Current house price correction in Canada has couple more years to run

The correction currently underway will persist for next couple of years. More adjustment to come in home prices: Carney

“Real wealth is built through innovation, and it’s gained through hard work,” Mr. Carney explained in an interview taped before this weekend’s G20 finance ministers and central bankers meeting in Moscow. “It’s not through some magical asset inflation.”

Mr. Carney said the pace of debt accumulation has slowed to about 3 per cent a year from 10 per cent.

Mr. Carney rejected the suggestion that he may be remembered as Canada’s Alan Greenspan – the former U.S. Federal Reserve Bank chief who many critics blame for inflating the housing bubble in that country – if there’s a housing crash.

“I’m coming back, so I’ll take responsibility if, if, well, that’s not going to happen,” he said. “I’m also coming back, so I’m here to face the consequences, ultimately.”

Sure you will. We look forward to it.

An Expat Canadian: Returning home has become "downright frightening"

Human's are herd/social creatures. Bubbles are about socially constructed myths, making them harder to see from the inside. For the outsider, there is only the language of disbelief. Neil Macdonald: Why a U.S.-style housing nightmare could hit Canada

Friends and colleagues who own homes in Canada are the very pictures of smug. They seem convinced the markets in which they happily reside will keep rising forever. Or at the very least, never drop.

And any discussion of the subject usually involves condescending lectures about how Americans, who are only beginning to recover from a six-year nightmare of foreclosures, could have used a dose of Canadian common sense and prudence.

It's all about the debt.

As was the case in America when I arrived here nine years ago, Canadians have for years been so desperate to avoid being left behind by a surging housing market that they've been stretching themselves beyond reasonable financial limits to jump in, thus of course ensuring continued surges.

In the process, household debt has doubled, going from a manageable 75 per cent of household income in the early 1990s to 150 per cent today.

Worse, as the Bank of Canada has been pointing out, Canadian debt is disproportionately concentrated in the most vulnerable households, defined as those devoting 40 per cent or more of household income to paying interest charges.

. . .

The central bank's analysis suggests that if interest rates rise to 4.25 by mid-2015, fully one fifth of all Canadian debt would be held by those households least able to finance it.

"My base case expectation would be that most markets in Canada over the next two years would see a pullback of housing prices of 10 to 15 per cent."

That's Don Drummond, former chief economist at TD. Back to Neil:

If you take that tax refund into consideration, prices in Ottawa are now approaching or equal to prices in Washington, DC., a city steeped in wealth and power. Seen from this distance, by a longtime expat, that is just unmoored from reality.

Bottom Calling in Australia

ABS (Australia Bureau of Statistics) is the most trusted name in Australian property data, everyone else is selling their book. But Australian Property Monitors has a new release that has inspired the WSJ to make a bottom call.

June quarter house prices back RBA governor's view

Nationwide, house prices gained by 0.4 per cent for the three months to June, while prices for apartments fell 0.8 per cent, according to figures released by Australian Property Monitors yesterday.

He said most capital-city housing markets had bottomed out in the December quarter.

"This trend can be expected to continue in most capital-city markets over the second half of 2012, underpinned by the prospects of an active spring selling season signalled by recent improvements in auction clearance rates and recent interest rate cuts," he said.

In a speech on Tuesday, Mr Stevens said he did not anticipate a fall in house prices and fears of a US-style collapse were misplaced.

(here's the APM report from March) The most affordable mainland capital city in Australia is Brisbane at $427,933.

Let's put that in perspective by comparing GDP per capita (international dollars)
U.S.: $48,387
Canada: $40,541
Australia: $40,234
The relative national house prices are: (in U.S. dollars)
U.S.: $204k
Canada: $439k
Australia: $555k
GDP source (IMF numbers show much less of a gap than World Bank numbers, IMF are used here.)

Noted: RBC Says Toronto Condos not a Bubble

Toronto Condominium Market Not In Bubble, Royal Bank Says

The country’s largest city needs more condos because legislation aimed at restricting urban sprawl has cut the supply of new single-family dwellings, according to a report by Royal Bank Senior Economist Robert Hogue. The record 44,100 condos and apartments that the government’s housing agency said were under construction in May compares with the 38,000 new households being formed in the city each year, Hogue said.

How many of these households want to start a family, and how many 3 bedroom condos are there to accommodate them? Kind of a mismatch there, eh?

Clearly families should just buckle down, cut costs and buy two. That'd only be a $million. Totally affordable.

“The strong presence of investors in the condo market raises the risk of a mismatch among the types of units supplied and ultimately demanded for occupancy,” Hogue said in the report. “At this point, we do not equate this risk with a bubble.”

I guess without a definition of bubble, why not?

Original Report at RBC

For comparison, these were the new highrise condo sales (according to: bildgta.ca) for all of GTA
2003: 11,871
2004: 13,750
2005: 17,693
2006: 17,617

Household formation graph from RBC

Based on RBC's own graph of household formation, the difference between the rate of formation in 2001 to 2006 and 2006 to 2011 is about a 14% increase. How does the growth now rather than then justify a more than doubling (possibly a trebling) of condo completions?

