Mortgage Market Updates

Thursday, 8 November 2012

How house prices depend on demographics

Jason Heath, The Financial Post

What’s going to happen to home prices in Canada? Despite all of the analyses and hypotheses in the media, the answer may not be based on historical real estate prices, interest rates or ratios. The answers may lie, to a great extent, in our demographics.

The typical Baby Boomer is likely to sell the 3,000 square foot, 4-bedroom home they raised their family in and instead opt for a 1,500 square foot condo before long. They don’t need the space and they don’t want the stairs. Besides that, they may need the money to fund their retirement. When they’re no longer able to care for themselves, the next downsize may be a 500 square foot nursing home. And the final downsize requires considerably less square footage.

This pattern is likely to put a damper on real estate prices, in general, in the coming decades. It’s also one reason supply, demand and prices for condos in this country may continue to rise.
According to Statistics Canada, the Baby Boom lasted 20 years in Canada. During that time, more than 8.2 million babies were born, an average of close to 412,000 a year. In comparison, the number of births in 2008, when the population was twice as large as during the baby boom, was only 377,886.”

What this means is that the pressure of Baby Boomer downsizing could be an impediment to home prices, economic growth and inflation

Canadian consumer spending represents about 58% of the Canadian economy as measured by Gross Domestic Product (GDP). Shelter, principal accommodation, household operation and household furnishing represent about 58% of consumer spending. This means expenditures related to real estate ownership and maintenance represent about 1/3 of Canadian GDP.

What this means is that the pressure of Baby Boomer downsizing could be an impediment to home prices, economic growth and inflation.

Canada’s annual inflation rate came in at 1.2% for September, below analyst expectations of 1.3%. Core inflation, which excludes the most volatile components of inflation, was 1.3%, compared to an expected 1.5% and down from 1.6% in August. The Bank of Canada maintains a target of 2% for core inflation. The Bank generally increases interest rates in order to keep inflation from rising too much, too quickly. Inflation does not appear to be an issue in Canada at this time, so we continue to have low interest rates.

Deflation — the opposite of inflation — occurs when inflation falls below 0% and prices generally decline. The problem with deflation is that money becomes more valuable the longer you hold it, which tends to become a self-fulfilling prophecy, as spending slows down and prices decline further. Why buy something for $100 today if it will only cost $99 tomorrow? It’s never been much of an issue in Canada, though Japan has fought a battle with it for the past two decades.

Ben Bernanke, governor of the U.S. Federal Reserve, made a famous speech in 2002 in which he said that deflation could be prevented or reversed by dropping money from a helicopter — a speech that earned him the nickname “Helicopter Ben.”

“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent),” he said, “that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Ten years later, Bernanke is putting his money where his mouth is, having recently embarked on a third round of quantitative easing to stimulate the U.S. economy. This stimulus is arguably focused most specifically on putting a floor on U.S. real estate prices.

Despite central bank intervention to help encourage economic growth, according to Harry Dent, author of The Great Crash Ahead, demographics are forecasting deflation.

Dent writes: “When the average kid is born, the average parent is 28. They buy their first home when they’re 31 . . . after they had those kids. When the kids age into nasty teenagers, the parents buy a bigger house so they can have space. They do this between the ages of 37 and 42. Their mortgage debt peaks at age 41. And . . . their spending peaks at around 46.”

Baby Boomers represent more than one-quarter of our population. Their spending habits will greatly influence future real estate prices and make the Bank of Canada’s goal of stable, predictable inflation difficult

Baby Boomers were born between 1946 and 1964, meaning their parents turned 46 in the 70s and 80s. Perhaps not surprisingly, these were the years during which Canadian inflation more than tripled from the post-war average of 2% to closer to 6% — peaking in 1975 at nearly 15%. High inflation during the 70s and 80s was not a Canadian phenomenon, but then again, neither was the Baby Boom.

The Baby Boom peaked in 1961. The thing about the magic number 46 is that if you add it to 1961, you get 2007. It’s not that Baby Boomers, the homes they live in and their spending habits caused the financial crises of the last five years — sub-prime mortgage lending in the U.S. and excessive government deficits abroad have played their part. But it’s interesting, nonetheless.

There are about 9.6 million Canadian Baby Boomers. They represent more than one-quarter of our population. Their spending habits will greatly influence future real estate prices and make the Bank of Canada’s goal of stable, predictable inflation difficult. At least we have Helicopter Ben patrolling our southern borders — for better or for worse.

Jason Heath is a fee-only Certified Financial Planner and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.

