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Canada Housing: Correction Ahead Or Soft Landing?

Analysts Waver; National Housing Agency Denies Major Problems

Courtney Tower – Market News International

High up in housing, in the condominiums of some of Canada’s largest cities, there may or may not be overheating and corrective troubles ahead. Down on the ground, in single-family dwellings, no Canadian market correction looms. These are the disputed prospects in the wake of new housing activity data.

Comment: And the funny part is that condo prices are moderating here in Toronto, while houses are going crazy. Some neighbourhoods have 70% of houses for sale going for over asking. That would be the soft and slow correction everyone is talking about – for condos.

Most analysts have argued that Canada is not at risk of anything like a United States-style crash in housing, but some now seem to be wavering while others continue to see activity ratcheting down gradually.

Comment: Anyone looking can see it. Vancouver is slowing down, Toronto condos are moderating. Time for a deep breath and some relaxing.

Canada Mortgage and Housing (CMHC), the national housing agency, took the step Tuesday of denying in a report specific concerns cited by Finance Minister Jim Flaherty that Canadians may be over-mortgaged or that CMHC’s mortgage insurance and securitization practices flirt with danger.

Opinions differed followed CMHC’s monthly report Tuesday showing housing starts in April surged by 14% to a seasonally adjusted 244,900 units from 214,800 in March. It was the highest level since pre-recession days of September, 2007, and was all about condos. They made up by far most of the increase.

Comment: Sure, lots of condos are being built, but the increased supply is moderating prices – just as simple economics would expect. Condos in Toronto have become the new rental market, a big driver of the new development sales. That and ever-rising prices are pushing first time buyers into condos as opposed to houses. People want to live downtown, close to work for a shorter commute, and near to the restaurants and bars they like to play in. It really is not surprising. As the city evolves, the core becomes more and more appealing for more and more reasons.

Single unit starts, which analyst Dina Cover of TD Economics terms “a more stable indicator of the overall health of the housing market,” edged up 0.6% to reach 67,700 homes at an annual rate seasonally adjusted.

The day before, Statistics Canada reported that home building intentions for March dropped by 1.3% to $3.9 billion at the seasonally adjusted annual rate, for this sector’s third consecutive monthly decline. Taken month over month, single family dwelling permits fell by 1.7% in March from February.

David Madani, Canada economist for the international firm Capital Markets, has long been one of the few predicting a savage housing market correction of about 25% over an undefined period of time and starting at an undefined time. He told MNI the April starts only confirm his view that the housing market “is out of control” and headed for a deep correction, at some time ahead.

Comment: What? There will be a correction at some point, lasting some sort of time… that is truly the stupidest “prediction” I have ever read. It is also impossible. Given an indefinite amount of time, all prices rise. It is called inflation. Cars, chocolate bars and houses – they all cost more today than they did 10, 20 or 30 years ago. Houses will NEVER drop 25%, not over any period of time.

Other analysts are not so sure. Emanuella Enenajor, at CIBC Economics, told MNI she expects a drop in starts shortly from April’s elevated numbers, but no large fall for Canada’s housing market this year at least. The market would be held up by continuing relatively strong Canadian economic performance overall and rising employment, she said.

Comment: There might be local dips, and Vancouver could drop significantly. That would affect the national average and send people running screaming for the hills. But it would mean nothing in most local markets.

The April surge in starts has the effect of “putting to rest any doubts that Canada’s housing market, at least in certain sectors and cities, is at risk of overheating,” Robert Kavcic, economist at BMO Capital Markets, wrote in a research note.

“The bubble-mongering that has been going on seemed overplayed for sometime given that housing starts were running only slightly above household formation (about 180k) on average, for the past three years. But that is no longer true, with starts now moving well above underlying demand, and accelerating in recent months,” he added.

Comment: Could that not mean that starts were behind household formation for a while and being just above for 3 years did not do enough to satisfy demand? If no one needed the housing, why would it be built? In Toronto, owned properties are all occupied and rentals are running around 1.3% vacant. So housing demand is so strong that (using the 50-50 rental to owned ratio) less than 2/3rds of 1% of Toronto housing is vacant. We are talking 0.65% – or less. That would strike me as extreme demand.

