This article appeared on the CBC.ca on March 15th, 2011 and was written by Dave Simms.
The Canadian real estate market continued its slowdown in February, with the number of homes sold declining 1.6 per cent compared to the previous month and dropping 5.9 per cent from a year ago.
The sales drop was the smallest year-over-year decline in nine months, the Canadian Real Estate Association said, but it underscores the market returning to a more balanced level from the highs it experienced through the early part of 2010.
“Most local housing markets in Canada are well balanced, but there are still a number of buyers’ and sellers’ markets,” CREA president George Pahud said Tuesday.
Price gains, however, are anything but balanced. The national average rose 8.8 per cent year-over-year to $365,192 in February. The average price has been skewed higher nationally and in British Columbia recently by a record number of multimillion-dollar sales in a couple of areas in and around Vancouver, said CREA’s senior economist, Gregory Klump.
“When you take Vancouver out of the equation, the year-over-year increase in the national average price drops to 3.4 per cent,” Klump said.
Listings rose 1.5 per cent from the previous month, building on the 4.3 per cent gain in January. The rise is consistent with CREA’s expectation that many sellers, who shied away from listing their home last summer when the national housing market softened, would put their homes for sale early in 2011, now that they’re confident better prices have returned.
Sales activity eased in almost two-thirds of all local markets from the previous month, enough to offset monthly increases in major markets like Vancouver and Calgary.
Inventory, a key real estate metric that measures the number of months it would take to sell the entire housing stock at the current sales pace, stood at 5.7 months at the end of February on a national basis. This is little changed from the 5.5 months reported in January, when it reached the lowest level since last April.
New mortgage rules announced by the Finance Department in January and set to begin Friday will make the maximum payback period 30 years — resulting in somewhat higher regular payments than with the 35-year amortization that has been the choice of about 30 per cent of home buyers.
The rule changes will increase the monthly payment on a $300,000 mortgage at four per cent interest by $105, but will also reduce total interest paid by $42,288 over the life of a mortgage because it’s repaid five years sooner.
CREA expects the rules will begin to put a lid on prices starting next month, as less buyers will be able to come up with the shorter terms and higher monthly payments they bring.
“National average price gains may recede after tighter mortgage regulations take effect in March,” Klump said.
This article was posted by the Business Spectator on March 2nd, 2011. This article first appeared on the MacroBusiness website on March 2nd, 2011.
Canada and Australia have a lot in common. Both economies are commodity exporters. Both countries have experienced similar rates of immigration. Both countries largely dodged the global recession that has recently shocked the developed world. And both are said to have world-beating banking systems, with Canada’s ranked as the strongest and Australia’s ranked third strongest in the world by the World Economic Forum’s Global Competitiveness Report.
As in Australia, there is also widespread debate about whether Canada is experiencing a speculative housing bubble or asset inflation based upon sound fundamentals.
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Canadian home values have risen strongly relative to incomes and rents over the past ten years on the back of sharply rising debt levels. The key charts pertaining to the Canadian housing market are below, taken from Capital Economics’ recent Canadian housing and economic updates.
The house price growth of Canada’s major cities compared to Australia’s capital cities is shown below (chart courtesy of World Housing Bubble, here and here).
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As you can see, there are some striking similarities between the two countries’ housing markets. First, the two mineral rich cities of Perth and Calgary experienced their own unique house price booms during the 2006/07 commodities bubble. Second, both countries’ governments and central banks were highly successful in reflating their respective housing markets after brief falls during the onset of the global recession.
In Australia’s case, the housing market was reflated by a combination of significantly reduced interest rates, the temporary increase in the first home owners’ grant, cash handouts to households, and the temporary relaxation of foreign ownership rules.
