Home-price declines in three of six cities in 2008

From http://www.housepriceindex.ca/

Canadian home prices in December were down 0.6% from a year earlier, according to the Teranet–National Bank National Composite House Price Index™. As the chart below shows, this reading extends and deepens the home-price disinflation that began a year ago. It confirms that by year end, after more than five years of seller’s-market conditions, Canadian housing as a whole had become a buyer’s market. Moreover, December was the fourth straight month in which the composite index declined, extending the first run of consecutive monthly declines since March 2007.

Within the Canadian composite picture, conditions varied widely from region to region. The indices for three of the six cities in the composite index were down from a year earlier. Vancouver (−1.5%) and Toronto (−0.6%) showed 12-month deflation for the first time, joining Calgary (−7.6%), where 12-month deflation prevailed throughout the second half of 2008. Meanwhile, December prices were up from a year earlier in Montreal (5.4%), Halifax (4.6%) and Ottawa (4.2%).

In every region, however, the more recent trend is downward. For the first time since the six-city index was launched in February 1999, prices in all six cities were down from the previous month. For Calgary and Vancouver, December was the sixth consecutive month of decline, for Toronto the fourth, for Montreal the third, for Ottawa the second. The Halifax index has been down from the previous month in four of the last six months, though only two of the declines were consecutive. The Calgary index has shown monthly declines in 13 of the last 16 months, since it also declined in each of the seven months from September 2007 through March 2008.

The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at http://www.housepriceindex.ca/

The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion. All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.

By: Marc Pinsonneault, Senior Economist Economic & Strategy Team, National Bank Financial Group

Teranet - National Bank House Price Index™ thanks the author for his special collaboration on this report.

A Deception so Great

" We are never deceived; we deceive ourselves."
- Johann Wolfgang Von Goethe

An old adage is that if two people tell you you’re drunk, you’re drunk. After repeated conversations with friends, co-workers, and family, I can safely say that I am nicely and completely hosed. Most of my social circle does not believe as I do Vancouver house prices are going to drop at least 40% from their peaks in 2008. From this, being a humble sort, it would be incredibly arrogant of me to think them collectively wrong.

Here I offer the wildly arrogant possibility that maybe -- just maybe -- “they” are wrong.

Vancouver is a city obsessed with real estate. Many cultures immigrating here cherish it above little else; prices have risen significantly in inflation-adjusted terms for a generation; the majority of homeowners have huge swaths of equity tied up in property. It is hard to make the case for why the real estate party is closing down for a long time. I have tried, of course, citing low immigration, low median incomes, flat rents, huge looming inventory, dependency upon construction employment, a global recession, negative savings rates, significant similarities to US markets now crashing hard, arguments with which real estate “bears” are familiar. All my arguments, it is rebutted, are short term phenomena which will pass in a few short years and Vancouver will continue with its price appreciation as it has done since it was founded.

I believe Vancouver is in a bubble. Not a house price bubble (though we are), but a bubble of collective dissonance when it comes to how to value real estate. The 800 pound gorilla in the room is the simple question: why are properties worth what they are?

There are several ways to answer the question. The first most obvious answer is simply that properties are worth what someone else is willing to pay. Fine, but that doesn’t get to the heart of “why”. Why is that someone else willing to pay? Who cares, we say. Who are we to second guess motives of buyers? Maybe there is a new batch of rich buyers who care not whether an investment produces a reasonable income stream, maybe population growth is forcing land prices up, or maybe future income growth will more than compensate for the prices we pay today.

Maybe so but the analysis of the data suggests we should care a great deal why others are willing to pay and not just stop at our whimsical assumptions about what Vancouver is. Rich immigrants? Not too many. Population growth? Not that high. Income and rent growth? In real terms, try the opposite. Running out of land? The number of residential projects under construction is near all-time highs. It is clear to me that the image of Vancouver being a playground of the rich with high immigration, rising wages, and a limited land supply is for the most part illusory.

If we go back to the question, why is property worth what it is, using the actual data, the results are all the more concerning for real estate bulls.

There is a strong case that Vancouver real estate, like other cities around the world, has been riding a generational bubble. It has fostered a “can’t lose” attitude, where stomach-churning drops are assumed to quickly recover to new highs. In the past 25 years Vancouver has spent relatively short periods in the price valleys with relatively long periods of over-valuation. This is classic speculation with a twist. The length of speculation and perpetual volatility has perversely led to survivorship bias and, due to the relatively slow movement of property markets, deification of successful real estate investors embedded in local social circles. The speculation has not been the flash in the pan we all connote with other booms but a slow and seemingly secular trend to permanently high prices. It has fostered an air of invincibility around real estate investing, still heavily present today. How about those stories we hear of flippers losing their shirts on presale assignments? They are merely unfortunate and limited casualties in the machinations of the city’s real estate juggernaut. It has been a mistake to count out the Vancouver real estate owner, say the successful surviving real estate gurus.