Kavcic noted that “the trend away from building detached homes in favor of condos continues unabated, particularly in Toronto, Vancouver and Montreal.” His bottom line: “There’s little question now that Canada’s residential construction sector is heated, with the big-city condo market boasting the highest temperature.”

Comment: For so many reasons, from price to good urban planning. Look at all big cities, world cities even, and see the density of housing in the downtown core. Toronto is just catching up.

Jonathan Basile, economist at Credit Suisse in New York, wrote that the April starts are “the first housing indicator to get us worried about a correction.” Credit Suisse, he said, “lean in the correction camp.” The correction would come from the multi-unit sector.

Comment: Seriously? People have been whining and worrying about the Toronto condo market since I first started reading about it in 2003. And that is just when I remember noticing it. And for 10 years now, Toronto keeps getting new condos. For half that time we have 140-some-odd projects on the go. We did in 2006 and we do now. Big whoopee, this is not new and certianly is not news.

Basile noted that multi-unit starts were 65% of total housing starts in April, “well above the long-run average of 42%. There was only one other episode — late 1981/early 1982 – when multi-unit starts made up such a large share. What followed was a sharp correction.”

Comment: But the long term average also includes the period of intense urban sprawl. That trend is reversing and much more housing is occurring vertically and not spread out across the fields. The long term average is moot in this case, as housing trends completely change. Look at condos in the 905 – where once was only houses, now there are towers. Not seeing that is incredible.

Dina Cover at TD Economics said the multi-unit surge probably is not sustainable and there could be “some give-back in the coming months.” However, Cover expected that overall homebuilding activity should remain healthy this year“as builders work to complete projects before the Bank of Canada begins to hike interest rates – a move we expect to take place in September.”

Kirsten Cornelson, economist at RBC Economics, said high pre-sales of urban multiple units in 2011 indicate “that strength in the housing market is being supported by increases in demand.” Nonetheless, she said, RBC expects “that there will be some easing in the coming months to a more sustainable pace of growth.”

Comment: Shocker! All of these condos are being built – wait for it – because people want them! And are paying for them! Who would have thought…

At the same time, CMHC authored a comeback, without directly saying so, against Canadian Finance Minister Jim Flaherty’s assertion that he has been worried for some time about the amount and quality of CMHC insurance of home mortgages, and about CMHC’s securitization of mortgage packages.

Flaherty put the insurance and securitization activities of CMHC under review by the Office of the Superintendent of Financial Institutions (OSFI) and put OSFI on CMHC’s Board of Directors.

Karen Kinsley, CEO of CMHC, said in the 2011 Annual Report that the agency turns a high profit on its mortgage insurance portfolio without cost to the taxpayer. Mortgage loan insurance “accounted for most of CMHC’s net income of $1.529 billion, which helped improve the Government of Canada’s fiscal position,” the report said. CMHC had turned over to the federal government $16 billion since 2002, it said.

Comment: For all those worried about everyone tanking and needing a bailout from the CMHC – read the paragraph above again. And again. Their NET income last year was over $1.5 billion. They MADE $1.5 billion. Because we don’t default on our mortgages. They have enough money that they have given the feds $16 billion in the past 10 years? With and average property price of $350,000 and 10% down, that means they have insured 2,539,683 mortgages without a single problem. Who is worried about our real estate market? In the US during the peak of their meltdown, they had default rates in the 30% range, some areas up to 60%. We are more than 75-150 times lower than that, at 0.41%. And with a population 10 times lower, than means 750-1,500 times fewer absolute defaults. Three orders of magnitude lower. And that is why we cannot be compared to the US.

CMHC maintains “more than twice the minimum capital required by OSFI” of mortgage insurers, and so is “well positioned to weather possible severe economic scenarios.” Answering concerns that homeowners are becoming over-extended, the report, and a media briefing by conference call with CMHC officers, said “the majority of homeowners loans have strong credit scores” and households manage their mortgages prudently.

Comment: A Toronto mortgage broker recently released a study showing their average applicant made $125,000/year and wanted a loan of only $262,000. And consumer debt is growing at essentially 0%, the lowest rate since 1992.

The briefing said 75% of high-ratio loans approved were fixed rate mortgages,” when a major contention of critics is that when rates inevitably rise from their extended lows many households will be very vulnerable.

