is proceeding gradually. Demand remains well supported by a pace of job creation that only Alberta has been able to outmatch. But Vancouver’s job market is also less vulnerable to downside risks tied to the volatile resources sector, and employment growth is expected to outpace the Canadian average by 2.5 times. Therefore, we are expecting the market to remain relatively tight. But as the supply of homes continues to grow, while demand softens as a result of eroding affordability, price growth should head back down towards a more sustainable pace. Yes we have robust employment in Starbucks baristas, retail, tourism, and yes, of course, construction employment. All of which are low paid, non-house-affording jobs except for the construction employment. And how exactly is our employment not directly tied to the volatile resource sector? Isn't the BC economy 'resource based' like cutting trees and digging up rocks?


TD Economics - you get the mohican what are you smoking award - hooray.