Soft landing seen for housing market
The Bank of Canada is predicting a ’soft landing’ for the Canadian housing market as the national real estate boom cools. The central banks deputy governor Sheryl Kennedy gave a speech yesterday in Banf Alberta where she referred to the cooling trend in the Canadian real estate market as both ‘expected and welcome’.
As one of the country’s largest housing booms loses steam, most economists are forecasting a small increase in prices this year that will keep pace with the central bank’s 2-per-cent target for inflation.
In similar news Federal Reserve Chairman Ben Bernanke is predicting a soft landing for the US market as well:
“Our assessment at this point … is that this looks to be a very orderly and moderate kind of cooling,” Bernanke said.
Though it is a minor concern, both the Bank of Canada and the Fed see potential problems when it comes to new mortgage products:
Despite her fairly positive outlook, Ms. Kennedy cautioned that Canada can’t afford to become complacent about the real estate market, noting it took a decade for prices and sales to rebound after the bust of the late 1980s.
To that end, the central bank is keeping an eye on “challenges,” including ensuring that mortgage innovations, including 40-year amortization products and “near-prime” mortgages, don’t detract from prudent lending practices.
While Bernanke had this to say on the topic:
On the issue of risky home mortgages, Bernanke pointed out that the Fed has issued some guidance for lenders and he underscored the importance of borrowers making sure they understand how interest-only and other non-traditional mortgages work.
“We’re not saying you shouldn’t make these loans. What we’re saying is that they be done the right way,” Bernanke told the banking conference.
Wait a minute.. I just noticed that US article is a bit out of date - it’s actually from 2006, sorry about that. Here’s a more recent article on the US market:
Home prices in 20 U.S. metropolitan areas fell in April by the most on record, signaling the housing recession is far from over, a private survey showed today.
The Case-Shiller home-price index dropped 15.3 percent from a year earlier, less than forecast, after a 14.3 percent decline in March. The gauge has fallen every month since January 2007. The group began keeping year-over-year records in 2001.
Mortgage defaults and foreclosures are adding to the glut of properties on the market, while stricter loan rules are making it more difficult for prospective buyers to get financing. The prolonged real-estate slump, along with higher fuel prices and a shrinking job market, is taking a toll on consumers and the economy.
Thank goodness it’s different here eh?
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June 24th, 2008 at 10:21 am
June 24th, 2008 at 10:34 am
June 24th, 2008 at 10:37 am
Oh, and by the way “it’s ALWAYS a great time to buy!” Hell, I’d buy the Sedins now, if I could.
June 24th, 2008 at 11:16 am
It’s interesting to hear Shiller describe this phenomenon while I watch it take place every time I’m out in public or every time I log on to these blogs, albeit the blogs have more doubters (like me) than enthusiasts. What I’ve seen is a shift from enthusiasts to doubters, in my small and insignificant circle of contacts, over the last year.
June 24th, 2008 at 11:19 am
Subprime mortgages did not cause the housing crash in the U.S. Similarily, a relative lack of subprime mortgages does not make Canada safe.
The housing crash in the U.S. was caused when housing prices stopped going up. When that happened, all the mortgages and personal financial decisions that were entirely dependent on the premise that housing prices always go up collapsed on themselves, along with a diverse selection of related voodoo securities and debt instruments. Which caused a massive surge in distressed sellers, which caused prices to go down. These prices did not go down slowly.
If housing prices in Canada stop going up (the ’soft landing’) why would you think the same can’t happen here? Canadian’s have stretched further than ever in terms of debt-to-income. Housing equity levels are at all time lows. A huge number of Canadians will be in trouble if prices drop a modest 5%. Why would prices stop falling after that?
* Hey Pope, you said the Bank of Canada reads your blog, right?
June 24th, 2008 at 11:31 am
You’ve mistaken the role of the BOC. Their place is not to tell the truth, their place is to help shepherd the economy. If they believe that lying to the public will help soften the coming blows then it’s their duty to lie.
However this does raise the problem of trust. Once they’ve lied enough times they will no longer be a trusted source and lose some of their ability to manipulate things.
June 24th, 2008 at 11:35 am
Canadian real estate boom over, statistics indicate …
http://www.cbc.ca/money/story/2008/06/1 … ml?ref=rss
June 24th, 2008 at 1:47 pm
The banks, the mortgage companies, the Bank of Canada, the builders might be right.
Canada is different, it’s not another Japan with an endless land mass.
It’s not a USA with 40 year mortgages and sub prime and overextended debtors.
But seriously folks, it looks like the wreck is about to go over the cliff, I would have not been so sure it was this close, had BOC not denied it.
June 24th, 2008 at 2:16 pm
June 24th, 2008 at 2:25 pm
“I would have not been so sure it was this close, had BOC not denied it.”