We are now in the throes of another wave of high volatility with a decided trend downwards. At first glance it looks the perfect storm: oversupply, low sales, high prices, a global recession, and tighter lending, all point to prices falling more. Even with these insurmountable odds speculators will still be playing in the market, ever aware of Vancouver’s amazing ability to rebound from previous crashes. I hear it constantly: prices have dipped and will stabilise in 2010, the recession will be over by the end of the year, in-migration of rich families will eat up the excess inventory quickly, et cetera. Almost certainly there will be people buying this spring anticipating new highs within a decade. The same will happen in 2010, 2011, 2012, and on, all the way down and up again. This does not mean these buyers would support prices from falling but it does mean there are still bulls in any active market (by definition, in fact).

I have heard several comments from those bearish on local real estate that prices supported by rents and incomes will happen in but a few years, amounting to a truly meteoric, though not unprecedented, fall from grace. I am not so sure. The mood of Vancouver is so tilted towards the sanctity of real estate investing I find it only convenient to think a handful of years of a bear market changes this thinking. If anything I see years of pain to change how people value real estate, likely more than five or even ten: the “stickiness” of prices we hear so much about. This does not preclude significant price drops in the next few years -- I personally think it likely -- but to really get to a point where affordability is restored could take much longer.

So why is real estate priced as it is? What would we say after a crash and the subsequent fallout? I can hear it now: real estate, in its essence, is but a utility, providing a service for a fee like a car. Affordable, not unaffordable, housing supports income and economic growth. Property is only worth what income it produces. Dare to dream, drunk jesse.

The past generation has done well from real estate investing and I believe its perpetual success has fostered a deception -- a cognitive dissonance -- about what real estate really is and how it is valued. The deception is so complete it is terrific. While high prices may continue, there is a real and plausible possibility of a slow and painful trudge towards lower prices for a long time.

Vancouver CMA CMHC Data - January 2009

The illustrious Canada Mortgage and Housing Corporation released the housing market data for markets across the country last week and here is a synopsis of the Vancouver data.



Starts are falling off a cliff. Only 609 units were started in January 2009 compared to 1332 in 2008.

Completions are accelerating now with 1431 units completed in January compared to only 838 last year.

Units under construction are at near peak levels but falling rapidly as completions outpace starts.

All of the current completions are coming into an oversaturated market now and the number of unabsorbed (unsold) units is continuing to rise. The number of unabsorbed units finished January 2009 at 2401 compared to 1407 last January.

Vancouver real estate market = toast, getting blacker by the day.

BC Budget: Junky assumption

I didn't look at the BC Budget in too much detail, but something on the radio caught my ear. Sure enough, I confirmed it on this pdf on page 87.

The BC Budget hinges on the projected unemployment rate averaging 6.2% in 2009. Have a look at the January 2009 numbers here. The January number is 6.1%. Does anyone really think that we won't see that go higher in February and then farther up from there?

I think the budget projection is pie-in-the-sky. I would say a more realistic projection, given the construction sector dry-up, is 8.7% by the end of 2009, with an average of 7.5% for the year.

The 2010 projection is 6.0%. By then, most condos under construction will have completed. Construction employment will be back below historical averages. The Olympics will be over as well. Unless every other sector suddenly pulls up the slack, there is a serious risk of double digit unemployment rates. 6.0% is a total joke.

Is now a good time to invest in real estate? - NO, NO, NO!

With home sales — and prices — dropping in B.C., is now a good time to invest in real estate?

The B.C. Real Estate Association says it just might be, pointing to a large drop in carrying costs for an investment property today compared to a year ago.

“It doesn’t matter what the market is doing, I don’t say whether or not it’s a good time to buy,” association chief economist Cameron Muir said in an interview Monday. “That being said, I would suspect investors are actively looking in the marketplace for bargains. If you compare today vs. a year ago, investing in real estate is more attractive than it was then.”

Muir made the comment after the release of an association housing survey Monday that concluded the residential sales dollar volume on B.C.’s Multiple Listing Service declined 61 per cent to $873 million in January, compared to the same month in 2008 when sales totalled $2.25 billion. In the Metro Vancouver region, the sales volume was down 62 per cent over the same period, to $413 million from $1.09 billion in January 2008.

Muir — who said he also believes sales activity in the province will pick up in the spring because of improving affordability resulting from lower mortgage rates and home prices — cited a typical mortgage payment for a property in January 2009 compared to January 2008.

He said the benchmark price for a two-bedroom condo in Metro Vancouver was $334,602 in January, 11.5 per cent less than the $378,336 the same condo would have sold for 12 months earlier. A typical posted five-year fixed-term mortgage stood at 5.79 per cent in January, much lower than a similar mortgage rate of 7.39 per cent the previous January.

Therefore, he said, a condo with a 10-per-cent down payment (on a 25-year amortization) would have resulted in a monthly mortgage payment of $1,890 this January, nearly $600 less than the January 2008 mortgage payment of $2,468 (property taxes, maintenance fees and mortgage insurance fees not included).

