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Tag Archives: monetary policy

Why the housing market won’t crash in 2013

January 7, 2013   General Real Estate, Mortgages and Financial Information, National Real Estate, Other Real Estate Markets, Real Estate Prices

Larry Mac­Don­ald – Globe and Mail

The 12-month change in the Teranet-National Bank House Price Index has decel­er­ated in recent months to 3.4%, led by declines in Van­cou­ver (-1.4%) and Vic­to­ria (-1.7%). Some peo­ple inter­pret this weak­ness as a sign that a hous­ing crash has started – see, for exam­ple, the Cana­dian Busi­ness arti­cle “Canada’s hous­ing crash begins.” I don’t see a col­lapse in 2013 for sev­eral rea­sons. One is the highly sup­port­ive mon­e­tary environment.

Com­ment: And how any­one can turn a 1.4% decline into a crash, I have no idea. The spin is alive and well in the media… Heck, in Toronto we have a 4% sales vol­ume decline cou­pled with a 7% price increase being touted as the begin­ning of the col­lapse. Yeah, I know, right?

In the case of the U.S. hous­ing boom from 2003 to 2007, the over­val­u­a­tion was pricked after the Fed­eral Reserve dra­mat­i­cally tight­ened mon­e­tary pol­icy to cool off an over­heated econ­omy. This cat­a­lyst is absent in Canada as 2013 commences.

Indeed, mon­e­tary poli­cies in Canada, the U.S., Japan, China and else­where around the world are dialed to the oppo­site extreme. They are hyper-expansionary, with inter­est rates at record lows and print­ing presses run­ning like never before.

Com­ment: I am not sure Canada is print­ing money, but the US is mak­ing the stuff like crazy.

This means that Canada and other coun­tries should con­tinue gen­er­at­ing growth in jobs and income. Since higher employ­ment and income typ­i­cally sup­port hous­ing mar­kets, prices are not likely to fall much in 2013. Or if they do, they shouldn’t stay down for long.

Com­ment: And if inter­est rates do rise, it will only be a sign of a strong econ­omy, mean­ing peo­ple have good jobs and money. Which is always good.

The crash crowd says Cana­dian houses are over­val­ued on the basis of the price-to-income ratio. So they fear the process of mean rever­sion will take prices down by 25% or more. But with so much mon­e­tary stim­u­lus in the sys­tem, the price-to-income ratio should also be nor­mal­ized by income increases.

Com­ment: But the price-to-income model is flawed. The cur­rent aver­age Toronto hous­ing price of $497,298 costs $1,899.52 to ser­vice at today’s mort­gage rate of 2.99% with 20% down. Go back 30 years to 1982 when mort­gage rates hit 19.41% and house prices were $95,496 and you have a monthly mort­gage pay­ment of $1,212.22 – in 1982 dol­lars. Adjust for infla­tion and that mort­gage would cost $2,610.77 in 2012 dol­lars. So hous­ing is actu­ally a lot more afford­able now that it was 30 years ago. So the whole price-to-income ratio is moot. What mat­ters is mon­thy mortgage-to-income, which has fallen. But the doom­say­ers do not want you to know this! Peo­ple buy houses based on what it costs every month to pay the bill, that is where their pur­chase price comes from. Same with cars, that is why Honda adver­tises the monthly cost, not the sticker price.

Inter­est rates may begin edg­ing up later in 2013. They shouldn’t threaten the hous­ing mar­ket because income and employ­ment will be climb­ing as well, cre­at­ing off­set­ting demand for hous­ing. Sim­i­larly, the one-off impact of a tight­en­ing in mort­gage rules dur­ing 2012 should not be cause for a seri­ous setback.

Com­ment: The new mort­gage rules only serve to strengthen the mar­ket, weed­ing out those that were close to the edge.

There are other rea­sons for expect­ing a crash to be a no-show in 2013. Suf­fice it to say that the mon­e­tary cycle sug­gests a soft-landing sce­nario. This is not to deny there are pock­ets of extreme over­val­u­a­tion or over­sup­ply, where the risk of sub­stan­tial cor­rec­tion remains. Cases in point could be Van­cou­ver hous­ing and Toronto con­dos.

