Tag Archives: Canada’s housing market
Canada’s housing market frothy, but not a bubble
Tighter regulation, healthier banking sector insulate housing market
Ronald D. Orol – Wall Street Journal
Canada’s pricey housing market is frothing – driven by debt-ridden borrowers – but a dangerous U.S.-style housing crisis isn’t in the cards, experts say.
“We don’t expect the base Canadian housing market to experience the trauma of the U.S. market,” said Robert Hogue, senior economist at Royal Bank of Canada in Toronto.
Regulatory observers said they agree that a series of actions taken by the Canadian government starting in 2008 and culminating in a June 2012 package of reforms to limit access to credit for borrowers is having its intended effect of cooling the frothy Canadian housing market.
Responding to the financial crisis of 2008, the Canadian government set a minimum down payment of 5% for government-backed mortgages. It also began a gradual reduction in the maximum amount of time borrowers could take to pay down their mortgages. The limit was set at 35 years in 2008 and was last cut in June to 25 years. The moves were imposed to tighten up underwriting standards that had been loosened between 2004 and 2008.
The steps were necessary, observers say, in the face of rising home prices – Canadian house prices have roughly doubled in the past decade, according to credit rater Standard & Poor’s – that forced borrowers to take on high debt to buy a house.
“There are signs that the market has been slowing. The measures [to tighten mortgage underwriting standards] by public authorities are preventative as well as reactive and cautionary, and they are having an effect,” said Sheryl Kennedy, CEO of Promontory Canada and deputy governor at the Bank of Canada from 1994 to 2008.
Kennedy argued that the regulatory actions taken over the past four years to tighten mortgage insurance and underwriting standards along with public pronouncements by the Bank of Canada and Ministry of Finance to ensure that Canadians understand they should be working to cut debt levels, have contributed to the cooling of the housing market.
Tom Lewandowski, a Canadian bank analyst with Edward Jones in St. Louis, said the Canadian housing market could experience some form of slowdown, with more delinquent borrowers and a small hike in foreclosures, but nothing akin to the millions of foreclosures experienced in the U.S.
“There isn’t a US-style bubble to be burst,” said Lewandowski. “Given the structure of the Canadian mortgage market, I don’t think you are going to see a similar amount of foreclosures [as in the U.S.].”
Comment: Canadian mortgages default at around 0.4% – while some areas of the US have hit 30% or more. That is 75 times higher! And in absolute terms, with 10 times the population, that means their mortgage default rate is really 750 greater than here in Canada.
In fact, statistics show that Canada’s housing market continues to cool. The number of homes newly listed for sale dropped 3.3% in July, from June, according to an RBC report earlier this month.
According to statistics from the Canadian Real Estate Association, 461,000 homes sold in July on a seasonally adjusted basis – virtually the same as in June. The average price of homes sold in Canada through the Multiple Listing Service fell for the fourth time in the past five months in July, dropping 0.8% from June on a seasonally adjusted basis.
Resales in Vancouver, a particularly hot market for condos and single-family homes, fell for the eighth straight month in July, according to RBC. Toronto, another city in a condo-building boom, saw a small decline in activity for the third consecutive month in July, with resales falling by 1.4% for a cumulative drop of 11.7% since April.
Comment: Vancouver may be in free-fall, but Toronto is not. Small dips in sales volumes are one thing, but prices are still climbing. With 7,570 sales in July and 7,922 last year, it is only a drop of 4% – in total sales. Prices rose 4% in the same time frame. Not sure I would say it is dropping… some moderation would sure be nice, though.
Canada – land of borrower interest-rate risk
However, even with a cooling market, Canadian borrowers typically take on far more mortgage interest-rate risk than their U.S. counterparts, with roughly a third of homeowners taking floating-rate mortgages, according to data from a May 2011 Canadian Association of Accredited Mortgage Professionals report.
Comment: Our variable-rate mortgages are not the same as US floating rate mortgages.
Hogue noted that the largest chunk of fixed-rate mortgages are 5-year fixed-rate loans and that in recent months he has seen a shift in Canadian borrowers moving from floating to 5-year fixed-rate mortgages in response to bank promotions and in anticipation of higher interest rates down the road.
Nevertheless, borrower interest-rate risk is there. Craig Alexander, chief economist at Toronto-Dominion Bank in Toronto, noted that the percentage of mortgages in arrears is well below 1%, with significantly fewer foreclosures. However, he argued that if the Bank of Canada were to hike interest rates by two percentage points about 8% of Canadian households would have more than 40% of their income servicing debt.
