Scotia & RBC housing reports
Donald sent in a couple of bank reports on the Canadian housing market that were just published. Yesterday saw the release of Scotia Capitals report “Is There a Canadian Housing Bubble?‘, while this morning RBC released their Housing Trends and Affordability report. The Scotia report is remarkable for putting the question right out there in the title, but their conclusion seems to be “yes, maybe there is a Canadian housing bubble, but thanks to mortgage innovation, it probably wont bust for another year or so”.
There is no question that Canada is perhaps curiously off-cycle compared to other countries by way of pursuing mortgage innovation while other countries have curtailed such activities. Stronger bank capitalization, more prudent regulatory and managerial oversight, a century’s worth of sounder policies relative to countries like the US in carving out a structurally sounder banking market, work since the mid-1990s to craft a relatively much sounder fiscal environment, and among the more pro-active central banks have all set decent backdrop within with such innovation can occur. Thus far, most of the innovation has been classically Canadian in a conservative sense, but there’s no objectively doubting that the market is changing.
Canadian innovation really only began, however, after the current federal government liberalized the mortgage insurance market in the Spring of 2006. Material innovation has only been characteristic of the Canadian market for 2-3 years, but it is already having a significant impact.
And their note on how amortization terms are changing:
In terms of amortization periods, it was 25 or bust until three years ago when 30, 35, and 40 year amortizations became available. Now, after just three years, 18% of outstandings are over 25 yrs. 10% are 35-40 years. As a share of new mortgage originations, 47% of mortgages originated for new purchases in the past year have had amortizations longer than 25 years, and over 60% of that share has been in 35 and 40 year mortgages. One can no longer get an insured 40 year mortgage in Canada, but uninsured 40 year amortizations are still available.
Remember, this is for all of Canada, we’ve heard anecdotal evidence from banks that greater than 50% of new buyers in Vancouver are opting for longer amortization.
The Royal Bank report remarks less on market forces and steers clear of any ‘bubble’ predictions. They do note that their ‘affordability’ trends are declining again, particularly in Toronto and Vancouver.
This near-frenzied tone to the market is occurring despite still historically poor, and now deteriorating, levels of affordability. In the third quarter, RBC’s affordability measures for Vancouver worsened for the first time since early 2008, rising between 1.7 and 4.3 percentage points. These increases were, in fact, the biggest among major cities in Canada. Even though the affordability measures fell substantially during 2008 and early 2009, they remain well above long-term averages.
I’m not sure to make of all the cautionary notes coming from banks about housing lately – From INGs CEO warning about a Canadian housing bubble to these recent reports. It would appear that this attention to the issue should avert some of the ‘nobody saw this coming’ comments that we saw out of US banks and lenders when their market crashed. One thing is for sure, as long as the CMHC is picking up the risk there’s no way these banks are going to stop handing out big home loans.
November 29th, 2009 at 11:19 am
You guys are hilarious, and once in a while even brilliant. Maybe you trash each other, but at least Google loves you. Every time i search on BC realestate up comes something from this blog..
November 28th, 2009 at 5:29 pm
I can't help but just laugh my guts out about what is happening in this town (Vancouver), province (British Columbia) and country (Canada). To me, this pipedream looks very much like the 2002-2005 hay days of the California housing boom. I have personally experienced this and can probably write a book about it. I think the title of it would be called “Collusion”. It is merely how all bubbles are created. Collusion, on the part of the government by a way of low interest rates, a drive to increase homeownership at all costs in order to extract political dividends including becoming a subprime lender of last resort (e.g. CMHC in Canada’s case), mortgage and real estate broker and borrower fraud, unwarranted government subsidies to certain segments of the economy, i.e. the construction, real estate and financial intermediation sectors , to name a few.
Location exclusivity being touted as miraculous reason for why prices are not where they should really be. Complete detachment from reality when it comes to economic and financial fundaments (e.g. price / rent ratios, price to earnings, population income potential, economic diversification etc). To add fuel to the fire which is destined to inevitably engulf all colluded parties involved, purported “chronic housing shortages”,” multi-decade demand outstripping supply” continuously trumpeted analyses and trends,
“land-use restrictions” or “ lack of buildable land” justifications for why housing prices are so high, “net growth in foreign and inter-state (province) migration”, “the presence of a diversified economy “, and so the list went on, were all symptoms of the bubble mania which took hold in California in the early part of the decade. This was all good until there were no more greater fools left to bid up the inflated housing prices, and so the party abruptly stopped. People realized that they were not buying homes. In fact, they were renting them for the price of the mortgage. Those aforementioned fallacies, and many more others, are some of the principal reasons why the bubble burst in the States and why it will follow suit in Canada. British Columbia is no California, heck, Canada’s GDP is less than that of post-bubble California, with the country’s economy NOT as well diversified as one would expect, BUT heavily dependent on a few industries (e.g. oil and gas, energy, forestry and other derivative commodity industries, heavy machinery, construction etc.). Noteworthy is that Vancouver MSA’s per capita income is half of what per capita incomes are in the San Francisco Bay Area, certain portions of Los Angeles and San Diego areas, where prices have plummeted more than 50% from their peak.