Comments: Yet another reason why the “run for the hills because mortgage rates are going up to 93%!!!” arguement does not hold much water.

The average outstanding loan amount per household was $162,157 in 2011, and the arrears rate for all CMHC-insured loans was 0.41%, they said.

Against concerns that CMHC is nearing its limit of C$600 billion in the worth of mortgage loans that by law it is allowed to insure, the agency said total outstanding loan guarantees in force come to C$362 billion.

Comment: Wow… that is not even close. That is just over half. And they make $1.5 billion a year.

CMHC is by far the largest insurer of home mortgages in Canada and says 46.5% of that business is in insuring mortgages the private sector tends not to insure, including large multi-unit rental properties such as nursing and retirement homes and homes in rural areas and smaller communities.

“A total of C$116.7 billion in securities backed by insured residential mortgages was guaranteed by CMHC in 2011,” the agency said.

House prices in Canada do not exceed levels supported by underlying factors such as high immigration, growing incomes, low interest rates, the CMHC report said. “Based on these and other characteristics, clear evidence of a bubble is lacking,” it said.

Comment: And that, my friends, is the sum of it.

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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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Mortgage refinancing lower after new rules, CMHC finds

September 5, 2011 Buying Real Estate, General Real Estate, Mortgages and Financial Information, National Real Estate, Selling Real Estate

By Mary Gazze – Toronto Star MoneyVille

Canada’s national housing agency says the country’s real estate industry will be strong in the back half of the year, building on favourable economic conditions in the first six months of 2011.

Canada Mortgage and Housing Corp. says mortgage rates near historic lows, as well as reduced unemployment, combined with increased house prices have led to fewer claims under its mortgage insurance business, which protects lenders against default.

The agency says it expects fixed mortgage rates to stay relatively flat for most of the year, with the five-year posted rate as low as 3.34%, then increase slightly in 2012, while variable rate mortgages will remain near historically low levels, in the 2.25% range.

But prices of homes shown on the Multiple Listing Service are expected to grow slightly going into the future because the real estate market is likely to stay in balanced territory.

The agency says changes to mortgage rules introduced by the federal government earlier this year played a part in reducing mortgage interest payments and allowed Canadians to build more equity in their homes, faster.

In March, the federal government put through new rules that reduced the maximum amortization period to 30 years and cut the maximum amount Canadians can borrow to 85% of the home’s value.

After the changes, refinancing activity fell by nearly 40%, and 10% fewer Canadians bought mortgage insurance, and the level was 5% lower than sales before the changes came into effect.

CMHC also said Canadians are finding it easier to pay off their mortgages, with arrears levels and rates improving and mortgage insurance claims volumes lower than expected.

The agency’s predictions for the rest of the year echo a revised forecast by the Canadian Real Estate Association released earlier this month. The association said strong second-quarter performance and momentum going into the third quarter means the resale market should finish this year slightly ahead of last year.

It revised its forecast upward, saying it expects higher national home resales this year, reversing its previous forecast of a one per cent dip in sales.

Prices will be in the range of $347,700 to $374,300, growing to between $349,500 to $385,000 in 2012.

CMHC says sales of existing homes should range between 429,500 to 480,000 unit range for 2011 and in the 410,000 to 511,900 unit range for 2012.

Earlier this month, the CMHC said that national housing starts rose to 205,100 units on a seasonally adjusted basis in July, 11.6% higher than the 188,900 reported in the same month last year and 4.3% more than the 196,600 recorded this June.

However, the uptick, driven by strong construction on condos and apartment buildings in urban centres, is likely due to builders catching up to robust demand last year, rather than expectations of coming growth.

Home building activity has been increasing through the first seven months of 2011, but starts are still down 4.6% from a year ago.

On Monday, CMHC also said its net income for the quarter was up by $61 million. The agency said its profit for the quarter was $383 million, up from $322 million in the same quarter last year. Revenues were down slightly at $3.3 billion, versus $3.4 billion.

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Economic conditions will help Canada’s real estate sector stay healthy

September 4, 2011 Buying Real Estate, General Real Estate, Mortgages and Financial Information, National Real Estate, New Toronto Condos & Lofts, Selling Real Estate

Mary Gazze, The Canadian Press

Canada’s national housing agency says it expects home sales and construction activity will cool but remain healthy in the second half of the year, due to favourable economic conditions that push up demand for homes.