Meanwhile prices across Canada continue to rise according to housepriceindex.ca. I continue to be amazed that despite obvious examples right next door, a bubble simply has to run its course, no matter what. It must run out of participants, which means it will always cause maximum collateral damage.

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.

Vancouver Housing Market Tipping Downward, Royal LePage

Royal LePage Survey: Canada's Housing Market at a Tipping Point

The first-time buyer segment of the population, which represents up to half or all transactions and where activity strongly correlates to low interest rates, is expected to be slowed by recent regulatory changes that will reduce access to insured mortgages.

Half of all transactions are first time buyers. HALF. The tweaks to the mortgage rules will impact half the buyers. Yeah, the market is going to notice that. Although, putting the kibosh on the massive intergenerational transfer of wealth that was going on, wasn't a bad thing.

Below is a handy chart from the report of prices changes by market by segment across Canada.

Royal LePage From this PDF

Below is another handy chart showing the previous downturn. This chart is not adjusted for inflation, that's why these downturns appear flat. The last one was far more significant than it appears. Royal LePage is again calling for a flatlining in real dollars. Given the extremes to which prices have risen this time, that's a bit mysterious, but hope springs eternal. They don't state it in the materials provided with the links, but for it to be flat this time again, inflation will have to surge.

Here's the juicy stuff, the market survey forecast. Canadian Housing Trends

All of the metros on here are pretty optimistic, except for the last one. 6.5% down by the end of the year for Vancouver. That doesn't sound like a lot, but just the loss on a million dollar bungalow would buy you half a house in most of the U.S.

Other notable declines from Q1-Q2 2011 to 2012 from the Basic Data Chart:

      Moncton detached -8.6%
      St. John NB Condo -8.1%
      St. John NB Two-Storey -6.7%
      Longueuil detached -5.4%

Lots of places still bubbling away. That's unfortunate. Every tick upward is farther it has to fall to normalize again.

"Very Difficult to Escape"

The RE industry estimated 230,000 house undersupply has been calculated by the latest census to be instead a 340,000 unit OVERsupply. 55,300 houses for sale in Melbourne in June (But it's not a crisis, according to Brian Welch, head of the Master Builder's Association, who has no particular bias on this topic.)

The video with this one is a cheerleader's special and has nothing to do with the article. Something odd about an Australian trying to speak extra clearly. Really has to open his mouth wide. (Just a random aside...) Maybe it's a spruiker thing?

Home owners face repayment disaster

Property analyst Mark Armstrong predicted appreciation would be slowest for home owners in outer suburbs, who could see negative to zero growth in values for as many as 20 years.

''It's the perfect storm of conspiring factors,'' the director of iProperty Plan said. ''The average plot of land in the outer suburbs is [worth] half what it is in the middle suburbs and it is the land that appreciates, albeit slowly on the fringe. The houses they are building actually depreciate.

''On top of that, the quality of construction is often cheap. So that's what's behind the negative equity.''

It's not the slowing of credit after a bubble that leads to negative equity, it's building a cheap house on valuable land. That's a different viewpoint...

Bear with me a second, if the land holds all the value, and the building is a liability, wouldn't you want the cheapest building possible on the land in order to best maintain the total asset value over time?

Kevin Bailey, principal at Shadforth Financial Group, said his warnings three years ago of a ''homegrown subprime crisis'', created in part by inflationary first home buyer incentives, are now playing out. He said the schemes enticed mostly young people, without savings, to borrow heavily and pay a premium for low quality housing in poorly serviced locations.

''Lots of baby boomer parents who have made money out of property gave sage advice to children to pour their money into bricks and mortar because prices double every seven to 10 years,'' he said.

''Young people who were sold that lie will find it very difficult to escape and it's a tragedy.''

You sold your children's future to the bank. Feel good?

G&M Debate on the Existence of a Canadian Bubble

Part 3 of a multipart debate in the Globe and Mail. Mandani knows his stuff. Where are Canadian real estate prices heading?

Many housing experts thought that U.S. house prices at the peak would keep rising because of strong demand and housing shortages. Many experts also dismissed what traditional price-to-income and price-to-rent ratios were warning them.

One important lesson from the U.S. experience was that the strong demand caused by changes in household formation created "perceived" housing shortages. These perceived shortages (or pent up demand) eventually led to excessive new home building and speculation in existing housing markets, pushing house prices too high. But now that the bubble has burst, the housing shortage problem has vanished.

The above should be printed in giant flashing letters. The speculative bubble creates the very conditions that make the speculative bubble seem rational. But those conditions are just as ephemeral as the equity they are artificially boosting.

CMHC has artificially boosted household formation rates, reflected by the decade-long upswing in Canada's home ownership rate, to almost 70 per cent from roughly 63 per cent over 10 years ago. This is a big change over such a short period of time.

And it can revert even faster.

It will end whenever buyers perceive that prices are no longer going up. Hence bubbles carry the seeds of their own destruction.

This. TD's prediction of a 15% fall ("at least 15%") seems wildly optimistic. Once the "get in now or be priced out forever" is shown to be the lie that it is, why would anyone overextend rather than wait?