Wednesday, 7 November 2012

The end of mortgage growth? Not yet

Boyd Erman, The Globe and Mail

For all the talk of rule changes slowing the growth of the Canadian mortgage market, some surprising statistics from the Bank of Canada show that has not been happening in any significant way.

Policy makers trying to cool the growth of household debt and home prices may not like it, but bank investors should given what it bodes for profits in the quarter that just ended.

The outlook for mortgage growth has been cloudy amid all the changes that Ottawa has made to try to dampen Canadians' ardour for borrowing, and mortgages are still by far the biggest business for Canadian banks.

After a strong showing for mortgage growth in the fiscal third quarter for banks (which ended July 31), few people would have been surprised by a marked slowdown in the fourth quarter as the changes finally begin to bite significantly into mortgage demand. Add to this signs that the housing market is slowing in key markets, with fewer sales and even soft prices, and the table is set for a significant drop in mortgage growth.

The thing is, it's not happening, at least not yet.

Digging through the Bank of Canada's statistics, total residential mortgages at Canadian chartered banks increased in August and September at a pace that is at or better than the average over the past 10 months.

(That's as far back as the numbers are easily comparable, because of changes resulting from the implementation of new international financial reporting standards, so keep in mind this is a limited data set. The Bank of Canada numbers are also not seasonally adjusted; then again, neither are earnings numbers.)

In August, mortgage balances rose 0.74 per cent from July. In September, the month-over-month gain was 0.54 per cent. That's compared to an average increase of 0.56 per cent in the past 10 months.

To be sure, the fourth quarter (which ends Oct. 31 for Canadian banks) likely will not be quite as strong as the third for mortgage growth, when the month-over-month gains clocked in 0.75 per cent (May), 0.67 per cent (June) and 0.77 per cent (July). Gains in volume may also be offset to some extent by lower margins as banks battle for share in a tougher market.

Still, volume growth in the quarter that just ended should compare favourably with the first and second quarters. Of course, this all hinges on October's numbers not falling completely off the map. That said, the first two months of the quarter were strong enough that even a weak October shouldn't do too much damage.

Will this change the perception that a slowdown in the mortgage business is inevitable? Not likely. Bank executives are clearly also expecting to require other engines of growth, as evidenced by recent purchases of lending businesses by Royal Bank of Canada and Toronto-Dominion Bank.

Meanwhile, the home-finance business keeps on giving for bank shareholders.

Streetwise, ReportonBusiness.com's home for news and analysis from the world of finance, is available online to subscribers of Globe Unlimited.

Tuesday, 6 November 2012

Our low-interest rate environment

Where are interest rates heading and when will they start to move? This has been the hot topic of conversation for the past two years and it looks as if it will continue until rates finally start moving and everyone can exhale and say, "yes, there, we knew it."

Or consider this: Can we just accept that low-interest rates are now the norm, since we've been in this environment since 2010, instead of trying to second-guess what the Bank of Canada will do every month? In a recent report by CIBC's Chief Economist, Avery Shenfeld said maybe it is time for a new message.

It's easy to forget that the housing market has been a vital component to the success of the Canadian economy during the past decade. In many respects, the industry has helped to stabilize a faltering economy. Consumer spending and confidence remains high - a large part of that comes from allowing consumers to take advantage of low interest rates and to tap into their equity for either spending or investing purposes.

Yes, the government in Canada has had to keep our economy afloat during the recent recession first, by injecting billions of dollars in spending into the economy and second, by instilling a degree of confidence in Canadians and investors by tweaking credit guidelines. However, at the end of the day, it still comes down to actions taken by every day Canadians who put their faith in their ability to repay loans, their ability to manage their household debt, and through consumer spending, that is pulling us through.

We are very fortunate to have weathered the recession as well as we have. However many Canadians are still worried. They are worried about rising rates, they are worried about the possibility of decreasing home values, and they are worried about their ability to save for the future.

Let's look at recent messages from Bank of Canada's Mark Carney. He delivered the message that consumers will pay more in the future for what they borrow today. The latest economic news is positive for a growing economy going into 2013, which will make it easier for Carney to raise the rates. However, recently Carney backtracked slightly and has hinted that rates are not likely to rise until later in 2013 and/or into 2014. He also said that he sees no "imminent" changes ahead, but that "over time, rates are more likely to go up than not."

The latest Housing Market Outlook reports that although slight increases are expected in 2013, rates will remain low by historical standards.

