Chart Below CMHC 3Q 2018: Housing Market Assessment
Chart Below CMHC 3Q 2018: Housing Market Assessment
Anil, a retired UBS rates options trader, quotes investment strategist Jeremy Grantham:
Bubbles have a blowoff phase lasting 21 months. Using a 5% threshold, the run from Feb 16 to Dec 17 was 22 months.
Hence the question "Have we seen the melt-up?" It certainly appears that way for Toronto Real Estate (as of February 2018 data) and the March data may add even more weight to the thesis.
Weak hands will offer up their assets first and in Canada we have a lot of household debt that eventually will face term renewals and the official stress test which is the greater of either the Bank of Canada’s five-year benchmark rate, now 5.14%, or the rate offered by a lender plus another 2%.
If you are thinking of 'buying the dip' make sure your income is amortized over the length of your mortgage. In a melt down, the erosion of net worth will shift a lender's risk management exercise to more closely examine the strength and security of your net income.
As we know employment income growth is facing profound challenges.
Global Risks 2018
"Canada's big housing markets in 'Goldilocks moment." CBC News, October 12, 2017
Mr Soper, president and CEO of Royal LePage also declared that Canadian housing is 'just right' if we are to use his metaphor:
Canadian housing is enjoying a Goldilocks moment — not too hot, and not too cold.
- Vancouver’s ‘renovictions’ driven in large part by vacate clause - via Business Vancouver August 2018
- New Westminster renovictions leave low-income renters feeling desperate - via CBC News June 2017
- Cook Street Victoria apartment tenants face ‘renovictions’ - via Times Colonist March 2017
- Tenants facing 'renoviction' went up against a powerful Vancouver developer and lost - via Metro September 2016
- Rent law changes coming, but not for ‘renovictions:’ Coleman - via Metro September 2016
- Renters of Vancouver: “It’s a new kind of renoviction” via Straight September 2016
Look for headlines soon to come out of Toronto documenting their experience of renovictions. Everyone has to pay more for housing now because of 9 years of ZIRP & NIRP
FROM Alberto Gallo, Bloomberg, August 2017
Economists are split on why inflation has lagged gains on growth and unemployment. The Fed has reassured low inflation is temporary, but many believe structural factors will keep inflation lower for longer than traditional models suggest. We are in that camp.
The scars left on the economy by the prolonged recession -- such as workers permanently dropping out of the workforce, new technologies that maximize sharing of existing resources, falling demographics, and a general weakening of labor bargaining -- are all responsible for keeping inflation subdued.
If inflation is likely to remain low due to structural factors, then QE may be less useful than previously thought. In fact, continuing QE can expose markets and the economy to two risks.
The first is that over time, persistent low interest rates may become self-defeating. Absent a fiscal policy stimulus, low interest rates may lose their impact or even become deflationary: aging populations save more to make up for lower returns, firms invest in new technologies employing fewer workers, and workers who were trained in sectors that were booming during the crisis remain permanently out of the workforce.
The second risk is that QE will generate dangerous side effects, including asset bubbles, rising wealth inequality, and a misallocation of resources in the economy. Negative or zero rate polices have pushed investors into search-for-yield strategies, distorting the risk premium in credit and volatility. QE has favored the haves over the have-nots, contributing to wealth inequality and to an asset-rich, wage-poor recovery.
Finally, NIRP/ZIRP can encourage resource misallocation by keeping alive zombie companies.
Capitalism Doesn't Work at 0%
"It would pay to travel to Mars because the returns here on Earth are very very low."
Bill Gross, June 2016
More than 70% of non-cash, first-time home buyers — and 54% of all buyers — made down payments of less than 20% over at least the past five years, according to the National Association of Realtors.
According to Better Dwelling, February 2017, "1 In 5 Canadian Homeowners Commits Mortgage Fraud, Says Top Broker" and the three most frequent frauds are falsifying owner occupancy, hiring a shady mortgage broker to forge documents, and personal financial engineering (eg: hiding debt).
So 20% of Canadian mortgage applicants are willing to overstate their equity and or cash flow positions on a bet that a market that has been a fabulous thrill since the crash of 2008-09 will continue unimpeded.
Risk managers and margin clerks are no longer buying the story. When market prices drop, everyone's attention shifts to shrinking equity and rising loan to value levels.
The Toronto Housing market has already telegraphed the end of the 10 year trend of single family detached prices gaining 20% per year. Prices are now down over 17% in the last four months from the March 2017 peak. The 2007-08 correction was only a 13% drop in 13 months (Plunge-O-Meter).
And Vancouver buyers are still in lala land.
