Friday, July 13, 2012

Yes, there will be a Canadian decline, a small, gentle one

Interesting how the default narrative has shifted to "yes there will be a decline" but not a big one. Or a sudden one, at worst case. No worries, mate.

Home prices in Canada continue to find support
External demand for our commodities isn’t providing the support for growth that it has on occasion in the past.
This only matters are part of the ballooning debt, for keeping the CAN$ strong and for encouraging foreign purchase of bonds. It's support for debt growth. Maybe that's what you meant but it doesn't quite read like that's what you meant.
It’s a possibility that has even been mentioned specifically by Mark Carney, Governor of the Bank of Canada – a too-rapid deterioration in the housing market.
Note the word "rapid". A deterioration is a given. What now matters boys and girls is the speed of it.
Even a worst-case scenario for housing in Canada, however, is not likely to yield anything like the catastrophe experienced by the sector south of the border.
It came about because too many low income earners were enticed into home ownership by sub-prime and variable-rate mortgages. Those borrowings were bundled into debt instruments that were sold between financial institutions with the promise they carried Grade A credentials.
You weren't paying close enough attention. Subprime came and went as a crisis. The rest of the 6 years of this was prime mortgages. Just like Canadian ones. Overpaying for houses that's what causes the crisis. Turns out lacking subprime, this tulip bubble style game can go on even longer than anyone imagined. Subprime broke the back of a the bubble. It didn't fundamentally cause the bubble.

Canadians can keep patting themselves on the back and insisting they are different (despite amortization lengths and 2.5% cash back mortgages that would make Countrywide blush). But Fannie and Freddie were banned from subprime mortgages and CMHC *specializes* in them. How is that for different? But, honestly, the rules don't matter except for the one that lets a bank appraise on recent sales. If banks think a given house's value is based on the previous nearby bubble-level sales then you will eventually get an unsustainable bubble. Subprime doesn't have to enter into it, only ever-increasing affordability measures like falling interest rates and higher leverage. Both of which Canada has mastered for year after year. You don't get to 70+% ownership without scraping the barrel sides for some crud. It doesn't matter what financial mechanisms get the market there. If it got there, it's vulnerable to shock.
There may be a moderation in Canadian home prices, it’s true, but the adjustment isn’t likely to be much more than 10% at most. (The decline in the U.S., peak to trough, has hovered near 33%.)
I love how these analysts never say, so, hm, what is the fair, long term sustainable value of Canadian housing anyway? Stop for a minute and look at where a 10% decline leaves the market. Oh, grossly overvalued based on rent, incomes and historical norms? Oh, totally reasonable estimation then.

A 10% fall, eh? Oh, so noted.
Canada’s healthy labour market will provide a backstop to housing demand. The unemployment rate nation-wide is now only 7.2%. ..d That’s not shabby, considering that even when the economy is performing at maximum capacity, the percentage of idle workers rarely falls below 6.0%.
Are you sure you're an economist? The fraction of GDP and employment contributed by the housing market is one of those things that will be cut in half with the crash. Oh, sorry, deterioration. I realize that's why housing starts are your one and only metric you are obsessing over, but you have to take it one more step out. What happens after housing starts decline? See the problem? Any reason you didn't take it out to that logical conclusion on your own?
Any taxi-cab driver will tell you that visitors to the city are amazed by the number of building cranes dotting the skyline.
So, you are a Friedman economist. Reams of actual data and you are using the Taxi Cab Rider Incidental Conversation Index.
Several other cities across the country have maintained healthy existing home price increases, including Halifax (+7.5%), Winnipeg (+7.2%) and Hamilton-Burlington (+7.1%). Edmonton (+4.7%) and Calgary (+3.2%) have also recorded good year-over-year advances. The average resale home price in Calgary, however, remains nearly one-quarter higher than in the province’s capital. Statistics Canada’s new housing price index (NHPI) for May was even more upbeat.
Upbeat? Okay, now we know who you are working for. Why is requiring households to sign themselves up for crippling debt slavery upbeat? It's not upbeat. It's increasing debt.

Here, rephrase it: 1257 homes exchanged hands this month in the 416 area code, the drag on those buyers' financial future increased 10% year over year, decreasing their odds they will invest in their children's future and their own retirement. Also significantly increasing the risk that they will be unable to sell at will without bringing additional money to the transaction. Sound upbeat to you?
In annual terms, there were a couple of declines, but they were confined to Victoria (-0.9%) and Vancouver (-3.2%). In the important Toronto market, the year-over-year change was a nation-leading +5.5%.
Yeah, it's not a housing market with long term and short term qualities it's the Kentucky Derby.


another value investor said...

Author: Alex Carrick
Chief Economist, CanaData

So who is CanaData?

"now we know who you are working for"

Ross said...

"So, you are a Friedman economist. Reams of actual data and you are using the Taxi Cab Rider Incidental Conversation Index."


jesse said...

I'm not surprised they talked around price-rent and price-income metrics, instead concentrating on data that support their view. At least mount a salvo into why those price ratios are not relevant this time. The piece comes across more as a sales pitch than an analysis, and no doubt my virtual bird will reap good entertainment reading this stuff.