Then Helmut follows up with one of the classic: We're running out of land!

Research shows that markets with a restricted land supply experience larger swings in prices when demand changes, since the supply curve is relatively inelastic. The boom/bust cycle in markets associated with more land restrictions is largely due to these fundamentals not to speculation.

Helmut, seriously, there has been a shortage of condos in Toronto and Vancouver? No, there have been a lot of underutilized condos stacked like poker chips at the table. Mandani has it right. Look at China. 64 million empty apartments later and the price STILL wouldn't have fallen if the government hadn't put restrictions on purchases. Oversupply does not slow price growth if credit is ballooning. Why does the U.S. have 7-11 million empty houses, post-bubble, if supply was constrained during the bubble? This is such a dead argument, but it always gets hauled out by the pave-the-earth crowd.

High turnover in existing housing markets is not sufficient evidence of speculation, unless turnover is defined as short-term buy and sell transactions, rather than the buy and hold transactions of most home purchasers.

The mantras of "buy now or be priced out forever" "get on the property ladder so you can leverage up" imply buy and hold with a strong speculative component. Do you have *anything* new to say, Helmut? This is the same beaten-to-death stuff that was just disproven in the U.S.

Prices can be high because of economic and market fundamentals. Market excesses can develop and occur under certain conditions.

Yadda yadda, paradigm shift (yawn). Yes, and when those "certain conditions" end? What then? That *is* the bear argument point, which you avoid taking your logical conclusion out to. "Certain conditions" are temporary. By the way, any specifics that actually apply or just macro-speak? [glancing down] Nope.

Conservative practices by mortgage lenders, tighter mortgage insurance conditions, and more regulatory oversight since the last recession mean tighter, not easier credit.

Ah, this is different, at least. We have a lot of anecdotal evidence otherwise, but nothing more. Because CMHCs books are not open. Open CMHCs books (hey, the public owns them, right?) then you can toss out assertions like this in the face of 70% ownership rates in Vancouver living cheek to jowl with prices that require the average household to spend 90% of their pre-tax money on a mortgage.

Toronto’s apartment condominium market is undergoing high levels of new investment and overbuilding could occur. If so, it is likely to be limited to that sector and have little or no effect on other markets.

"It's contained." You hauled that one out? Oh, dude, so noted.

The next housing recession will occur with the next economic recession and not because the price-income ratio is high. The trigger for every post-war housing recession in Canada has been external to housing and the next time will be no different.

This would explain why the bull analysts in Canada already blaming Europe for the downturn. Okay, let's step through this: If prices are in line with fundamentals, why are they so fragile? In a downturn, there is a flight to safety. If houses are so overwhelmingly safe, and prices are not in excess of fundamentals (based on some new paradigm) why would they fall at all in the face of a recession? You can't have it both ways.

Truth is, houses do have a real value, it's based on rents. In the U.S. we've watched house prices grind downward to the point at which a landlord will scoop them up for a 5-6% cap rate. Those buyers materialize no matter the environment (even with bank lending frozen). In a downturn where a bank account pays 0.1% interest, rentals make great investments. Trouble is, you are trying to claim that there is a new "fundamental" that is not based on economic return but on leverage of a misinformed, emotionally manipulated consumer. That's why the price is fragile. That's why its in a bubble. That's why a recession will change the price. If a recession is capable of changing the price (as you yourself stated) then you are acknowledging the existence of a cycle and acknowledging that prices are above true economic fundamentals. You just can't bear the word "bubble," but you just admitted it existed. Why you bothered, I don't know. All of that macro hot air, and your conclusion is: "well, sure, prices will fall, when there is an external shock to the system that forces prices back to true fundamentals." Right. Can't disagree with that.

Btw, that's not the only way it can happen, you can also tighten lending, cutting off the market's access to untapped greater fools. But keep blaming Europe if it makes you feel better.

Toronto's Condo Bubble in Seminar

325 project on the market
173 additional towers under construction
15 years of relentlessly rising prices

Toronto braces for a deflating condo bubble

Industry stakeholders stress that the potential for a crash is slight, and most of the talk at the Queen's University seminar was about the strengths of the market. But as construction cranes swiveled outside the windows, the discussion repeatedly circled round to the danger signals that have become impossible to ignore, similar to pilots explaining why they are packing parachutes to take onboard.

Who are you gonna believe . . . me or your lyin' eyes? Wait, is this parachute packed properly?

The developers talked about tighter financing and affordability. The real estate agent wondered about a growing gap between new condos and the resale market. The bankruptcy specialist worried about high supply and few players. The salesman talked about skittish investors and bad press. While it sounds like Canada may be importing the 2008 housing bubble from its neighbors to the south, nearly everyone in the industry argues that Canada is different.

The U.S. is more different from Spain and Ireland than Canada is from the U.S. Did that help? No. Overpaying is overpaying. Loaning in excess to the underlying economic value of a property is a bad idea no matter the structure of the regulations and the culture.

Toronto, with an area population of 5.8 million, accepts about 100,000 new immigrants every year. The bulk of them are from countries where dense urban living is common, and a hard-to-determine number of foreign buyers are helping to prop up the market.

