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By Andrea Hopkins and Leah Schnurr
(Reuters) – Canadian condominium construction has surged but population growth has kept oversupply in check, the federal housing agency said in a report on Wednesday that also showed declining mortgage arrears and high home-equity levels.
In its annual report on the housing market, the Canada Mortgage and Housing Corp pointed to steady levels of mortgage debt and an increasing number of households as evidence that residential real estate is in good shape, despite warnings from observers that the market is overheated.
Canada’s housing market avoided the crash experienced in the United States five years ago due in part to more conservative lending standards and a stronger economy. While economists have long predicted an eventual correction in Canada, they are divided over whether prices will drop sharply or simply stagnate in a so-called soft landing scenario.
“The main argument here is just that the Canadian housing market still looks fairly normal,” said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.
The agency’s report showed that as of June 2013, 0.31 percent of residential mortgages were three or more months in arrears, compared with 0.33 percent 12 months earlier, CMHC said. Arrears averaged 0.41 percent in the decades 1990-2010.
About 31 percent of recent buyers made lump-sum payments or increased their regular payments in 2012 to pay off their mortgage sooner, and 44 percent had set their payments above the minimum, the report showed.
The average amount of equity for homeowners with mortgages was 47 percent, and 71 percent had at least 25 percent equity in their homes. Only 7 percent had less than 10 percent equity as of April 2013, suggesting only about 7 percent of homeowners would be “under water” if prices dropped more than 10 percent.
Some 41 percent of homeowners had no mortgage, while the rest typically had solid equity levels, accelerated mortgage payments or declining arrears.
CONDOS DOMINATE HOMEBUILDING
With the once-booming but cooling condominium market widely perceived to be the weak spot in Canada’s urban housing market, the CMHC said condo construction was far outpacing construction of detached homes. Even so, there were no signs of oversupply yet because of an increase in the number of people living alone as well as population growth resulting from a strong influx of immigrants.
While single-detached dwelling starts rose just 1.5 percent to 83,657 in 2012, multiple-dwelling starts – typically condos – rose 17.6 percent to 131,170 units. Condos comprised 61 percent of all construction in 2012, continuing a trend that began in 2002.
The surge was most notable in Canada’s biggest cities, where cranes dot the skylines and tens of thousands of new units come on line every year. The share of condominium starts out of total starts was highest in Vancouver at 64 percent, followed by Toronto at 59 percent and Montréal at 58 percent.
While the number of starts suggests a huge supply in the pipeline that will come to the market in the next year or two, the building boom has begun to slow and CMHC said inventories so far are not above historical levels.
Still, economists remain concerned about the level of condo construction already underway in some major cities.
“There’s still a huge supply of condos, particularly in Toronto, coming on the market in 2014, 2015,” said Diana Petramala, economist at TD Bank in Toronto.
Housing starts began moderating in the last half of 2012 and the first quarter of 2013, with multiple-dwelling starts declining for three straight quarters before rising modestly in the second quarter of 2013.
In 2012, urban inventories averaged 4.7 units per 10,000 people, CHMC said, only slightly above the long-term average of 4.6 from 1992 to 2012. By the second quarter of 2013, however, inventories were at 5.1 units per 10,000 people.
CHMC said population growth and a shift in the way people are living suggests the demand for smaller housing, including condos, will grow.
Condo ownership rates rose in every age group between 1996 and 2011, but condos were particularly popular with seniors and young adults. In 2011, 19 percent of condo owners were under the age of 35, while 29 percent were 65 and older.
“It does show that some of the demand is being driven by demographic fundamentals, particularly for condos,” Petramala said.
“Some of the over-building may not be as excessive as some people might be warning.” (Reporting by Andrea Hopkins and Leah Schnurr; Editing by Leslie Adler and Peter Galloway)
By Louise Egan
OTTAWA (Reuters) – Soaring consumer debt and a robust housing market pose an “elevated” risk to Canada’s financial stability, but the overall level of danger has fallen from six months ago, the Bank of Canada said on Tuesday.
“In Canada, the high level of household debt and imbalances in the housing sector are the most significant domestic vulnerabilities to address,” the central bank said in its semi-annual Financial System Review.
These risks could make Canadians vulnerable to an adverse macroeconomic shock and a sharp correction in the housing market, it said.