Condos are still insanely expensive compared to rent.

On top of that, he said, there’s upward pressure on rents with the same two-bedroom condo renting in October 2008 for about $1,507 a month — a five-per-cent increase from October 2007.

“For both investors and home buyers, your mortgage payment would be several hundred dollars less than a year ago,” said Muir, who noted that investors have so far not been very active since the economic downturn started last year. “As an investor, the cash flow from the rent will more closely match your mortgage payment on the property.”

The BCREA survey also showed that residential unit sales fell 57 per cent to 2,115 units during the same period.

The average price on the MLS in B.C. was $412,934 in January, down nine per cent from the same month last year, the survey noted.

Muir said that home sales were sluggish in January, reflecting an overall malaise in consumer confidence and a weaker provincial economy.

Muir said that first-time buyers are especially affected by the economic news and are holding back because of a lack of confidence. “Demand from first-time buyers has been off significantly. First-time home buyers tend to be younger and not have years of experience in their occupations. Therefore, they have more concerns around job security. They’re more vulnerable to layoffs.”

Yes, those first time buyers would have to earn in excess of $100,000 per year to afford to buy very basic accomadations and I just don't see a lot of those people around right now.

Despite that, he said, the BCREA expects sales to rise this spring because of greater affordability and lower interest rates.

Muir noted that realtors are reporting increased activity from buyers over the past three weeks, but that it hasn’t yet materialized in sales statistics. “By all accounts, there’s increased interest. There’s more showings and more buyers kicking tires.”

Meanwhile, an Ipsos Reid poll released last week showed that a growing number of British Columbians think this is a good time to buy a home, though most say it isn’t a good time to sell.
The poll found that some 71 per cent of respondents said it is a somewhat good or very good time to buy real estate. In November, only 60 per cent of respondents told Ipsos Reid it was a good time to buy.

In the latest poll, though, 82 per cent said this is not a good time to sell a home. The poll also found that British Columbians’ expectations for falling prices are changing, with just 42 per cent of respondents saying they expected prices to be lower 12 months from now compared to 57 per cent in November.

The association represents 12 member real estate boards and about 18,000 realtors.

The last sentence is really all you need to read! The number of realtors declines each and every month right now.

Ho-Hum

Sorry for not posting much lately. I've been incredibly busy at work with Tax Free Savings Accounts and RRSP contributions for my clients. Additionally, there really hasn't been compelling things to write about in the Canadian housing market. The script has already been written and played out in the US and other International markets so I think those of us who have been watching for the past couple years know what to expect next. More price declines - - especially here in Southern BC.

Back to the grindstone for me. Have a great day.

Housing Sales Collapsing

LORI MCLEOD Globe and Mail Update February 13, 2009 at 12:47 PM EST

Sales of existing homes fell to the lowest level since the mid-1990s last month, with activity dropping by 41 per cent in January from a year ago.

Last month 16,343 resale homes changed sales across the country, according to a report Friday from the Canadian Real Estate Association (CREA). The average price fell by 11 per cent from the year before to $273,607.

“Canadian existing home sales turned in another brutal performance in January, sliding by more than 40 per cent from year-ago levels,” Mr. Porter said in a research report.

“While another particularly harsh winter may have played a small role in the dismal sales figures, there is little doubt that Canadians are hunkering down amid widespread job losses and sagging consumer confidence,” he added.

Each of the country's 25 major markets reported a drop in sales from year-ago levels, and all but four of these experienced declines of at least 20 per cent.

In these major markets the declines were the greatest in Vancouver, down 59 per cent, followed by Calgary at 49 per cent. Sales held up best in Winnipeg, down 4 per cent from the year before. Trois-Rivières, Que., which saw the biggest year-over-year decline in prices at 15 per cent, had the second lowest drop in sales activity at 8 per cent.

Other markets that experienced large price declines last month included Victoria (-15 per cent), Saint John (-14 per cent), and Calgary (-11 per cent). Prices were up the most in Newfoundland and Labrador (+20 per cent), and Halifax-Dartmouth and Quebec (+11 per cent).

The recession is hurting consumers, and that's translating into pain for both the new and resale housing markets, Mr. Porter said.

“The deepening recession, which began in earnest among exporters, is now more forcefully dragging down the domestic side of the economy. The ongoing sharp drop in home sales points to further declines in prices as well as a deeper pullback in new home building,” he said. There are still many buyers and sellers, but deals are taking longer in many markets, CREA president Calvin Lindberg said in a statement.

Recent measures in the federal budget including an increase in allowable RRSP withdrawals for first-time home buyers and a tax credit for closing costs are expected to have a positive impact on the market later in the year, Mr. Lindberg said.

Stop dreaming Mr Lindberg, the recent measures in the federal budget will have a meaningless impact on the market. Houses are too expensive still and prices need to fall before people can afford them. In the past five years, people took out way too much debt in relation to their homes and they are now having trouble servicing that debt. They must pay it off before they step into the market again either as first time buyers or as upgraders. The pain has only begun.