It’s only a matter of time until the bubble bursts. The deflation in the U.S. started when the Federal Reserve began increasing interest rates. This could, however, start sooner than that. One should pay a close attention on consumer psychology when it relates to perceived expectations in the future. Often, this is how contagions, financial panics, great depressions are started. The longer the imbalances persist in the greater economy when it comes to housing, the more painful and protracted the adjustment is going to be when it comes. The Canadian government can keep the last fool from wanting to dump his inflated housing mortgage on the market for as long it provides backstop guarantee. However, financial markets are going to severely punish the Canadian government shortly by dumping its dollar, lowering its perceived credit worthiness (thus increasing implicitly and explicitly borrowing costs in the economy). A scenario just like this is currently unfolding in the U.S. Anyone wanna buy BC, Ontario provincial government bond at 9%? You start printing enough money until the federal currency is eventually debased and has little incremental value left.
After having met recently with "respectable mortgage brokers" who have been in the business for over 25+ years, I am now firmly convinced that this market is going to have a crash landing like one never experienced before. Pre-sales "pink paper" flipping (as what was called in the U.S.) where respective condo owners would trade condos like call options by purchasing condos without any intention of taking possession of the unit(s) and thus procuring further the housing bubble, funky appraisals based on comparable sales only with little to no historical economic fundamentals in place, liar loans (i.e. stated income (NIQ loans), stated assets) etc. are all hallmarks of the impeding and most definitely inevitable collapse of housing prices in Canada.
November 27th, 2009 at 9:17 am
"If any of you have questions just ask" Scullboy
Nope.
November 27th, 2009 at 4:15 am
I've heard it said imitation is the sincerest form of flattery, therefore I'd like to take a moment to thank the poster who tried to post as me.
I think a few well chosen obscentites can shock people, which is why I post the way I do. Your average Vancouver bull is probably the most smug and complacent creature on the planet. Why not try to shock them?
We all made the points we wanted to make years ago. What's the point of trying to change the mind of a guy like supraladyboy? Absent additional debate the only reason for posting is the shock value. Bulls like supra aren't smart enough to engage in rational discourse anyway. They are only really good for target practice.
So far Halifax has been awesome. The restaurant scene is amazingly diverse. There aren't any huge companies locating head offices here but the city benefits from a phenomenon I had not heard of before: nearshoring.
A lot of companies do not want to farm out jobs to places like china or India. It's too hard to keep an eye on the quality of the work and the time difference is prohibitive. They can often realize significant cost savings while keeping quality high by sending work to a closer location.
It's my understanding that the Maritimes have benefitted considerably from this. Several relatives are working in call centers at well paying jobs for large banks and insurance companies. The company I work for has 500 employees and handles IT infrastructure for a surprising variety of national and international companies.
While it's true that taxes here are higher overall prices seem to be quite a bit lower. Some things like bananas are a little mote expensive but others are surprisingly cheap and if you substitute local products for imported ones then things get very cheap indeed. Local artisinal cheeses are way cheaper the say Salt Spring Island cheeses. Same for lamb and haddock (which substiutes brilliantly for halibut). Atlantic salmon isn't as good as pacific but apparently pacific salmons about to go the way of the cod anyway.
Lobster is 5 bucks a pound and my friends were very amused at my reaction.
a friend of mine has a Kenyan husband and 2 kids. Her husband is still trying to get his career started but they were able to buy a small home not far from the place I hope to rent. They paid in the 300k range. Bear in mind this isn't a semi detatched or a condo. It's a sfh on a small lot.
So yeah taxes are a little higher here. Big fucking deal. Overall prices are so much lower that you still end up living a much better lifestyle.
Oh yeah and you don't have to pay bc a monthly fee for health services, which also saves money.
Best of all, because it's smaller it's way easier to network which makes it a lot easier to find work. I've already had 2 companies offer me jobs if I decide to leave my current one.
Life here isn't for everyone. The pace is a lot slower. Supra would absolutely hate it. There aren't a lot of flashy cars on the streets and ostentious displays of wealth are mocked and scorned, and Maritimers have a keen ability to identify and mock the absurd. There's a reason that "united breaks guitars" guy was so successful. Google it if you are unfamiliar. Mary Walsh just got big press for punking Sarah palin too, and let's not forget Rick mercer punking George Bush. We are very good at getting under the skin of self important jackasses. That's probably why I love tormenting supra so much. He's just so irresistable.
anyway that's life here. If any of you have questions just ask
November 26th, 2009 at 10:17 pm
TV TOWER2 IS THE BEST PLACE ON EARTH.
November 26th, 2009 at 10:17 pm
Smart Gastown Living is best building in Gastown Vancouver.
November 26th, 2009 at 10:06 pm
Garth's only a fearmonger if a housing correction is fearful. In my books, it's the bulls, the "buy now or be priced out" people, and the "the cost of home ownership will take 60% of your take home pay, suck it up" people, who are really dealing in fear. All those developers hyping condos into overnight lineups: that's fear.
