Tag Archives: residential investment
Canada housing boom ending with whimper, not bang
By Ka Yan Ng – Reuters
Canada’s rapidly cooling housing market is robbing the nation’s economic recovery of one of its main drivers, but most industry watchers still think the once booming sector will avoid a U.S.-style crash.
Low mortgage rates, a healthy banking system and higher lending standards than in the United States are expected to support a market that saw double-digit price and sales gains in late 2009 and early 2010.
But many analysts and industry figures warn sales levels will slow, and property prices, at best, are likely to stagnate over the next 12 months.
“It was one of the key drivers of the recovery. We can’t expect that, in 2011, to continue. It gave us what it could and it doesn’t have anything else to give,” said Phil Soper, chief executive of Royal LePage Real Estate Services, one of the country’s largest brokers.
After taking a brief hit from the financial crisis, Canada’s housing sector broke away from the global trend and rebounded forcefully last year.
Bidding wars broke out for properties in Vancouver and Toronto, even as homeowners from Florida to California struggled to sell, or to abandon heavily mortgaged homes to their lenders.
With the bursting of U.S. and European property bubbles fresh in its mind, the Canadian government tightened lending rules earlier this year to cool the market.
Still, activity and prices heated up in the first half as buyers raced to avoid the stricter rules and new blended sales tax regimes introduced in two of the country’s biggest markets, Ontario and British Columbia.
Some transactions were also brought forward to sidestep anticipated interest rate hikes by the Bank of Canada, which tightened policy in June and July, and has also warned that residential investment will weaken.
“It brought forward some activity and now we’ve entered the payback period and so I’m not shocked,” said Robert Hogue, senior economist at Royal Bank of Canada.
“I don’t think the recent trends are a sign that a bubble had formed and a bubble is now bursting.”
LOST GROWTH DRIVER
Indisputably, the sector is cooling. Sales of existing homes fell nearly 25%, seasonally adjusted, in July from a year earlier, while the average home price was up a slim 1%, according to the Canadian Real Estate Association.
Bank of Nova Scotia recently declared that housing was “lost” as driver of growth after housing starts fell in July for a third straight month.
Talk of a U.S.-style housing crash was revived this week when the Canadian Centre for Policy Alternatives said the housing market was “an accident waiting to happen”. It predicted that in a worst case scenario, prices could fall more than 30% in some markets.
But that view was contradicted the same day by a report from another think tank. The C.D. Howe Institute argued that Canada’s housing policies would blunt the risk of a massive wave of defaults.
It noted tighter lending standards protected the Canadian housing market from the build-up of high-risk mortgage loans seen in the United States. It argued this should shield the Canadian market from the fate of its southern neighbor.
But an equally important factor for Canada’s housing market may be a bond market rally that has kept mortgage rates near historic lows. Bank of Montreal cut its five-year low-rate mortgage to 3.59% from 3.79% this week.
BETTER THAN U.S. ALTERNATIVE
Low rates may support the Canadian market, but few see much upside. David Rosenberg, who correctly predicted the U.S. housing downturn when he was a Merrill Lynch economist, said he expects Canada’s housing market to go through four to six quarters of extremely sluggish growth.
“That mini-housing boom was not what I would refer to as totally organic. All these policies and the expiry dates brought forward a tremendous amount of housing consumption,” said Rosenberg, chief economist at Gluskin Sheff & Associates.
“We’re paying the price for that distortion right now. We have to couple that distortion now with the reality that the economy broadly is going to be slowing down.”
Royal LePage’s Soper also sees stagnant prices over the next 12 months, but he said prices will return to a steady rate of appreciation, around 3%, after that.
“The real estate market in general should chug along nicely at about the same rate — which is not exactly exciting. But it’s much better than the alternative, which we saw south of the border,” he said.
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Carney urges ‘prudence’ in housing market
Central bank expresses concern over rapid rebound, identifies sector as key upside risk to its inflation outlook
By Tara Perkins and Kevin Carmichael – Globe and Mail
Bank of Canada Governor Mark Carney is warning consumers not to get in over their heads in the real estate market, and asking that bankers take care with the mortgages they offer because interest rates will eventually move up.