The average immigrant is making 60% of what a native born is making. (source). The median household income in Toronto is $78,000 (source). Assuming the same rate of multiple income households (which would be a generous assumption given cultural differences) then the immigrant household median is $42,000.
Assuming a high downpayment of $20,000 the TD mortgage calculator says the median immigrant household can afford $150,000. Based on the TREB May 2012 stats, there were 18 condo apartments sold under 100k and 272 sold between 100 and 200k. Given the skew is upward (700+ were sold in the next two ranges) we'll say 1/3 of those were under 150k. That means that in the month of May, 100 or so condos were sold in a range affordable to new immigrants.

This is your great salvation? Selling 100 condos a month to new immigrants? This is the biggest delusion running right now in the industry.

Mortgage rates that start at 2.4 percent and don't rise beyond 6.75 percent have boosted affordability, especially compared with pricier single-family homes. The average condo price is C$368,000 (US$378,000) less than half the C$821,000 (US$844,000) it costs to buy a house.

See, again. Just because they look cheap in comparison, they aren't affordable. Not even to the median Canadian-born household in Toronto.

Canderel is focused on inner Toronto and has no plans to change. "I think we will continue to focus on downtown, because when things do change, they probably will fall from the outside in. In our opinion ... the margins will still be ... downtown," Rogowski said.

Does this guy actually look at the stats? The core is degrading the fastest. The others fared better, finally eeking out new highs. This could be a peak market sales mix shift, where demand, locked out of the high end, finds a substitute. Could be timing on projects. Could just be the bubble goes on.

Drost says a huge pipeline of supply is one concern, but believes the big players will weather a cooling in the market. "I think it will slow down but I don't know if we're going to see a lot of failures, frankly," he said, noting he has lived through several corrections and knows the signs. "I think probably the ones you will see or hear about are smaller developers who haven't managed their marketing well, that have maybe cut corners where they shouldn't have, and have not really matched up the project to the target market."

Noted.

BIS Shrapnel Analyst Predicts Price Growth for Sydney, Long Soft Landing

House prices unlikely to decline, expert says

But BIS Shrapnel managing director Robert Mellor is one property analyst who believes that strong population growth and a shortage of homes will ensure Australian house prices do not collapse.

"I've never seen a time where the market responded and softened so much in one year as it has in the last 12 months, basically because there's a lack of investors in the market," he said.

Investors? I thought owner occupiers were the salvation of your market? (strong population growth)

'Modest growth' Mr Mellor says people will not sell a house unless they absolutely have to if they are going to get less than what they paid for. "Only people who are forced to sell, whether they be owner-occupiers or investors," he said.

Sure, but at 10% growth per year (up to two years ago), anyone who bought five years ago can sell for 20% off, anyone who bought ten years ago can sell at any price. Now, wealth effect will make them not want to, but if it's just a matter of taking a loss relative to purchase price, that still leaves a lot of sellers.

"I'd be very conservative in terms of forecasting price growth going out the next five or 10 years, for many markets, particularly places like Melbourne, price growth is going to be minimal." He says prices will struggle to rise more than 1 per cent per annum in the next three or for years.

That is, in effect, a serious decline. Inflation is a low 1.6% Q1 2012 but it's been averaging 3% over the long term. Gains of 1% against a 3% inflation rate over ten years results in a loss of value of about 23%. That would be a soft landing, but it would still be a major landing in house values.

"But markets like Sydney, Perth, Brisbane, where there's massive amount of pent up demand and very low vacancy rates, we will see over the next six to 12 months a return to modest growth - not 10 per cent plus but more in the 3, 4 per cent to 6, 7 per cent range.

"Unemployment would have to go up to 7 or 8 per cent to even get a 5 or 10 per cent decline in house prices."

Noted. I also note there is nothing on credit markets, commodity prices, Europe. Australia IS an island, in all ways.

Demographicman will save the day in Toronto

I would have said that you could recognize Demographicman by his red cape with a chart printed on it, but there aren't any charts in this article.

Demographics make big city condos hot

Housing starts in April (expected to have lost some activity to a warm March) were a surprise 244k, 40k higher than estimates.
Average house prices in Canada are 84% higher than in the U.S. (that is on lower average post-tax income, btw)
Multifamily unit starts are up 27% year on year.

So clearly it doesn't take a statistics degree to read the numbers and unequivocally declare the Canadian housing market is overheated and in particular, the condo market, right? Wrong.

You can trust these guys to never disappoint.

First off, CMHC's recently released annual report stated: "Clear evidence of a bubble is lacking [and we] continue to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centers, including condominium markets."

All of the above, plus household debt, plus mortgage debt, plus recent gains in price far in excess of GDP or personal income are, of course, not evidence of anything.

And what are those demographics that will absorb tens of thousands of excess condo inventory, just this year? (Oh, he didn't say the rescue was this year, just in "the coming years")

Retiring Boomers will move into condos
Every new immigrant (despite much lower salary and higher unemployment) will RENT condos (apparently below carrying costs because otherwise, wouldn't it be cheaper to buy?)
And young people will flock downtown to work and form families (apparently happy with 600sqft to do it in).