I think anyone looking at Paul’s graph can quite plainly see Vancouver is up the proverbial creek. That kind of upwards inventory pressure makes talk of, “soft landings” look like a feather pillow attempting to stop a locomotive.
June 24th, 2008 at 3:00 pm
The drop from the peak to this point represents the loss of four years worth of gains and the losses aren’t showing signs of ending yet.
June 24th, 2008 at 3:01 pm
June 24th, 2008 at 4:46 pm
found this gem. Dont know it is a joke or for real,have a laugh:
Jun 16 - $500 Vancouver 2010 787sqft - (Gastown)
Apologies for not hotlinking, dont know how to here.
June 24th, 2008 at 4:49 pm
what kind of conversation will occur
2 years hence in canada?
June 24th, 2008 at 7:27 pm
http://tinyurl.com/5ybr3d
Canadians grow richer in spite of their deeper debt load
Most bears realize this already, but I’d just like to point out : The “debt load” is real and must be paid back. The “richer” part is purely imaginary until you actually sell your house. We can’t all sell our houses, particularly not all at once. Very few houses sell in any given year(compared to the total number of houses NOT on the market) The problem with imaginary dollars is they can disappear as easily as they came along, but the debt will remain until paid or defaulted on. If the latter….. Anyone own bank shares in your RRSP?
Yet never a mention of this in this “reporting”.
June 24th, 2008 at 7:47 pm
How anyone can talk about the “Canadian real estate market” as though it were homogeneous is beyond me. Thunder Bay has higher household incomes than Vancouver and prices… well how about a house for 35K?
CHEAPER THAN RENT. SAY GOODBYE TO YOUR LANDLORD
They buy houses in Thunder Bay because it’s cheaper than renting? What a concept!
June 24th, 2008 at 9:06 pm
June 24th, 2008 at 9:08 pm
June 24th, 2008 at 9:49 pm
June 24th, 2008 at 10:17 pm
“Our assessment at this point … is that this looks to be a very orderly and moderate kind of cooling,” Bernanke said.
What a flippin moron. If only he’d read some blogs, he’d have know exactly how it’d end.
The BoC? Well Patriotz is right, the west will get it bad, but I don’t think there will be a soft landing in the aggregate.
Shiller also lists Vancouver as one of his few Glamor Cities of the world.
Could you perchance back that up with a link or some such thing?
June 24th, 2008 at 10:18 pm
http://tinyurl.com/58tzez
Enjoy TO great cafes and restaurants.
June 24th, 2008 at 10:57 pm
Holy selective reading Rob. He didn’t mean glamour in a good way, but rather as packaged and overhyped RE products sold to unwitting overseas investors.
June 24th, 2008 at 11:01 pm
Indeed Rob, but the action Schiller has in mind does not seem to be the kind of action that you have in mind.
Think Second Narrows Bridge kind of action.
June 24th, 2008 at 11:08 pm
June 24th, 2008 at 11:09 pm
June 24th, 2008 at 11:09 pm
June 24th, 2008 at 11:10 pm
June 25th, 2008 at 12:34 am
June 25th, 2008 at 12:44 am
June 25th, 2008 at 1:03 am
http://watch.bnn.ca/the-business-news/j … #clip62279
(Use the slider at the bottom of the clip to jump to time: 3:10)
June 25th, 2008 at 1:04 am
June 25th, 2008 at 3:12 am
June 25th, 2008 at 6:08 am
Forgot to mention that market is our biggest trading partner and heading into a nasty recession due to housing collapse. Nope, nothing relevant at all.
June 25th, 2008 at 6:15 am
June 25th, 2008 at 7:31 am
My sarcasm detectors aren’t working! Johnathan, are you serious or just an idiotic housing bull?
They don’t award the Olympics to some third rate country!!!! That’s why the US doesn’t ever get them!!!
Uhh, Utah 2002? Atlanta 1996? And those were just the last 15 years!
Crossing fingers and hoping for sarcasm. I can’t believe anyone is really this stupid…
June 25th, 2008 at 7:35 am
We get it, you’re being ironic. But it’s getting old.
June 25th, 2008 at 7:45 am
Co-heads of global cross asset strategy, one would think they have a clue or two.
Patriotz especially, what’s your take on this?
Direct link:
http://bigpicture.typepad.com/comments/ … EPRINT.pdf
June 25th, 2008 at 7:53 am
The speech that the article was written from is available on line. It’s an interesting read and you could see how a more dire acrticle could have been created out of it if a reporter were so inclined.
“Finally, a significant increase or decrease in house prices from historic norms – that is to say, the inflating or deflating of a “bubble” – can have an impact on the real economy. In a nutshell, bubbles are costly (in both directions) because they distort decision making and impede the optimal allocation of resources. As a bubble develops, people tend to build and purchase more housing than would be the case when prices reflect fundamentals, and lenders may divert investment to housing from alternative, more productive opportunities.”
http://tinyurl.com/6kzcem
June 25th, 2008 at 8:01 am
Here are some of his main points:
- “..the decline is, if anything, accelerating rather than slowing down..”