Com­ment: Toronto con­dos will cool off, but they will not crash. Maybe some small prices drops, but mainly a flat­ten­ing. There is no over sup­ply, not when every new project sells 80–90% of their units before a crane goes not. Not when the vacancy rate for rentals is barely above 1%. The demand is there, trust me, if any­thing the sup­ply is not enough!

—————————————————————————————————–
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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    Higher than expected home prices renew concerns of Canadian bubble

    June 4, 2012   General Real Estate, Mortgages and Financial Information, National Real Estate

    Gordon Isfeld – Financial Post

    As home prices continue their steady ascent, the volume of debate over the too-hot or just-about-right market is also getting turned up.

    Politicians and monetary policy-makers are warning consumers to tackle their debt loads now, while many analysts argue that is already happening and house prices are still in a healthy range.

    Comment: It is happening, there is proof. Canadians, as a whole, are taking on less debt and are paying down what they have. Couple that with rising incomes and our debt-to-income ratio is falling. Just what the finance minister ordered!

    Few are suggesting a market crash is imminent, but this week’s spate of strong housing data has renewed concerns the market is dangerously close to overheating and heading for a bubble.

    The latest salvo came Thursday, with Statistics Canada data showing new home prices climbing 0.3% in March — the 12th monthly increase in row — and just above forecasts. When compared to 12 months earlier, prices were up 2.6%.

    Comment: Wow, that rate of increase is actually 0.65% less than the long-term inflation rate. And exactly the same as the current inflation rate. That means prices have actually not risen at all.

    The biggest gains in March were in the Toronto and Oshawa region, where prices were up 0.6% in March — due to favourable market conditions and increased demand — and 6.2% higher on the year.

    On Monday, StatsCan reported housing-permit values rose 4.7% in March, way above expectations, and following a 7.6% increase the previous month. But it was Tuesday’s closely monitored new home construction report that really got tongues wagging.

    Canada Mortgage and Housing Corp. said housing starts jumped 14% in April from the month before to 244,900 units. Most of that activity was once again in the frenzied condo sector.

    Comment: And the warmer than usual weather would not have anything to do with that, would it? Not that builders could get a head start and begin more projects sooner because the weather allowed them to. Naw, more likely just another sign of the real estate apocalypse.

    That report “led to more than a few gasps and coffee stains upon release, highlighting just how high the heat has turned up in certain markets,” said BMO Capital Markets economist Alex Koustas.

    “That being said, the new home price index has been relatively well-behaved, reflecting more balance on a national level.”

    Comment: So really, if we don’t twist the numbers, things are overall just fine. Uh huh.

    Yet, some market watchers believe home prices are overvalued by as much as 15%, while others see the gains as moderate.

    Comment: No one has any basis for their “overvalued” numbers. Why 15%? Why not 22%? Or even 8.2% The market is what the market is – free and open. Prices are set by 100s of 1,000s of buyers and sellers and realtors every year. There were 456,749 sales across Canada in 2011. With one buyer and one seller, each with their own Realtor, there were 1,826,996 people involved in the national real estate market last year. Almost 2 million independent opinions on what properties are worth. Thus, house prices are exactly where they should be, at market value.

    “The [market] is still healthy,” said Laura Parsons, mortgage specialist at Bank of Montreal.

    “Vancouver’s market is so much different than most of other markets, and [in] Toronto … new housing prices are up substantially but it’s because of a lot on condo development — and affordable condos.”

    Comment: What? New housing costs are not up. In fact, new condos fell by 1% per square foot in Q1.

    As for household debt, Ms. Parsons said: “I’ve never seen so much discussion around trying to save on costs and paying more attention to their debt load.

    Comment: And it is working. People are reducing their debt load. Good news, end of story.

    “I think if we really had to cut back on our budget every month to afford a mortgage, I think there’s room there.”

    The Bank of Canada, which has kept its trendsetting interest rate at a near-record low of 1% since September 2010, says household debt remains the biggest threat to the domestic economy.

    Household debt-to-disposable income is running at about 152.9%.

    Along with Finance Minister Jim Flaherty, central bank governor Mark Carney has urged consumers not to get in over their heads because rates will eventually start going up.