November 26th, 2009 at 10:04 pm
CANADA RANKED BEST PLACE FOR EXPATS
"expats in Canada have the best quality of life and found it among the easiest places in the world to integrate with the local population,Dubai stinks".-HSBC BANK INTERNATIONAL.
November 26th, 2009 at 9:31 pm
i've seen that show too. to be fair, the realtor does sometimes tell the victims to lower their expectations. my favorite episode was when she told the buyers replacing the countertops would add $30,000 to the value of the home. i guess that explains all the granite countertops.
November 26th, 2009 at 7:32 pm
@Drachen:
Who cares if he agrees with you or not? Do you really need the validation of a fearmonger?
Again, I thought you didn't believe in graphs. Strange that you are now trying to predict the future off one.
November 26th, 2009 at 6:34 pm
"Where did all the good commentators go?"
Seriously. Still appreciate the posts but the comments have become moronic.
November 26th, 2009 at 6:21 pm
"Dubai struggled to ease fears of debt default Thursday…"
Interesting how all this info was revealed on the day the US stock markets were closed due to Thanksgiving.
I'll be watching the reaction tomorrow on the New York Exchange after Wall St. has been able to take a deep breath and count to 10.
November 26th, 2009 at 6:20 pm
other ted,
Thanks for the explanation. I agree with you, pitchforks are indeed needed!
But…..
Aren't you embarrased to admit publicly watching that show a few times? LOL
Or maybe you are watching it for anthropological research?
Regards
arit
November 26th, 2009 at 6:11 pm
I just realized the taxes are damn high in NS. Hope I didn't make the wrong decision coming here. Food prices are also sky high. Someone lied to me about how good this place is, now I want to go back to Vancouver.
November 26th, 2009 at 6:00 pm
arit I have seen property virgins a few times. I saw that episode yesterday and was disgusted with the fools. HOw the show usually goes is the gapped tooth realtor eggs on the clients. She almost always gets the virgins to go over bid. I saw one time over 100k over. Then she congratulates them on having there property cherry popped. And then there is my favourite when the homeowner is entertaining mulitple offers. The young idiots bid over asking. And then the realto/host comes back and tells them the owner wants them to do better. No counteroffer nothing. And of course not knowing if they were the best bid or not already the young victims go even higher. If it were me I would say make my next offer lower. And if not your fired. This shouldn't even be legal and this fool on tv gets away with it everytime. I believe once the bubble bursts these loonie realtors on tv will have people with pitch forks coming after them.
November 26th, 2009 at 5:56 pm
What do you say when people tell you that you might as well buy now, since everything is relative..
Upcoming higher interest rates may mean lower prices, but your over all monthly mortgage payment will work out the same..
November 26th, 2009 at 5:45 pm
58 X Drachen Says:
November 26th, 2009 at 3:30 pm
@patriotz:
And we don’t have any of that smelly black gunk just lying around in pools everywhere (not in BC anyhow).
——————
Neither does Dubai (well, not much at least, compared with the other gulf states), which is their problem.
November 26th, 2009 at 5:24 pm
# 56 Drachen:
Congrats on being picked up by Garth (and good info!):
The 1980's will go down as an era that seeded a lot of future economic turmoil.
November 26th, 2009 at 5:20 pm
49 X CMHC or bust
That is truly scary, and one wonder how much of this has gone on.
November 26th, 2009 at 3:30 pm
@patriotz:
And we don't have any of that smelly black gunk just lying around in pools everywhere (not in BC anyhow).
Speaking of which, apparently energy derived from Alberta's oil sands causes more pollution than an equal amount of energy derived from any other source on the planet.
November 26th, 2009 at 2:35 pm
55 – Yup, the tide has just gone out on Dubai, and left them naked. We'll find out over the next year or so how many others have sold their swimwear and are praying the tide doesn't go out…
November 26th, 2009 at 2:32 pm
Hey, my letter's featured on Garth's blog today.
I wonder if that means he agrees with my CMHC/MBS generated/enhanced bubble theory?
November 26th, 2009 at 1:15 pm
So you think we can have a sustainable economy based on RE, hot money, and tourism? Well maybe not…
Dubai strives to ease default fears
But it's different here. It rains a lot.
November 26th, 2009 at 12:11 pm
@Oh La La: Shut the F up, just don't visit the blog, ok.
November 26th, 2009 at 12:05 pm
@Oh La La: I don't want the blog to be closed down. I don't know if there's much more from an analytical standpoint that I (or most) could learn right now, so that type of commentary is no longer of crucial importance.
It's posts like #49 that keep me reading this blog. I'd love to see some enterprising young journalist take this up as a story, interviewing the people at TD, and folks and the CMHC and the Canadian government.
November 26th, 2009 at 11:31 am
With all this bickering, I don't quite see the point of this blog. Close it down before it becomes a flame war central? Where did all the good commentators go?
November 26th, 2009 at 11:27 am
Scullboy,
OK, I understand what you are saying. I still don't think the cursing helps anything here, but you are free to do as you wish.
Keep us updated about Halifax, if things don't improve here we might all end up there.
Regards
arit