There. See. You bears are so wrong about condos in Toronto.

Therefore, my feeling is that big city condo values will continue to rise in general and that house prices in some urban areas will fall as a broad trend, with average home prices across the country potentially flat in the years to come.

Your "feelings"? Seriously? Also, "soft landing" is the term you are avoiding here for some reason.

Big Banks Exit Nonprime Market

Nonprime (isn't that a nice word? so much less scary than "subprime") is a $200 billion market, making it 18% of the total mortgage market. Canada’s big banks flee nonprime market amid signs of housing downturn

Canada’s banks have been exercising more caution on higher- risk mortgages after Bank of Canada Governor Mark Carney warned that record household debt remains the biggest domestic risk to the economy. Carney this week signalled the potential for interest rate increases that would cool off a housing market that has seen prices almost triple in some Canadian cities over the past decade.

“We see opportunities with people that are really high- caliber borrowers with good proof of income, but their circumstances are a little different,” said Chairman and Chief Executive Officer Gerald Soloway, who was interviewed with Reid. “We haven’t had to go down the credit scale; we’ve been able to go up the credit scale, which is an unusual phenomenon.” (bold mine)

This is interesting. Is this a fully risk off effect sending quality borrowers into nonprime credit issuers, or is the market itself also sending them there?

Above is the Economists Clicks and Mortar chart showing rents versus price. You have a choice in the Canadian market, rent and accept the subsidy the market provides when the landlord is banking on ethereal future price gains, or buy and accept paying more for shelter. In the past when prices were in line with rents, high quality, non-traditional borrowers could afford to purchase using their own means (cash, loans from relatives, posting other collateral). Given the elevation in prices, high leverage is now the only way into the market.

Toronto-Dominion Bank, the country’s second-largest lender, stopped originating non-prime residential mortgages as of March 31, spokesman Mohammed Nakhooda said. The loans, offered through TD Financing Services Home Inc., represented about 0.2% of the bank’s mortgage portfolio.

“This decision was based on a number of factors, including a regular review of our secured lending risk management strategies,” Nakhooda said. “To remain competitive in the business in the current environment would require us to increase our risk profile, something we concluded was no longer in our risk appetite.”

Interesting counter opinion on these borrowers. The nonprime lenders are looking at ability to repay (look at these great customers they are sending our way!) and the banks are looking at collateral (any decline in prices and this mortgage is underwater so we aren't writing this unless the taxpayer backs it). They can both be correct and 180° differing in opinion.

Home Capital had record profit of $190.1 million last year and adjusted return on equity of 27%. It was the 14th- straight year the company had a return on equity of 20% or higher.

“I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble,” said Soloway. Economists predicting a collapse in Canada “have been wrong for years; my prediction is that they’re going to be permanently wrong.”

Future footnote: It was great while it lasted.

You are all a bunch of whiners

Pete McMartin suffered through renting, borrowing heavily from his parents to buy, it's exactly the same as now, you whiners. Affordable housing in Vancouver? Why bother?

We rented for eight years, raising our three kids in that time. It was only with the help of my in-laws that we could afford our first house, and then only after cashing in all our assets, including all our RRSPs. Then we borrowed big from the bank.

Well, actually, it's not totally the same. Vancouver home ownership out of middle-class reach

Kershaw has compared B.C. incomes and house prices now with those in the 1970s.

In the 1970s, the annual household income for couples aged 25-34 was the equivalent of $73,000 in today's dollars.

Today, the same age group earns just $68,000 a year.

Kershaw says even with more women working, households are earning less, not more — and at the same time, the average cost of housing, adjusted for inflation, has increased by 149 per cent.

Oh and by the way, since Mr. McMartin has terrible retirement savings because he lost out on all that early compound interest, he'd like to thank you ahead of time for supporting him in his old age. He really needed a house and will need your help with that. Thanks.

There Are Threats of Trouble in Canada, But They are Not Immediate

Lots of varying predictions recorded in this one.
Ghost of Fannie Mae Haunts Canadian Housing as Exposure Worsens: Mortgages

Government-owned CMHC insured C$541 billion ($546 billion) in mortgages as of Sept. 30, an amount equal to 31 percent of Canada’s annual gross domestic output, as home prices climb and construction expands. In 2006, when U.S. home prices peaked, the combined exposure of the government-backed agencies to potential defaults was slightly more than a third the size of the economy, according to Bloomberg calculations based on U.S. Federal Reserve data. Fannie and Freddie were bailed out in 2008.

Another 1980s-style housing correction can’t be ruled out, said Finn Poschmann, vice president of research at the Toronto- based think-tank C.D. Howe Institute. “Everything under the sun will happen again. It always does,” Poschmann said, adding CMHC’s stress tests would be more credible if the agency provided enough data for outsiders to validate the results.

“Although there were a lot of discussions in the public domain about a house-price bubble, I must say clear evidence is lacking to support those conclusions,” said Mathieu Laberge, CMHC’s deputy chief economist, in a telephone interview.
Unlike the U.S., Canada avoided having to directly inject public money into the country’s financial institutions during the financial crisis.

