FEBRUARY 20, 2012
It’s been a while since I’ve found the time to do a blog post, and for that I apologize to my readers. I figured I should give a quick update on the trends I'm seeing in the different markets across the country.
The following are excerpts from a monthly housing data overview I do for clients. Keep in mind that this type of data is backwards looking. It tells us what has already happened. Inventory and sales levels can give indication of short-term price pressures, but in a credit-driven market, the real story of future price movements is found in changes in mortgage demand/availability, which I cover in a separate report. The bottom line on that front is that the recent incremental changes in mortgage requirements may prove to be more significant than any month-to-month sales trends. These recent changes include tightening stated-income and business for self mortgages, tightening of CMHC bulk portfolio insurance for big banks, some lenders capping max mortgage amounts at $1 mil, and reports of general internal tightening via lenders and CMHC. The problem is that with 15% of all mortgages originated through the broker channel being originated through explicitly subprime lenders (the highest on record), it strongly suggest that the marginal buyer is the main support of this current market. Prime buyers, by and large, are already in the pool. So these types on incremental changes, which affect marginal buyers the most, can sometimes have far greater consequences than anticipated.
With all that said, here are just a few thoughts on what I’m seeing in the Canadian housing markets:
Y/Y prices are now negative for the second month leading to a decline in the 12-month moving average for the first time since early 2009. January sales were the second weakest in the past decade (second only to January 2009), while new listings were the highest of any January in the past decade. Consequently, the sales/new listings ratio was extremely weak (0.27) while months of inventory ballooned to 8 in January. Sales will pick up in subsequent months, but rising inventory and weak sales will likely persist, meaning downward price pressure will remain intact. The last time we saw sales this weak, the BoC was in the process of cranking rates down to zero. The ‘shock and awe’ from low rates are now long gone. I’m not sure what will reinvigorate sales in the short term. While it may be too early to call a definitive peak in Vancouver, things aren’t looking good.
January stats reveal a Y/Y decline of 3% in Calgary house prices with particular weakness in the condo segment. While sales were unusually low for this month, they weren’t alarmingly so. Active inventory was also particularly low. As a result, the months of inventory reading was a benign 4. While Calgary was the weakest performing large market, there is little on the supply/demand front to indicate that prices will continue to melt going forward.
The story in Toronto remains the incredible lack of inventory and the robust pace of price gains, particularly in the detached segment where bidding wars reign and prices are increasing at +15% Y/Y.
While sales were slightly weaker than average in January, new listings were well below average. With total inventory at decade lows, even the modest sales in January meant there was only 2.4 months of inventory on the market in January.
Of note, housing starts ballooned in January on the back of additional condo projects which pushed the 12-month rolling average condo starts up to within spitting distance of its all-time high from 2008.
The fundamentals of the Toronto market remain ugly, but until inventory levels normalize and/or sales weaken significantly, there is little to temper the current pace of price gains. The euphoria in Toronto, particularly around the SFH segment ‘feels’ like we’re approaching a blow-off top that could see prices rocket higher through the summer unless a significant shock interrupts current market dynamics.
Much like in Toronto, the prices in the Ottawa real estate market remain very stretched relative to fundamentals. Both the price/rent index and the real price index are a touch under 3 standard deviations above long-term trend. That’s troubling. But for now there appears to be little to significantly pressure prices in the near-term. Sales were average in January while new listings were relatively low. Price gains accelerated in January to 6% Y/Y. Just like Toronto, Ottawa will have its day of reckoning, but it does not appear to be imminent.
The second largest Canadian city often flies under the radar in discussions of regional bubbles. However, prices relative to underlying fundamentals are as concerning here as anywhere in the nation, and there is evidence of stress building in this market.
January home sales were quite weak relative to the past decade, while new listings were very high leading to the second lowest sales/new listing ratio of the past decade. Months of inventory in January was nearly 11, a number surpassed only by a handful of months in late 2008 and early 2009. Active listings were at their highest January level of the past decade while Y/Y price gains continued their decelerating trend and were up only 2% Y/Y in January.