The central bank is concerned about the strength of the Canadian housing market, Mr. Carney said yesterday in his first significant comments on the market’s rapid rebound.
“We expect prudence from lenders,” he said. “We expect, and we have confidence in, prudence from Canadians. We remind people that borrowing is for the period you are going to borrow, not just for the moment you take out the loan.”
The Bank of Canada has already carried out one analysis of the risks posed by the real estate market, and will be doing a more detailed study that will break down consumers based on income levels.
“We do have some concerns about it,” Mr. Carney said, but was careful not to overstate the risks. “Obviously, consumer borrowing cannot grow faster than the economy forever.”
Sales of existing homes are already near the peak levels they hit before the crisis took hold.
The average price of an existing home was $331,602 in September, a 13.6-per-cent hike over one year, the Canadian Real Estate Association says.
Mr. Carney suggested the rebound stems from consumers unleashing pent up demand, noting there was a “significant pause” in housing activity during the crisis. He added that houses are more affordable, due to both prices and mortgage rates, and he expects the strength to trail off in 2011.
The central bank identified the real estate market as one of the key upside risks to its inflation outlook, saying that “Canadian households may increase their spending on consumption and residential investment more strongly than projected” as the recovery takes hold.
Mortgage and renovation loans are helping to fuel the economy right now. “Unlike the situation in most other advanced economies, Canadian consumers can readily obtain credit, as evidenced by the continued brisk pace in its growth,” the bank said yesterday in its Monetary Policy Report. “The strength in household credit is linked to the rebound in the housing market and the pickup in renovation activity.”
Low interest rates, coupled with a government program that has bought more than $64-billion in mortgages from lenders to free up space on their balance sheets, have helped drive mortgage rates to historic lows.
But by saying it expects prudence from lenders and borrowers and that it is watching the situation, it seems the central bank intends to let the situation play out for now, HSBC Securities (Canada) Inc. economist Stewart Hall said.
“Is their head in the sand? Maybe, maybe not,” he wrote in a research note. “Indeed the banking system has been padding its margins by raising the cost to borrow, which is to suggest that market pricing for credit could be applying some of the braking power that the bank is not inclined to apply at this stage of the recovery.”
Banks have begun raising some of their mortgage rates this month. Nevertheless, it would be easy to view the bank’s decision to drive interest rates down to 25 basis points and the government’s program to buy billions in mortgages as key elements in the runup in the real estate market, Mr. Stewart suggested.
“Limited as they are, anecdotal stories out of the Vancouver area suggested to us that it was not so much pent up demand that was driving activity as a fertile monetary environment.”
Canada’s housing market went through a brief correction that began last October and ended around May, National Bank economist Stéfane Marion said in a recent report. “Market conditions have turned around so rapidly in Canada that they went from a buyers’ market to a sellers’ market in the blink of an eye.”
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Housing spending hits $19.8B in first quarter
CBC News
Canadians spent $19.8 billion on real estate through the first three months of this year, up 7.5% from the first quarter of 2007, Statistics Canada said Monday.
The overall value includes spending on new housing construction, on renovations and on acquisition costs, which include sales tax, land development charges and fees and premiums for mortgage insurance.
Statistics Canada said that in the January-to-March quarter, new housing investment increased by 8.8% compared with the first quarter of 2007 to $9.7 billion.
Spending on apartments increased by 17.5% to $2.6 billion, while spending on single-family housing construction rose by 3.7% to $5.6 billion.
The increase for single-family housing was due exclusively to higher prices, Statistics Canada said, adding that the growth in spending on apartments was mainly linked to new construction starts.
Renovation spending came to $8.4 billion, a 7.2% increase compared with the first quarter of 2007
Acquisition costs rose 1.3% to $1.7 billion.
The biggest increases in residential investment occurred in British Columbia, where spending shot up 21.2% to $4 billion. Spending in Alberta was up 9.1% to $3.5 billion, and in Ontario by 4% to $6.9 billion. Quebec, Prince Edward Island and the three territories reported decreases.
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Contact the Jeffrey Team for more information – 416-388-1960
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