The bank cut its overall level of risk to the country’s financial system to “elevated” from “high”, citing among other factors continuing stabilization in the euro zone and the start of a modest recovery in that region. Despite the brighter outlook for Europe, it remains the biggest threat to Canada, the bank said.
Tuesday’s report marked the first time the bank has eased its overall risk level since it began classifying risk in this way in December 2011.
The overall level of risk could fall further with continued progress on banking sector reform and other reforms in the euro area. That said, the level could increase if the current low interest rate environment in advanced economies persists longer than anticipated, it added.
The bank listed risky financial investments in a prolonged period of low interest rates as a “moderate” risk and added financial vulnerabilities in emerging markets as another moderate threat.
Canada’s housing market has been a source of concern for policymakers and economists since a property boom helped fuel the economy’s rebound from the 2008-09 recession.
After four government interventions to tighten mortgage rules, the market cooled in late 2012 only to regain momentum through the spring and summer of this year.
The bank, the finance ministry and the banking regulator monitor the market closely. The bank noted an oversupply of multiple-unit dwellings in some areas, and cited an elevated number of high-rise condos under construction in Toronto.
“If the upcoming supply of units is not absorbed by demand as units are completed over the next few years, there is a risk of a correction in prices and construction activity,” it said.
Such a correction could spread to other parts of the market and hit the overall economy, it added.
The bank said simple indicators suggest there is overvaluation in the housing market overall and it said any sharp downturn in a large city could spread, ultimately affecting sentiment, lending conditions as well as jobs and income.
While the latest data suggest some stabilization in the market, there is still much debate among economists over whether housing is poised to crash and damage the economy, or have a so-called “soft landing”.
Bank of Canada Governor Stephen Poloz has placed himself in the latter camp, saying he expects record-high household debt to ease gradually as the housing market softens.
The report on Tuesday supported that view.
“The overall moderating trend is expected to resume in due course,” it said. “As long term interest rates normalize with the strengthening global economy, the risk will diminish over time.”
The ratio of household debt to income in Canada hit a record high in the second quarter of 163.4 percent, although the pace of credit growth has been slowing.
Statistics Canada will release third-quarter data on household debt on Friday.
(Reporting by Louise Egan; editing by David Ljunggren; and Peter Galloway)
Heinz shuts down its plant in Leamington, Ont., laying off more than 700 and ending a 104-year-long presence in the town. Three weeks later, Kellogg’s shuts down its plant in London, Ont., erasing 500 jobs. Days after that, drugmaker Novartis announces its pharmaceutical plant in Mississauga will shut down, taking 300 jobs with it.
Add it all up, and what you have is the largest medium-term threat to Canada’s economy, BMO chief economist Doug Porter said in a client note this week.
Porter noted that Ontario has lost 4 per cent of all its manufacturing jobs in the past year — something he understatedly describes as “not good.” Canada overall lost 2.5 per cent of all its manufacturing jobs this year, the Wall Street Journal notes — and that’s despite a recent rise in manufacturing output.
There are now more jobs in health care in Ontario than there are in manufacturing; as recently as 2000, there were twice as many factory jobs as health care jobs.
The decline of factory jobs is taking place even as manufacturing around the world, particularly auto manufacturing, is experiencing a boom — one that appears to bepassing Canada over.
“It would seem to us that this is a much bigger issue for the medium-term Canadian outlook than the more hyped housing bubble/household debt concern,” Porter wrote.
The Bank of Canada appears to disagree, once again reiterating this week that it sees high house prices and record high consumer debt levels as the dominant domestic risk to the economy.
But maybe those two risks aren’t entirely unconnected. As manufacturing employment wanes (even with manufacturing output growing), the real estate boom has picked up much of the slack, and construction employment is at or near record highs in Canada today.
But few market observers, even those optimistic about the future of the housing market, expect this juggernaut to continue. That’s why economists are constantly looking to external demand (i.e. exports) to pick up the economic slack from a housing boom that’s expected to level off.
On that front, there is some hope for good news, BMO economist Robert Kavcic says.
“With the high-profile job cuts in Ontario’s manufacturing sector piling up, there might be some reprieve coming from the weaker loonie and stronger expected U.S. growth,” he writes.
“But keep in mind that a weaker currency won’t help overnight — the impact tends to filter through over the course of at least two years.”