Inflation is another reason rates could rise. Canada's inflation rate is sitting at approximately 1.2% - the lowest level in more than two years. If this should start to rise past Carney's 2.5% benchmark then rates could rise.

The retail sector is a good indicator about consumer confidence and the state of the economy. New research from Ernst and Young predicts that 2012 holiday retail sales in Canada are expected to increase by 3.5% over last year.

It's clear that Canada's economy continues to expand and that we are operating on sound principals. According to Carney, Canada is no longer in the recovery stage but in the expansion phase. That is good news for all economic sectors. Will interest rates go up? They will, but likely not until late 2013 so as not to negate any of the positive effects of a growing and expanding economy.

TMG The Mortgage Group

Homebuilding to slow in Canada: CMHC

Reuters

TORONTO — The pace of homebuilding in Canada will continue to moderate in the last quarter of 2012 and into 2013, while existing home sales should hold steady and prices climb at or just below the inflation rate, Canada Mortgage and Housing Corp says.

The federal housing agency’s forecast on Monday for a weaker, but still healthy, housing sector echoed a string of data that has shown Canada’s recently red-hot real estate market cooling, but without signs of a crash landing.

Long convinced the country’s housing boom would never end in a crash, Canadians have watched this autumn as a sharp slowdown in real estate spreads across the country, leaving would-be home buyers hopeful and sellers scared.

“A weaker outlook for global economic conditions and the waning of the effect of pre-sales from late 2010 and early 2011, which contributed to support multi-family starts this year, will bring moderation in housing starts next year,” Mathieu Laberge, deputy chief economist at CMHC, said in the agency’s fourth-quarter outlook.

“Nevertheless, employment growth and net migration will help support housing starts activity going forward,” he added.

Canada’s housing market, which roared higher in 2011 and the first half of 2012 aided by low interest rates, started slowing after the government tightened rules on mortgage lending in July in a bid to cool things down and prevent home buyers from taking on too much debt.

Statistics Canada data released on Monday showed the value of building permits fell by an unexpectedly large 13.2% in September from August, dragged down by a major drop in the non-residential sector, but with housing permits holding steadier.

The overall fall in permits – the biggest since a 23.7% plunge in April 2011 – was far greater than the 3.0% decrease forecast by market operators. Statscan revised August’s advance to 9.5% from an initial 7.9%.

But the value of residential permits climbed by 0.4% after two monthly decreases. Single-family dwellings advanced by 3.4%, while multi-family dwellings dropped by 3.8%, suggesting some strength remains on the housing side.

“On the year, residential permits remain up 19%, highlighting the booming homebuilding sector that continues to thrive under a low-rate environment,” CIBC World Markets economist Emanuella Enenajor said in a research note.

Still, the tighter mortgage lending rules that took effect in July are expected to continue to help to rein in the market.

“Although the value of residential building permits increased slightly in September, the effect of tighter mortgage lending regulations announced by the government in July will likely put a damper on new residential construction over the near term,” Deutsche Bank economist John Clinkard said in a research note.

Permits in the non-residential sector plummeted 30.8% in September after increasing 27.7% in August. Industrial and institutional permits posted particularly steep drops.

In its quarterly outlook, the CMHC said housing starts will be in the range of 210,800 to 216,600 units in 2012, with the most likely outcome 213,700 starts. Homebuilding should slow further in 2013, with starts in the range of 177,300 to 209,900, and a most likely outcome 193,600, the agency said.

Economists at CIBC World Markets said last week they see a slowing in housing starts to 180,000 a year by 2014, down sharply from the 220,000 range today. In that scenario, the impact on growth in gross domestic product would be a drop of 1 to 1.5 percentage points, CIBC said.

The Bank of Canada has forecast economic growth of just 2.3% in 2013 and 2.4% in 2014.

The CMHC forecast existing home sales to slow to a range of 449,200 to 465,600 in 2012, with the most likely outcome of 457,400. In 2013, sales are expected to rise to 433,300 to 489,700, with the most likely outcome 461,500.

Price gains are expected to slow in 2012 but regain some strength in 2013. CMHC’s forecast for the most likely average price calls for a 0.2% gain to $365,100 in 2012and a 1.5% gain to $370,500 for 2013.

“A weaker outlook for global economic conditions and the waning of the effect of pre-sales from late 2010 and early 2011, which contributed to support multi-family starts this year, will bring moderation in housing starts next year,” Mathieu Laberge, Deputy Chief Economist for CMHC, said in the federal agency’s fourth-quarter outlook.

“Nevertheless, employment growth and net migration will help support housing starts activity going forward,” he said.