Canada Mortgage and Housing Corp. said Monday that lower unemployment, a steady level of immigration, and low interest rates are working together to prop up Canada’s real estate industry.

“I think the Canadian housing market is healthy at the moment despite the uncertainty we observed in the financial market,” Mathieu Laberge, deputy Chief Economist at CMHC said in an interview.

He was referring to the stock market ups and downs earlier this month as investors worried about the European debt crisis and feared the U.S. could slip back into recession.

“Employment is expected to grow at a moderate pace in the next few years,” he said.

“We expect interest rates to remain flat for the remainder of the year and increase in 2012, and new immigration is an addition to demand in the housing market.”

Laberge said the CMHC predicts the market sales volumes will hold at a stable level next year.

Canada Mortgage and Housing Corp. said low unemployment, immigration and low interest rates led to fewer claims in the first half of the year under its mortgage insurance programs, which protect lenders from defaults by borrowers.

The agency said it expects fixed mortgage rates to stay relatively flat for most of the year, with the five-year posted rate at between 4.1 per cent and 5.6 per cent, then increase slightly in 2012.

CMHC said variable rate mortgages would remain near historically low levels, although some banks recently increased their variable rates to reflect the higher cost of raising money.

Prices of homes shown on the Multiple Listing Service are expected to grow only slightly going forward because the supply and demand for resale homes will likely stay in balanced territory, CMHC said.

A least one analyst agreed that the real estate market should stay fairly healthy for the rest of 2011, but said it’s already cooling slowly and home prices may decline in the longer term.

“What you’re probably looking at is a period where prices are relatively flat, maybe a little bit lower in the next few years,” said Adrienne Warren, an economist at Scotiabank who specializes in the real estate industry.

“Affordability from a price perspective has deteriorated and that’s going to have to, over time, come back to more normal levels but it doesn’t imply that that has to happen quickly as a type of correction that occurs quickly.”

She said interest rates are low and attractive right now and encourage first time home buyers to enter the market, which drives up prices. Once those rates begin to rise — likely in the second half of 2012 — the current price of homes will become unaffordable for many, putting downward pressure on future prices.

In its report Monday, CMHC said changes to mortgage rules introduced by the federal government earlier this year played a part in reducing mortgage interest payments and allowed Canadians to build equity in their homes faster.

Canadians are finding it easier to pay off their mortgages, with arrears levels improving and the volume of mortgage insurance claims lower than expected.

In March, the federal government put through new rules that reduced the maximum amortization period to 30 years and cut the maximum amount Canadians can borrow to 85 per cent of the home’s value.

After the changes, refinancing activity fell by nearly 40 per cent, which means fewer Canadians took on more debt. Federal Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have repeatedly warned of the dangers of the ballooning debt level of Canadian consumers.

Ten per cent fewer Canadians bought mortgage insurance immediately after the new rules began, and the level was five per cent lower than sales before the changes came into effect.

CMHC also reported its net income for the quarter was $383 million, up $61 million from $322 million in the same quarter last year. Revenues were down slightly at $3.3 billion, versus $3.4 billion.

The agency’s predictions for the rest of the year echo a revised forecast by the Canadian Real Estate Association released earlier this month. CREA said it expected higher national home resales this year, reversing upward its previous forecast of a one per cent dip.

National average prices will be in the range of $347,700 to $374,300, growing to between $349,500 to $385,000 in 2012, CREA predicted.

CMHC said sales of existing homes should range between 429,500 and 480,000 units in 2011 and between 410,000 and 511,900 units in 2012.

Earlier this month, the CMHC said that national housing starts rose to 205,100 units on a seasonally adjusted basis in July, 11.6 per cent higher than the 188,900 reported in the same month last year and 4.3 per cent more than the 196,600 recorded in June.

The uptick, driven by strong construction on condos and apartment buildings in urban centres, is likely due to builders catching up to robust demand last year rather than expectations of coming growth, it said.

Home building activity has been increasing through the first seven months of 2011, but starts are still down 4.6 per cent from a year ago.

Predictions for the Canadian market were in stark contrast with the most recent figures from the United States, which showed that country’s depressed housing market is still trying to get back on track.

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Contact the Jeffrey Team for more information – 416−388−1960

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