Arg! What is it with this myth? Or do bailouts from CMHC AND the U.S. not count somehow?

By insuring mortgages against default, CMHC says it helps lenders keep mortgage rates low. The agency also buys mortgage- backed securities from financial institutions, which it says lowers funding costs for banks and other lenders.

Thereby driving prices up until housing becomes unaffordable. For the good of the consumers.

Even Bloomberg apparently can't come up with a current number on CMHC's total book, citing September's data. Really curious what it's at right now. Again, this price war on mortgage rates smells of trying to lock in the last of CMHC's coverage. I would if I were the banks.

National Bank Senior Economist Wants You in Debt up to Your Eyeballs

Matthieu Arseneau, a senior economist with the National Bank, likes mortgage payments as the best yardstick. That's because the evidence tells him that the rise of interest rates from today's bargain-basement levels will be moderate. Based on this, he thinks it's silly to foresee a housing crash, since monthly payments won't get into distress territory even by the time rates peak in about three years.

That's why Arseneau dismisses apocalyptic talk about a housing crash in Canada. As a cautious analyst, he doesn't rule out any scenario absolutely, but Arseneau said Monday that this one is awfully unlikely: "I think there will be no collapse unless there's a worldwide recession and credit crisis."

Banks have already completed several rounds of scraping the margins of qualified buyers to push ownership to 70%. Where is the next buyer at these inflated prices supposed to come from? This is the inconvenient part of beanie baby trading; your holdings only have value if that next buyer is ready and waiting to buy, with approved financing, at a price at least tracking inflation, just in order for the house of cards to stand as is. For the current owners to continue to hold, overextended as they are, rather than exit, properties must at least track inflation on their already inflated values. So not just gaining 3.25% on the true economic value of the property as measured by what it would produce in rent, but on the extra $150,000-$400,000 above that.

In order for that to happen, the banks must find yet another round of even more marginal buyers to get into the market. This has nothing to do with interest rates beyond the inability to drop them further as part of helping qualify this next round. See how that works. If total debt load has been tossed out the window as part of qualifying buyers you can keep a bubble going a long time on eroding rates. That's why ignoring total debt load is such a terrible idea.

The other thing roundly ignored by the "interest rates must rise to cause a crash" crowd, is that housing is unique in that buyers are also sellers. Say you live in Toronto, in a house now valued at 800k, and some buyer out there currently in a 400k condo would like to buy it. And you also want to move up. Where are you going to move up to? You don't qualify for a 1.2 million mortgage at any interest rate. So you are stuck. At the extremes of the market that mythical property ladder stretches out and the rungs become too far apart to climb. This is why new buyers (and the symptomatic rise in ownership rates) are essential to keeping the house of cards from collapsing.

Even without interest rates moving, there are limits on the market: Running out of even the dodgiest of marginally qualified buyers and the inability to assemble a chain of buyers and sellers to make transactions happen.

CEO of ING Direct Canada Says "Uncategorically" No Bubble

Peter Aceto on Debt, BMO & Bubbles

“Uncategorically, I would say no, I don’t think we have a bubble like we saw in the U.S.”

"Uncategorically" is a malapropism, usually taken to mean "categorically", the term from logic meaning unconditionally. Is that what he meant? I guess we'll say it was. (note: I don't have a good enough connection to watch the video at the moment to scope out more context.)

"…We have some issues....It's not a national issue. It’s more of a British Columbia issue or an Ontario issue. Prices are very high.”

Um, you mean, there is only a problem in the two provinces where 18 of the 34 million Canadians live? Well, that's a relief. How anyone could miss the runup in Montreal prices, or this insane run up in Alberta I don't know, but we'll note his concerns.

Condo valuations are “pretty high on top of the list of things we are watching very, very closely.”

Wait, another trouble spot? Maybe he did mean uncategorically, a new term which means "with caveats" . . . ?

The Only Bubble Is Small and It Is Over There

Jay Bryan: Inevitable housing crash? It's been called off

At a time when job growth in Canada is throttling back, as consumer spending slows, we're going through a delicate transition that could be badly derailed if there were a hard landing in real estate markets.

Just out of curiosity . . . what is the point of an article (editorial?) like this anyway? Comment fishing can't be worth this embarrassment. Appeasing the Real Estate Advertisers is the next most reasonable explanation I can come up with.

And I love how the only meaningful number cited is the 10% overvalued as opposed to basic journalism which would involve presenting countering stats. He doesn't even bother summarizing how the 10% calculation came about (I've never seen it accompanied by an explanation, so maybe there isn't any).

Yeah, Mr. Bryan, the market is a mere 10% overvalued after going up that much nearly every year in the last decade while inflation was less than a third of that.

Let's recast it this way: Let's say you are divorced and paying alimony. And every year since 2000 the judge has ordered you to pay your wife 10% more than the year before. If you and your friends are out at the bar drinking, would you assert to your drinking buddies that your wife's share of your monthly paycheck is only 10% overvalued?

Doesn't that sound foolish?