    Last month, Mr. Carney told the House of Commons finance committee that the average home price in Canada is now about 4.75 times people’s income, while the historic average is around to 3.5 times income. He cautioned Canadians to use “prudence and caution” with their family budgets.

    Comment: Yet again, that ratio is flawed. People buy a house based on the monthly cost, not the purchase price. Without getting into the details, the average house in 1982 at the current mortgage rate would have cost around $7,100 in today’s dollars. The same average house at today’s rates is around $2,800 a month. That is the ratio that matters.

    —————————————————————————————————–
    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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    Home Ownership More Affordable

    March 6, 2011   Affordable Housing, Buying Real Estate, General Real Estate, Mortgages and Financial Information

    Prop​er​ty​Wire​.ca

    Home afford­abil­ity con­tin­ued to improve for Cana­di­ans in the last quar­ter, accord­ing to the Hous­ing Trends and Afford­abil­ity report released by RBC Eco­nom­ics Research. Slight rises in home price appre­ci­a­tion, cou­pled with a mod­est dip in five-year mort­gage rates are the most likely factors.

    “Some of the stress that had been build­ing in the hous­ing mar­ket between 2009 and the first half of 2010 has been relieved, but ten­sions per­sist over­all and the recent improve­ment in afford­abil­ity is likely to be short-lived,” said Robert Hogue, senior econ­o­mist, RBC, speak­ing with Prop​er​ty​Wire​.Ca.

    “We expect that the Bank of Canada will resume its rate hike cam­paign this spring and with bor­row­ing costs set to climb fur­ther in the next two years, hous­ing afford­abil­ity will erode across the coun­try. That said, we don’t expect this to derail the hous­ing mar­ket because of ris­ing house­hold income and job cre­ation from the sus­tained eco­nomic recovery.”

    Says Hogue, there are addi­tional ele­ments lead­ing to an expec­ta­tion of bal­ance. “There is also expected bal­ance between sup­ply and demand. Prices will also likely stay flat, with small increases. In that con­text– the mar­ket is calm and mov­ing side­ways in the likely out­come. There is no real rush to buy, and no rush to sell.”

    “Across the coun­try, mar­kets by and large are in bal­anced range.”

    Price appre­ci­a­tion has fallen back to more man­age­able lev­els, in the face of this new bal­ance in the mar­ket. The expec­ta­tion is that price appre­ci­a­tion will con­tinue, but a much slower, and more sus­tain­able pace than had been seen in recent years.

    “We expect afford­abil­ity mea­sures will rise grad­u­ally in the next three years or so while mon­e­tary pol­icy is read­justed, but will land softly there­after once inter­est rates sta­bi­lize at higher lev­els,” added Hogue. “This pat­tern would be con­sis­tent with mod­er­ate yet sus­tained stress on Canada’s hous­ing mar­ket. Over­all, the era of rapid home price appre­ci­a­tion of the past 10 years has likely run its course and we believe that Canada has entered a period of very mod­est increases.”

    Look­ing at dif­fer­ent hous­ing types across the coun­try, the detached bun­ga­low bench­mark mea­sure fell back slightly to 39.9%; Stan­dard con­do­minium mea­sure fell to 27.6%; the stan­dard two-storey home fell to 46%.

    Most provinces reported for­ward move­ment in terms of afford­abil­ity– most notably in Alberta. Decreases con­tin­ued in Alberta– this time declin­ing by “1.0% to 2.4%.” This builds on top of con­sis­tent declines since 2007. The com­bi­na­tion of lower inter­est rates, and steadily decreas­ing home prices, have both con­tributed to the increase in affordability.

    Accord­ing to the report, the days for this may be num­bered in Alberta,” The sig­nif­i­cant improve­ment in afford­abil­ity is near the end of its line, how­ever, as demand has shown more vigour in recent months – along­side a provin­cial econ­omy that is gain­ing more trac­tion – and the mar­ket has become bet­ter bal­anced. RBC expects that this will stem price declines this year, thereby remov­ing a poten­tial off­set to the neg­a­tive effect of pro­jected rise in inter­est rates on affordability.”

    ———————————————————————————————————————
    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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