So here’s hoping the housing construction boom keeps up for a few more years, or Canada could get a nasty surprise in future unemployment reports.
- Sept. Pending Sales… the largest MoM drop since Sept 2001… not 2011… yes, 2001.
Don’t let them tell you ‘this is normal for Sept’. The ‘oh-crap’ moment is now in the can. Going forward, “Existing Sales” volume will disappoint on a YoY basis for several quarters. There is no way around it…
Fool me once, shame on you; fool me twice, shame on me; fool me thrice, shame on the Fed…
Via Mark Hanson,
Existing Sales is terribly backward looking and you can’t change history no matter how hard certain parties try.
‘House Prices’ have already fallen sharply post-surge and continue to weaken — prices are set at contract but not recorded until “closing” — simply awaiting printing by lagging surveys.
Contrary to ‘New’ Home Sales, Existing Sales are where the Fed’s go-go juice really showed up thanks to the Twist/QE 3, 4 increase in “purchasing power” beginning in Q4 2011 and the new-era “investor” rush to market in mid-2012. This is evident in the demand divergence between the two series. As such, the “post-surge” housing market “demand collapse” will be much more evident in this series than it was by the 27% MoM drop in New Home Sales in July.
In short, over the next few months we will see the two series quickly “converge” — Existing Sales weaken considerably to be more in-line with the weak builder demand — reflecting conditions more akin to the “hangover” period following the sunset of the Homebuyer Tax Credit.
Along with this comes lower YoY Existing and New Sales volume along with down trending MoM house prices as far out as July 2014, at which point house prices have a good shot at being negative YoY as well.
Sept Pending Home Sales Low-lights
1) US Pendings Fell 21.1% MoM on an NSA basis(down more not including last month’s revision), the most on record for any Sept since Sept 2001…that’s a terrible period to comp against.
2) On a YoY basis Pendings were down 4.3% on a daily basis (Sept 2013 had 1 extra business day YoY). And remember, in Sept demand was still being pulled forward due to rates and fear of Gov’t shutdown.
3) Levels of Sept Pendings virtually ensure Oct through April Existing Sales” are lower YoY. A year ago volume outperformed (muted seasonality) in winter & spring, as new-era “investors” all dove in at the same time. This year the market will underperform (heavier than normal seasonality) due to the stimulus “hangover”. This delta will produce meaningful YoY Existing Sales declines especially through April 2014.
4) Leading indicating Western region absolute Pending Sales lowest since 2007.
5) Heavily weighted, leading-indicating Northeast & West Sept Pendings down 31% & 20% MoM NSA respectively,also 12-year record drops.
6) YoY, Northeast & West Pendings down YoY by 3.1% and 5.2% respectively…the first YoY drop since after the 2010 sunset of the Homebuyer Tax Credit.
7) MoM, Sept national Pendings dropped 54% and 40% more than the 10-year average and post housing market crash avg Sept respective seasonal drops.
**note, items 5 & 6 were straight from NAR and not normalized for more business days this Sept than last. In short, the YoY drop is larger than reflected in 5 & 6.
- Pending Home Sales Fell 24.5, The 3rd Worst Drop Since September 2001 (confoundedinterest.wordpress.com)
- Here Comes Pending Home Sales… (businessinsider.com)
- A Lonely Housing Bear Predicts a Big Fall – Bloomberg (bloomberg.com)
- Pending Sales of Existing Homes in U.S. Decreased 1.6% in August – Bloomberg (bloomberg.com)
- Housing recovery takes another blow as pending home sales tumble (nbcnews.com)
Garth Turner, who served as both a Progressive Conservative and Liberal member of Parliament for the Halton region near Toronto, has called the monthly numbers released by the Canadian Real Estate Association (CREA) a “fraud,” because of the apparent practice of houses being counted multiple times when they are sold.
CREA’s monthly sales and price releases are among the most closely-watched measures of the housing market. Several industry insiders confirmed to HuffPost Canada last month that duplication of house listings across multiple real estate boards could be distorting sales data.
Turner, who runs a blog focused partly on real estate and is a financial advisor at Turner Tomenson Wealth Management Group, also suggested that something fishy could be going on at the Toronto Real Estate Board (TREB).