Canada’s central bank and government also provided significant stimulus to the housing market. In addition to the Bank of Canada lowering interest rates to record lows (click to view chart), the government significantly loosened mortgage eligibility criteria, culminating in the introduction of the zero-deposit, 40-year mortgage in 2007. Further, the amount that Canadians could borrow was increased, with many individuals in 2009 being granted loans in the $C500,000 to $C800,000 range, provided their household income ranged from $C110,000 to $C170,000.
Finally, in an effort to support the housing market in 2008 (when affordability fell sharply and the economy stalled), the Canadian government directed the Canadian Mortgage and Housing Corporation – the government-owned guarantor of high loan-to-value-ratio mortgages (explained here) – to approve as many high-risk borrowers as possible in order to keep credit flowing. As a result, the approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, the average Canadian home buyer who took out a mortgage had only 6 per cent equity in their home, suggesting the risk of negative equity is high even if there is only a moderate correction.
The Canadian government has since raised the mortgage eligibility criteria. In October 2008, it discontinued the zero down, 40-year mortgage, reverting back to the 5 per cent down, 35-year mortgage requirement that was in place prior to the global recession. Then, last month, the Canadian government announced that it would reduce the maximum amortisation period for mortgages to 30 years from March, adding around $100 in extra loan repayments to the average mortgage. The government also reduced the maximum amount that Canadians could borrow against the value of their homes – called a Home Equity Line of Credit (HELOC) – from 90 per cent to 85 per cent.
Bubble trouble
Last week, Capital Economics released its Canada Economic Outlook Report (Q1 2010), which predicts sharp falls in Canadian house prices, household deleveraging, and anaemic economic growth into the future.
The report warns that Canadians’ belief that their economy is somehow invincible after emerging from the crisis relatively unscathed is “disconcerting” as house prices lose touch with fundamentals.
“Relative to incomes, our calculations suggest that Canadian housing is now just under 40 per cent over-valued, which is about the same level of excess that the US market reached before it collapsed. We have pencilled in a 25 per cent cumulative decline in house prices over three years, mirroring what happened south of the border.
“The biggest downside risk is that an adverse feedback loop could develop, as it did in the US, with rapidly falling house prices leading to a contraction in both output and employment, which puts even more downward pressure on house prices.”
Capital Economics also warns that the government-owned CMHC could be exposed to significant losses should house prices fall significantly.
“According to our reading of CMHC financial statements, insured mortgages and securitised mortgage guarantees total an amount close to $C800 billion. The total equity of CMHC is $C10 billion.
“If house prices collapse further than we predict, say by 35 per cent, with a default rate of 10 per cent and average home equity of 10 per cent, then the potential capital loss amounts to $C20 billion.
“Even if we assume that half of this amount is eventually recovered, that still leaves an expected loss of around $C10 billion. Under the same assumptions, the 25 per cent decline in house prices that we expect over the next few years would still result in a considerable loss of around $C6 billion.”
Only a year ago, the mainstream view in Canada was that the housing market was bullet-proof and that a US-style meltdown was highly improbable. Now sentiment appears to have changed following a collapse of sales, a build-up of inventory, and three consecutive months of price falls between September and November (December recorded a 0.3 per cent rise).
Will Canada be the next housing market to fall? Watch this space.
This article appeared on CTV.ca Friday, March 4th, 2011.
The Canadian housing market could be headed for trouble if there is no moderation in prices in the months ahead, the Bank of Montreal says in a new report.
Housing prices are currently about 10 per cent above what they were before the recession, which was already an all-time record.
The bank says housing prices are rising faster than personal incomes, a worrisome trend which is making the market less stable.
Bank of Montreal economist Sal Guatieri says that a nationwide correction is unlikely, but would be possible if the price-to-income trend doesn’t change, or if interest rates spike.
At the moment, the risk is not the same in every housing market in Canada, with some provinces seeing more extreme conditions than others.
The most concerning scenario is in Saskatchewan where the price-to-income ratio is 39 per cent above historic norms, followed by Newfoundland at 34 per cent; British Columbia and Manitoba, with each at 31 per cent; and Quebec at 29 per cent above normal levels.