- NYC down 8.4% yoy (less drop because didn’t see new development)
- Numerous cities down >20% yoy, the ones that went up the most
- Miami has lost 10% in the last 2 months alone
- Back to 2004 prices THUS FAR
June 25th, 2008 at 8:18 am
He came drunk in a boom as he could he rode me over to the mount everest like mountains and ocean of bc with his wheels up in the center of boing 747 he put my tail on fire with in few minute we have landed softly.
June 25th, 2008 at 8:31 am
how did you guys miss the message that there is “no bubble” bulls were screaming to help you guys but who put you on the side line?Is it Vhb?Drachen?or Mohican?.Are they willing to pay trillions of $$$’s real estate damage to bears dream over 4 year of farce?
I suppose to include rentha and freako but they are already here then,Where is Micheal Randalbard and Tulip Mania?where they are?Hey Micheal you gold tail monkey??.
June 25th, 2008 at 9:00 am
You make a very good point. Its always interesting to see how the media can skew a person’s comments to suit a purpose. Why would he BOC bother to outline the characteristics of a bubble if they didn’t believe that bubbles exist in some parts of this country?
June 25th, 2008 at 9:12 am
“The Canadian housing market does not appear to be characterized by excess supply at this time. The proportion of unoccupied, newly built dwellings in most cities remains below historical averages, suggesting that a major widespread reversal in house prices is unlikely in the near term.”
The italics originate with the speech text. Another way of interpreting this remark would be that the BOC believes there are some markets where there is an historically high proportion of unoccupied dwellings which may, combined with other factors, result in a reversal in house prices. Notice also that the BOC frames their rejection of a widspread reversal of prices in the context of “near term”. If they were that confident about Canada overall dodging a bullet, they wouldn’t have added that qualifier.
June 25th, 2008 at 9:21 am
June 25th, 2008 at 9:24 am
Furthermore, if financial innovations allow people to buy houses with very little “skin in the game,” they can, in a rising-price environment, encourage speculation in “quick flip” financial investment. This additional stimulus to demand can, in a market already characterized by tight supply and rising prices, boost house prices further, and increase the risk of a correction.
And this warning about the dangers of ‘the wealth effect’ (which the US is currently experiencing):
When the value of a house rises, the owner can typically borrow against this increased equity to fund home renovations, a second house, or other goods and services. These expenditures can “accelerate” a rise in house prices, reinforcing the rise in collateral values, access to additional borrowing, and thus a rise in household spending. Of course, this accelerator effect can also work in reverse: a decrease in house prices tends to reduce household borrowing capacity, and amplify the decline in spending.
June 25th, 2008 at 9:27 am
On top of that, their job is to moderate the situation by being the voice of calm, even if it is time to panic. So the fact that they’re even introducing these concepts means they’re far more concerned than they’re letting on, they just don’t want to lose credibility when things collapse.
June 25th, 2008 at 9:34 am
Japan was a glamor country in the 1980s, with Tokyo’s marginal property values at one point overtaking the land value of the entire United States. Japan’s housing market has declined ever since.
http://en.wikipedia.org/wiki/Japanese_a … ice_bubble
When investors (and first time home owners, who are really investors who rent their investment) don’t believe that asset prices will continue increasing, no amount of glamor will save the housing market.
June 25th, 2008 at 10:20 am
Whatever happened to giving a post a thumbs up or down?
I’m working on modifying the code so that highly rated comments are highlighted while negatively rated comment are diminished, but ran out of time and haven’t had the opportunity to dive back into it. For now it’s easiest to leave that feature turned off, but I hope to get it working in an improved version soon.
you said the Bank of Canada reads your blog, right?
nope. we get a fair amount of traffic from banks, private companies and government sites, but I don’t have a way to tell if anyone from the BOC is reading here.
Apologies for not hotlinking, dont know how to here.
You should be able to just paste a link into your commment and it will be autolinked. If you post more than one link within a comment, or if the link is something more exotic than a normal html page your comment may get temporarily hung up in the spam filter until I can manually approve it.
June 25th, 2008 at 11:04 am
I agree, I think that talking about a soft landing on a national scale is valid because on a national scale there wasn’t that much of a run-up. There are a lot of cities in Canada where SFHs are still perfectly affordable, and they help flatten out the average. That doesn’t mean BC isn’t in for a world of hurt, of course.
June 25th, 2008 at 11:16 am
So much for the chances of a nation-wide bailout package. A BC/Alberta centric bailout? It’s best to think about how that would even be possible.