Pro-tip: the need for the "delicate transition" (that must be an economic term of some kind) is caused by misallocation of capital, into houses. If houses are so amazingly perfectly valued, you wouldn't be fearful of government policy damaging the value. You've just undermined your entire assertion by screaming "Hey, don't blow on that house of cards. That would be a really bad idea right now while the rug is on fire and the dog is eating the cat!"

While we're now getting a growing boost from exports to the thawing U.S. economy, the slowdown in consumer spending on housing needs to be gradual if Canada's growth is to avoid a shock. Happily, this is pretty much what seems to be happening.

Yes, and when the speculative component is gone from the market, people will still totally be cool with paying twice as much as an American for the same shelter. On lower post-tax income, no less. What troopers.

A few cities, including Montreal and Ottawa, saw bigger sales declines, but their prices remained firm. rising a little faster than the national pace of 2.7 per cent for the past 12 months.

Oh yeah. Year on year we're good, folks. Nothing to see here. Montreal is down 5% just since July, but all's well. And hey, it's only 10% overvalued. So we're halfway there. Yippy. (And I know the production of your little advertiser happy meal wasn't meant to take up too much of your time, but you need a comma there, not a period.)

Not coincidentally, Toronto is the one market with a segment that could be flirting with speculative instability, suggests Douglas Porter, deputy chief economist at BMO Capital Markets.

Great news, those 10.5x income to price ratios in Vancouver are totally reasonable. Montreal, of course, with it's median multiple up 60% since 2004 to 5.1x (according to demographia) is not a bubble, either. Mr. Bryan wouldn't miss a bubble in his own back yard, would he?

Still, the broader market looks increasingly sustainable as price gains slow down to a national pace that no longer outruns people's income growth, Porter notes.

"No longer outruns" So . . . there is no reckoning for the previous binge on mortgage debt? Canadian households are just going to limp along under record debt loads, sacrificing stuff for their kids, vacations, etc, forever?

Given this benign outlook, it's a little baffling that we're still seeing scary reports about Canada's bubble - a situation where price gains accelerate as they feed on themselves.

Sorry, what's baffling? You just said it. Prices outran income, employment is shaky, and now carrying costs and debt are going to crush consumers. It's called an unwind. You imagine it will happen in an orderly fashion based mostly on the assumption that the overvaluation is small. Your tiny dream overvaluation which is already exceeded by the declines in Edmonton, Victoria, and Calgary. But you don't supposition that all's well nationwide because some places have already adjusted that whole amount. Why not? It's almost like you don't actually know that.

While it's sad to see a renowned publication [the Economist] sink to such a level, perhaps it's not surprising.

I agree, calling it a balloon is comically silly. When you let go of a balloon, what does it do? Flies around smacking into all kinds of things. You are hanging your hopes on a METAPHOR. On the other hand my metaphor can beat up your metaphor might make a cute bumpersticker . . .

Porter, who's been tracking all the predictions of disaster with bemusement, theorizes that people just can't understand why, if the U.S. had a huge crash, next-door Canada had its own big housing boom, but no crash.

It's not a mystery. 40 year amortization with 0% down. Securitization of 90% of mortgage debt growth over the last 4 year. Banks giving 7% cash back on a 5% down mortgage. Mystery solved.

The answer, of course, it that a bubble-and-crash cycle isn't easy to produce.

What? Since the dawn of civilization, bubble and crash cycles have been the norm. But they are hard to produce. That's new.

First, a true speculative bubble requires impressive levels of irresponsibility from banks and regulators, something that took a long time to develop in the U.S. Canada never matched this achievement. A mere 10-percent or so of overvaluation, which is roughly what we have in Canada, is no bubble.

Show me the fiscal irresponsibility in Ireland, in Spain, in the UK. Bad news, buddy, the problem is overextending credit, period. Subprime and mortgage fraud simply broke the back of the system sooner in the U.S. You will please note that Jumbo mortgages (in excess of $1 million, all Prime mortgages issued to people more than able to pay, and still able) lead the growth in foreclosures right now. Up nearly 600%. Overextended buyers will not keep paying once those dreamed-of gains vanish. Once people realize there is no "investment" in buying a house, they will realize they are no more than renters paying too much rent, and carrying all the risk, unlike a real renter.

Apart from some overheated niches in the market, history suggests to him that we'll likely see home prices that simply go sideways for several years, allowing incomes to catch up.

"History suggests?" Really? Porter should point to a single case where this has happened, you know, in history.

Toronto Bubble Risk Naysayers Collected

In one handy reference guide from Bloomberg.

Toronto Bubble Risk Topping New York in Condos

Canada’s housing market is about 10 percent overvalued, with inflated prices primarily in Vancouver, Montreal and Toronto, [Sheryl King, an economist with Bank of America Merrill Lynch] said in a telephone interview. “We would call it a bubble,” she said.

10%? The median is already down 4%. Does that mean Toronto's market's already 1/3 of the way to the bottom? Have you noticed that Edmonton, Calgary, and Victoria have already fallen at least that far but somehow you didn't mention that they were overvalued in the first place.