In Canada’s largest province, Ontario, this same ratio sits only 10 per cent above historic levels, which suggests its housing market may be overvalued, but is not in danger of collapse.
The good news is that the bank expects household incomes to grow faster than housing prices in the future, which would make a major correction unlikely.
The Bank of Montreal says that tougher mortgage rules and higher interest rates should help stabilize housing prices and cool down sales.
The report is the latest warning about rising housing prices and the risks they pose to the Canadian economy. A February report from Capital Economics warned an existing housing bubble was set to burst, a potential collapse that could be triggered by rising interest rates. The economics consulting firm predicted that housing prices could fall 25-35 per cent over the next three years as interest rates increase.
This article appeared on Reuters on March 1st, 2011 and was written by Randall Palmer and Louise Egan.
OTTAWA (Reuters) – The Bank of Canada left its key interest rate unchanged at 1 percent on Tuesday and gave no signal it plans to raise rates soon, spurring traders to scale back rate-hike bets and to knock the Canadian dollar off a three-year high.
The central bank repeated the exact language on rates that it used in its January rate announcement, saying that while considerable monetary stimulus remains in place “any further reduction in monetary policy stimulus would need to be carefully considered”.
It said the Canadian recovery was moving a bit faster than it expected and hailed a budding recovery in net exports. But it cautioned that the export sector “continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance”.
Investors hoping for a hint that recent strong economic data would prompt the bank to resume rate hikes at its next decision date on April 12 were disappointed. The Canadian dollar weakened against the U.S. currency following the stay-the-course statement. “On balance, it suggests no imminent rate move,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.
It also raised more doubts about whether the bank would move on rates at either its April 12 or May 31 policy-announcement dates.
Most analysts polled by Reuters last week predicted the bank would resume rate hikes in the first half of the year, with May 31 being the most likely date for the next move. Markets “perhaps got ahead of themselves in their expectations for first-half rate hikes,” said Jacqui Douglas of TD Securities.
Canada was the first of the major industrialized countries to start lifting rates from emergency lows last year, raising borrowing costs three times between June and September. The bank then moved to the sidelines, saying it needed more evidence the U.S. and global recoveries were gaining traction.
After fourth-quarter economic growth came in stronger than expected at 3.3 percent and the U.S. economy showed signs of strength, many economists expected the Bank of Canada to signal plans to resume tightening monetary policy in coming months.
“Nothing much new here,” said Avery Shenfeld, economist at CIBC World Markets, of the bank’s statement. “Therefore, perhaps not really as hawkish as some might have been expecting.”
Overnight index swaps, which trade based on expectations for the key central bank rate, showed traders pricing in less of a chance of rate hikes at upcoming Bank of Canada announcements. Investors see a 92.20 percent probability rates will stay on hold April 12, up from 86.49 percent before the statement, according to a Thomson Reuters calculation.
The Canadian dollar retreated to as low as C$0.9756 to the U.S. dollar, or $1.0250, after the bank’s announcement from C$0.9714, or $1.0294, just before. Money market rates and bond yields fell slightly.
The central bank said the global economic recovery was proceeding broadly in line with its January projection and the recovery in Canada was slightly faster than expected.
It remained sanguine about prices even though it added a reference to the Libya crisis by flagging “geopolitical events” that could push commodity prices higher.
Canada has so far been relatively immune to price pressures with annual inflation of 2.4 percent in January and a core rate of 1.4 percent. “Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy,” the bank said.
There is more evidence that the engines of growth in Canada are shifting to exports and business investment from consumer spending and fiscal stimulus, it said.
Household debt is less of a concern than it had been in past months. Consumer spending remains strong but is easing to levels more in line with incomes, the bank said.
In addition to the tentative export recovery, business investment is picking up speed, it added, helped by low borrowing costs and the need to compete.