Monday, 5 November 2012

Who Can You Believe About the Real Estate Market?

Brennan Aguanno and Anna Kemp, The Huffington Post

I've always found the disparity of housing market articles fascinating. On any given week I will come across headlines varying from predictions about an imminent collapse to stories about how the market has never been better. Statistics can be manipulated in so many ways that realtors, journalists, economists, or whoever feels like it, can pretty much paint the market to look however it best suits them.

Recently, for instance, the Toronto Real Estate Board blamed the drop in September home sales on the fact that this September had fewer working days than most. I can't help but ask myself why the heck I've been working so many weekends, if those sales don't even count!

The Canadian Real Estate Association is, in fact, no better. A recent headline of theirs proclaims 'Home sales up 2.5 per cent from August to September.' Kind of gives you the impression that things are moving in a positive direction, doesn't it? The only problem is that September, the official kick-off month to the busy fall market, is usually up much more than 2.5 per cent compared to August, which is consistently amongst the slowest months in the Canadian real estate market, as that's when so many of us take our vacations.

In light of all of the nonsense out there, when it comes to real estate maybe it's best to stick to the acronym KISS, which most of us know stands for Keep It Simple, Stupid! In the spirit of KISS, I've included two very basic graphs below, but as you'll see, sometimes not even the simplest of graphs is as straightforward as it appears.

The first graph, for instance, is a popular one that I got off of the Toronto Real Estate Board's web site. It shows the average prices of Toronto homes from January 1995 to the present, and paints a picture that real estate prices, with a few minor exceptions, just keep going up and up. It seems that it couldn't possibly be any more clear or obvious, and for those reasons has contributed to countless first-time buyers coming to the decision that if they want to make money, then all they need to do is buy a property. After all, according to the graph, regardless of when you buy property prices will certainly rise in the coming years. Well yes, I suppose that's true, as long as you don't consider inflation or a more reasonable time-line.

The second graph, the one which I prefer, was produced by the Canadian Real Estate Association. Not only does it span all the way back to 1980, it includes an adjustment for inflation. After all, if your home's price doubles but your money is worth half as much as it used to be, has your home really gained any value? This graph also illustrates that home values do not, in fact, always go up. People who bought properties in late 1981 had to wait all the way until 1993 to be able to sell it for the same value they bought at and even then they only had a short window to do so until prices dropped again. Buyers making decisions based on this graph would certainly be less convinced that now is a great time to buy.

Maybe keeping it simple is not so simple after all.

Graph #1 - via the Toronto Real Estate Board

Graph #2 - via the Canadian Real Estate Association

Follow Brennan Aguanno and Anna Kemp on Twitter: www.twitter.com/aguannokemp_sir

Friday, 2 November 2012

Home prices cool across Canada in September

Canadian Press

TORONTO — A new survey says Canadian home prices weakened in September as a change in mortgage rules introduced in the summer appeared to keep some buyers out of the market.

The Teranet-National Bank National Composite House Price Index released Wednesday shows that home prices fell 0.4% in September from the previous month.

If sales continue to decline, a cumulative price drop of around five per cent is likely in a soft-landing scenario for the Canadian home resale market

The drop was spread across six of the 11 Canadian cities in the study, with Victoria facing the steepest decline of 1.3%.

Prices fell in Vancouver, down 1.2%, and Ottawa, down 0.8%.
Other Canadian cities showing weakness were Montreal (down 0.6%), Edmonton (down 0.7%) and Victoria (1.3%).

On the upside was Toronto, rising 0.1%, while both Calgary and Halifax rose 0.5%. Hamilton increased 0.3% in September from August.

On a national level, home prices are still 3.6% higher than they were a year earlier.

The report offered further evidence of the summertime slowdown of the domestic economy, as well as the impact of mortgage regulations that were introduced by Finance Minister Jim Flaherty in July.

Under the new rules, the maximum amortization period for government-insured mortgages would be reduced to 25 years from 30 years.

National Bank senior economist Marc Pinsonneault said in a report that the regulation changes “undoubtedly contributed to cool the market.”

But he also noted that third-quarter home sales for the cities in the survey fell eight per cent from the previous three month period, which could be a harbinger for lower house prices next year.

“Price declines have occurred outside recessions when sales dropped a few quarters in a row, even if market conditions were overall balanced. We could see a repeat of that,” Pinsonneault said.

“In our view, if sales continue to decline, a cumulative price drop of around five per cent is likely in a soft-landing scenario for the Canadian home resale market.”

The Canadian Press