A record 27,504 condo units in the City of Toronto were under construction at the end of last year, according to Canadian Mortgage & Housing annual data, adding to the city’s total of 199,000 units.
“If builders stopped building today, there’s five years worth of supply that is about to be delivered, relative to what normal population growth is,” Bank of America’s King said.

But it's only 10% overvalued? And downtown Central Toronto condos have already fallen 7%. Where in the world did you get that number?

Banks are also cutting their funding costs by selling covered bonds, a form of corporate bond backed by assets such as home loans. Bank of Montreal and Bank of Nova Scotia sold $4.5 billion of the securities last month, after a record $25 billion of sales in 2011. Relative yields on the covered bonds fell to 130 basis points on Feb. 9, down from 170 at the start of the year, according to Bank of America Merrill Lynch data.

Someone has to finance that ever expanding bubble of credit. Thanks bondholders. You do realize that Canada, unlike Greece and Ireland, are perfectly capable of currency devaluation, right?

Investors represent a “significant portion” of Toronto’s condo market, with 20 percent to 30 percent or higher for some projects, the report said.

Doesn't sound that high, honestly...

“In absence of another recession, we’re not expecting demand to fall,” Canadian Mortgage’s Hildebrand said. “We’re expecting it to hold steady so long as the economy holds steady.”
Toronto is home to about 2.5 million people -- more than double that including its suburbs -- and accounts for about 11 percent of Canada’s economic output, according to the City of Toronto.
. . .
Realtors and others in the industry say the record condo units under construction will be easily absorbed by 100,000 immigrants streaming into the city each year, wealthy foreign investors looking for a haven to park their money and young urbanites demanding to work near the financial industry that is the backbone of the city’s economy.

Where did that number come from? The highest annual growth number I can find is .4%, which would be double the average census number from 2000 to 2006. Against a population of 5 million, that's 20,000 people a year. Or, for the next twelve months, 1.35 condos coming on the market, per immigrant. If the financiers have their way, however, they will happily let every one of them buy three a piece, so there you go. No overhang.

“There are reasons why people want to spend time in Toronto, and that’s part of what supports these real-estate markets,” said William Strange, RioCan Real Estate Investment Trust Professor of Real Estate and Urban Economics at Rotman School of Management in Toronto. “Toronto tends to be a pretty good place to do business and, with respect to Canada, it also tends to be a place where people want to live.”

Noted. It's different here. Really it is.

Toronto isn’t facing a bubble because price increases have been steady, said Ben Myers, executive vice president of Urbanation, a Toronto-based real-estate research firm.
“We’ve seen the same level of increase in the market year- over-year in terms of index pricing in 10 of the last 15 years,” Myers said. “If we didn’t have an explosion of the bubble in those years, I’m not sure what would cause it to happen now.”

Awesome. Bronze that quote.

Fallout from Toronto’s construction boom may not surface immediately, according to Queen’s University’s Andrew.
“It’s going to be three-and-a-half to four years from now when these loans are all coming up and you’ve got a number of people who say they can’t afford to refinance it, so they’ll just sell,” Andrew said. “They’ll find out that 40 units in the building all went on the market in the same month, and now they’ve got a big problem.”

The lag in the reckoning is based on how creative the banks were getting in the last year with financing people who are already overextended on debt. The slow bleed and unusually high levels of variable rate financing will push distressed properties on the market sooner than that.

Real Estate Bull Insists Rents Should Not be Adjusted for Quality

And he calls it a "fallacy". Awesome. So noting this one.

Analysing Toronto’s Real Estate Market: How Can So Many Be So Wrong?
Because this is the largest credit bubble in world history, maybe and therefore utterly unprecedented?

Oh, nevermind, Mr. Pasalis does not acknowledge the impact of credit on prices. I see given his little list of things that impact prices. (Hint: it is not the same as low interest rates. Interest rates were formerly used as a mechanism to control appetite for credit, but that does not make it a requirement to control access to credit. They really are independent. With regulation, that is. What we have is a massive symptom of lack of regulation.)

Also, if the house price gains were real wealth, they wouldn't be balanced out on the other side of the equation by an equal gain in debt. Think about it.

These new condominiums are completely different in size, style and condition from old purpose built apartments. They are usually in more premium locations and have modern finishes and amenities that you do not find in an older apartment building. As a result, condos will usually rent for roughly 40-50% more than older apartments.

Condominium rentals are not a luxury upgrade that only a select few choose. This is the new standard in Toronto's rental market. With vacancy rents hovering around the 1% level in Toronto, most renters have no option but to pay this premium.

The vacancy rate right now is 1.4%. (More accurate given the huge error incurred in rounding to actually include that digit, btw.)

But you need to take it to the next logical step. Given the ultra low vacancy rate and the ability to double and treble up in these amazing new standard flats of glory, why haven't rents gone up more? You're crying foul because rents have remained commensurate with quality. If your thesis were correct here, they would have exceeded it. Greatly.

I'm just glad this guy isn't talking his book. Ehem.

Related Links: Ontario Vacancy Rates

Just noting something for later

Need a good laugh, here's one for you.

By the way, even if it takes 5 years to decline 40%, it will still look like a crash after the fact.