“Statistically when more than 40% of income is going to personal debt that is when you have real problems, so about 8% of Canadians would find managing their debt level is extremely difficult, not insignificant, but not a U.S.-level problem,” Alexander said.
Many economists following the Canadian housing market agree that, barring external shocks such as a major U.S. recession or an uncontained European crisis, the Bank of Canada will raise interest rates gradually starting in 2013. Backing those assertions, Bank of Canada Gov. Mark Carney appeared upbeat earlier this month about the economy. He said, “We had been growing above trend, and to the extent to which we continue to grow above trend, we may withdraw some of that monetary-policy stimulus.”
However, some analysts note that Carney may delay rate hikes after unemployment rose to 7.3% from 7.2% in June.
Nevertheless, Hogue said he doesn’t see the jobs market as hindering the housing market. He added that the deterioration in affordability so far has been less during this housing boom than the period around the late 1980s and early 1990s in Canada (Canada had a recession in 1990-91) and that he believes it is unlikely that affordability will deteriorate so much more that it reaches a comparable position.
Comment: We forget that 1989-1991 was a unique period due to the real estate bubble and crash, coupled with the recession.
He said that RBC’s base economic forecast for Canada in the period ahead calls for sustained growth in economy, rising employment and a much more supportive environment for the housing market than in the early 1990s.
“It’s not that home prices are not high in Canada, but borrowing costs are still manageable,” he said.
Analysts also disputed notions that Canada’s condo market, particularly in Toronto, is in a dangerous bubble. Kennedy said Canada’s condo market has traditionally fluctuated more than the single-family market, but that restrictions limiting how many condos an investor can buy and requirements that a substantial segment of a condo complex be sold before financing can be provided for construction have contributed to reducing the likelihood of a dangerous condo bust.
“This helps prevent the kind of situation we have seen in Florida and California where whole developments that the banks financed are empty, without buyers,” Kennedy said
Nevertheless, credit rating agency Standard & Poor’s warned in July that five Canadian banks are vulnerable, dropping its outlook for them to “negative” from “stable.”
The warning hit three of the largest banks in Canada, Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia, as well as two smaller competitors – Laurentian Bank of Canada and National Bank of Canada. S&P noted hikes in consumer debt, elevated housing prices and a worsening outlook for the global economy as key risks and reasons for the outlook revision.
External shocks
External shocks could still change the analysis. Kennedy acknowledged that there are some low-probability events that could hurt Canada’s housing market and economy. Domestically, a recession or a dramatic rise in inflation that would require a hike in interest rates could trigger an increase in borrower defaults. However, she added that neither of these scenarios is in the base case scenario for economists following Canada’s economy.
Comment: And neither of these scenarios is in any way likely.
Paul Ferley, assistant chief economist at RBC, said a severe U.S. recession would cause Canadian unemployment to rise at the same time that it hits incomes.
“A major U.S. recession at a time when consumer debt levels are fairly high just becomes unbearable and you would get a correction in the housing market,” Ferley said. “Then interest rates would get cut.”
Externally, Kennedy said that a contained euro zone problem would not be a risk because Canada doesn’t depend directly on exports to Europe while Canadian financial institutions have said they don’t have a lot of exposure to Europe.
“But if there was contagion through the global economy and financial system, particularly affecting the U.S., that would be a concern,” she said.
Kennedy added that if there is a U.S. and Europe problem at the same time that also depresses demand from emerging economies, including China, for commodities, then there is a threat to Canada.
Comment: Again, that is a lot of “what-ifs”.
“If the U.S. is struggling because of fiscal problems but the emerging world is growing fast and doing fine because they are managing to tap into internal demand, Canada is fine,” she said.
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Contact the Jeffrey Team for more information – 416-388-1960
Laurin & Natalie Jeffrey are Toronto Realtors with Century 21 Regal Realty.
They did not write these articles, they just reproduce them here for people
who are interested in Toronto real estate. They do not work for any builders.
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Housing market begins to normalize
Sales expected to slow in new year
By Sunny Freeman The Canadian Press
Housing market activity has rebounded from a trough hit in July, but sales are expected to enter the new year at a more subdued pace that is closer to normal than the revved up levels reported earlier this year.
The Canadian Real Estate Association said Monday that seasonally adjusted home sales on its Multiple Listing Service climbed 4.6% to 35,714 units in October, following similar increases in August and September.