Speaking on BNN Monday, Turner said TREB’s house sales numbers “are almost always revised down” after their initial public release. That would mean that, when new numbers are released, they appear to show a larger increase from the previous reporting period than otherwise would have been the case.
Other housing market observers, such as analyst and blogger Ben Rabidoux, have also suggested that TREB may be revising its older numbers too far down, and creating the impression of a stronger real estate market than may really be the case.
This sort of thing matters, Turner told BNN, because people’s perceptions of the housing market affect house prices.
Turner didn’t speculate on how much house prices may be getting pushed up by potentially misleading data.
CREA economist Gregory Klump told HuffPost Canada last month that double-counted listings amount to a scant 0.8 per cent of housing supply on the market.
In an interview on CBC’s Lang & O’Leary Exchange on Monday, Klump said the double- or triple-listing of homes is largely concentrated in the Toronto area and Nova Scotia. But he described the effects of those listings as “statistically insignificant.”
“We remain completely confident in the reliability and accuracy of those statistics,” he said.
But real estate consultant Ross Kay, who is the original source for Turner’s arguments, suggested in an audit of housing data that sales numbers may have been over-reported this year by some 22,000 house sales so far.
He told HuffPost last month that the phenomenon of double-counted houses is having substantial effects on housing data.
“Statistically valid month-over-month comparisons on sales volumes are inflated as much as 15 per cent in some cities in 2013,” Kay wrote. “Average prices are skewed upward as much as 10 per cent some months.”
Noting that most Canadians’ net worth is in their homes, Turner suggested housing market data should be made reliable through regulation the way financial markets are regulated.
“We have complete regulation in the financial markets, and almost complete benign denial of the accuracy of numbers in the real estate market, which is so critically important to people,” he said.
“I hope it changes.”
- Accuracy of Canada’s housing data under scrutiny (theglobeandmail.com)
- Canadian home sales increase slightly in September: CREA (ctvnews.ca)
- Existing home sales edge up in September, surge 18% from year ago: CREA (business.financialpost.com)
- Canadian Housing Market Remains in Balanced Territory (theepochtimes.com)
Bob Shiller Warns “None Of This Is Real; The Housing Market Has Become Very Speculative” | Zero Hedge
- Case-shiller Home Price Appreciation Decelerates (businessinsider.com)
- Two Big Housing Risks-Ending Fed Stimulus & Speculation-Professor Robert Shiller (rvnewstoday.com)
- Case-Shiller Home Prices Rise Just 12.2% (ITB, XHB) (businessinsider.com)
- Home Prices in 20 U.S. Cities Increased at Slower Pace – Bloomberg (bloomberg.com)
- Dallas-area home prices post record increase in June (bizbeatblog.dallasnews.com)
- TD, RBC follow other banks in hiking mortgage rates (cbc.ca)
- Mortgage rate hikes put the squeeze on Metro Vancouver homebuyers (vancouversun.com)
- As banks lift mortgage rates, Ottawa steps to sidelines (globalnews.ca)
- RBC hikes mortgage rates (theglobeandmail.com)
- Demise of the discount mortgage? (blogs.montrealgazette.com)
- Housing market has returned to full health, numbers show (mercurynews.com)
- New mortgage rules pushing first-time homebuyers to wait (cbc.ca)
- Canadians might not be headed for that debt apocalypse after all (metronews.ca)
- Southern Alberta housing market unlikely to crash: CHBA (globalnews.ca)
- David Rosenberg: All’s fine on the Canadian homefront (business.financialpost.com)
- Over-heated housing market a drag on down Canada’s economic standing, report says (vancouversun.com)
- StatsCan data to reveal gap between Canada’s rich and poor (calgaryherald.com)
- Flaherty sees no ‘doom and gloom’ in housing market (bnn.ca)
- Canada’s Flaherty: No ‘doom and gloom’ in Canada housing market (xe.com)
- Housing Market Optimism (southvalleyhomes.wordpress.com)
- Return of the Housing Bubble? (cepr.net)
- Canadian Finance Chief on Those Betting Against Housing Market: ‘I Wish Them Bad Luck’ (blogs.wsj.com)
- Home Flipping Indicates Recovery Of Housing Market (losangeles.cbslocal.com)
- Calgary listed as one of Canada’s more affordable housing markets (calgaryherald.com)
- The Hottest Housing Markets of 2013 (247wallst.com)