“National sales activity is now running almost halfway between the highs and lows posted between late 2008 and late 2009,” said Gregory Klump, CREA’s chief economist.
“This suggests that the Canadian housing market may be starting to normalize. After the wild rollercoaster ride that many housing markets have been on, normal and stable market conditions are something that many buyers and sellers will likely welcome.”
Housing market activity now sits 13.3% above July levels — a low-point for the year when sales declined 30% from a peak in the final quarter of last year.
Still, sales activity was 21.6% below the record levels reported last October.
Pascal Gauthier, senior economist at TD Economics said October’s figures were indicative of a “soft landing” in the housing market.
“The last three months of data suggest that a trough in resale housing activity may have formed earlier than we expected.”
Many Canadians had rushed into the housing market during the second half of last year and the beginning of this year in advance of new mortgage regulations in April, an expected increase in interest rates and a new sales tax regime that took effect in July in Ontario and B.C.
That had the effect of pushing sales ahead into the end of 2009 and the beginning of 2010 that may have otherwise taken place in the spring and summer. It may also have lured buyers into paying more for homes than they would have without the sense of urgency.
Year-over-year prices rose incrementally in October, following a brief dip in September. However, they were up about three% from the month before.
Douglas Porter, deputy chief economist at the Bank of Montreal, said the market is finally approaching something closer to “normalcy” after wild swings in prices and activity over the past three years.
“Sales are still down heavily from the piping hot pace of a year ago, but they are close to average levels since 2000,” he said.
“And, prices are up just slightly from a year ago, while the inventory of unsold homes is close to typical. In other words, there’s not much here for either the wild-eyed optimists or the ranting pessimists, which is probably a good thing.”
Sales volumes for the first 10 months of the year are now down 2.6% from 2009′s pace, with B.C. experiencing the biggest sales drop, followed by Alberta and Ontario.
The number of new listings on the MLS edged up 1.3% in October, still 14% below the recent peak reached in April 2010.
The number of new listings is normalizing to levels consistent with the reduction in sales activity, which has kept the market balanced since the spring.
Price increases are starting to level off as a cooler sales market becomes the new norm.
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Contact the Jeffrey Team for more information - 416−388−1960
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Housing to cool but not fail
John Shmuel, Financial Post
Canada’s housing market is expected to cool off this year and next, but isn’t at risk of falling victim to a U.S.-style foreclosure crisis anytime soon, says a new report by debt-rating firm DBRS Ltd.
DBRS says in the report Canada will continue to fare well in comparison to its U.S. neighbour when the Canadian housing market corrects itself and interest rates are tightened. That is because lending practices here are much more sound than in the U.S. market.
“The likelihood of us having the kind of situation they had in the U.S. is extremely low,” said Jerry Marriott, managing director of structured finance at DBRS. “It’s a combination of the lending practices prior to the peak in 2007 — they were more restrained, so there were better underwriting practices in Canada. We also think there are a number of factors in the Canadian market which have lent themselves to more prudent lending.”
Those factors include less aggressive lenders as well as systems designed to keep people paying their mortgages.
Mr. Marriott said a cooling effect is gradually taking hold in the housing market as credit availability begins to tighten, and the HST factors into home buying decisions in Ontario and British Columbia.
That means there’s a greater likelihood this year that there will be a correction in housing prices rather than a continued increase. Mr. Marriott said DBRS expects the market to cool throughout the year and continue to cool into 2011.
“If you add up the factors you would look at as to whether there’s going to be further price increases or the potential for a correction, we don’t see there’s a lot of factors supporting further price increases,” he said. “But there are a number of factors that show there might be some moderation in housing prices.”
That may bode well for potential buyers after a report by Canadiahn Imperial Bank of Commerce this week said that on average, Canadian home prices are 14% over their “fair” value. That represents about 1.5 million homes, or 17%of all dwellings.
The report also highlights that households continue to have a high level of debt, something DBRS says is part of an ongoing trend. But it tempers that by adding that household debt is not as worrying as some analysts have suggested.
For instance, the debt-to-disposable income shows Canadians are generally more indebted than Americans — but the report says this doesn’t reflect certain differences between the two countries that affect income, such as the fact that the United States has lower taxes but Americans pay more toward health-care bills.
Overall, mortgage lending in Canada reached $958.8-billion at the end of 2009. That’s more than double the $414.1-billion 10 years ago. When including home-equity lines of credit, outstanding mortgage-related credit was more than $1-trillion.
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Contact the Jeffrey Team for more information - 416-388-1960
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