Hilliard Macbeth digs into the Toronto numbers beginning at 8.05 minutes below:
50 Shades of Real Estate
Facing staggering debt loads, hundreds of Alberta post-secondary students are logging on to seekingarrangement.com connecting them to "sugar daddies" who can provide them a monthly allowance and gifts in exchange for negotiated relationships. Calgary Sun January 14, 2017
The red notations show the latest Demographia unaffordability rank of each University location. It's not surprising to see Toronto, the biggest metro in Canada as a destination for pussy grabbers. If we had the data, I would imagine Vancouver, the most unaffordable city in Canada and the 3rd most unaffordable out of 404 global cities, would also incent young men and women into prostitution. In 2011, the Vancouver city council estimated there were +/- 10,000 sex workers in the city. (Vancouver Sun, Sept 30, 2016). Note that Victoria BC is listed on the chart above; you know, that nice little tourist town and retirement village that promotes itself as "a little bit of Britain". The study chart claims 361 Victorians use SeekingArrangement.com which amounts to 0.5% of Victoria's 2006 census. Tea, crumpet, hair pie anyone?
"Students from 20 British universities are joining dating Web sites matching young women with older men, in an attempt to raise money to pay off student loans and other debts." IBTimes.co.uk 2012.
Meanwhile new generations of young inheritors of our social contract enter the culture as a rank commodity to be exploited by daddy.
Canada could use an overhaul of its collective aspirations.
Vancouver Named Sugar Daddy Capital of Canada 2013
Here’s a look at the top 10 Sugar Daddy destinations:
- Paris, France
- Puerto Vallarta, Mexico
- Palm Springs, California
- San Juan, Puerto Rico
- Chicago, Illinois
- Seattle, Washington
- Punta Cana, Dominican Republic
- *Vancouver, Canada
- Las Vegas, Nevada
- Barcelona, Spain
*Vancouver Sugar Daddies spent $4,307 monthly on their younger counterparts on average, more than anywhere else in the country.
Vancouver Sugar Daddies are 40 years old and make $292,506 annually, on average. CTV NEWS 2014
- In the U.S. for the past 55+ years the average NRoI has been +/- 2.5% and in the Eurozone has been +/- 1.7% (MonetaryRealism.com). In Canada, the "real" Bank of Canada bank rate (rate less CPI) was approaching 5% in 2007 before the 2008 crash and as well after the dot.com bust in 2001. It's flirting with zero now.
At street level in Canada earnings have been topping with the commodity crash but in many cases, earnings reliability are not even necessary to use in the calculus of risk analysis when granting a mortgage or consumer loan. We should be ashamed of ourselves, but instead we blame others.
As CIBC economist Benjamin Tal said, he is concerned that subprime lending is “driving the bus.”
Subprime borrowers’ debt loads will continue to grow as long as interest rates are low. Benjamin Tal
- Average debt levels up nearly 3% in the first quarter of 2016.
- Non-mortgage debt rose to $21,348 in 1Q 2016, up 2.7% Y/Y.
- Subprime average credit card balance grew by 5.7% Y/Y to $6,601.
- High interest installment loans grew 4.8% Y/Y to an average $23,591.
- Serious delinquency rates (90+ days late) increased 3% in 1Q 2016.
At the national level it's worse; net Federal Direct Investment widened dramatically in 2015 Y/Y meaning that Canadian investment capital would rather look for yield offshore than on. We can't even invest in ourselves (Net FDI has been negative for the last nearly 20 years); we continue to increase our borrowing so that we can consume to 'maintain' our lifestyle.
Even people without money via savings and low employment earnings are buying property - how would they know the value of money? Well they will find out along with their extended families the difference between equity and debt in an aging speculative triumph.
BMO Millennial Home Buyer Survey (March 2016)
According to the survey, millennials expect they will have to spend $350,000, on average, to buy their first home. These amounts range from about $235,000 in Quebec to more than $478,000 in British Columbia... To make such a purchase, respondents indicated that they expected to raise about 15 per cent of the purchase price for their down payment - or, roughly, an average of $53,000. Most (65%) indicated that they would rely, to some extent, on parents or other family members for financial assistance for as much as 10% of the purchase price, although most don't know.
A probability sample of this size would yield results accurate to ± 2.2 percent, 19 times out of 20.
Ipsos Reid - BDO Poll (May 2016)
55% of Canadian would have trouble paying bills if interest rates rise.
46% say rising cost of living is limiting the money they put toward paying off debts.
37% say the rising cost of living hasn’t impacted their debt payments at all, suggesting its having some impact on most people.
58% think the value of their home will increase.
The poll is accurate to within +/ - 3.5 percentage points, 19 times out of 20, had all Canadian adults been polled.
Condo Construction Subject To Red Alert From Royal Bank
HuffingtonPost.ca (May 30, 2016)
RBC isn't the only organization that has presented concerning statistics regarding the housing market recently.
Sales activity in Toronto and Vancouver may have "topped out," Canadian Real Estate Association (CREA) president Cliff Iverson said earlier this month.
Sales didn't grow in Toronto at all in April after dropping 1.8 per cent in March.
They were also down one per cent in Vancouver, after a drop of 0.3 per cent the previous month.
Gregor Robertson Mayor of Vancouver, May 30, 2016
Yes, housing prices are high in Vancouver, and global capital plays a part in that. If prices keep increasing, many of the things we love about Vancouver are at risk, and many will not be able to put down roots in a city bound together by a rich, multicultural history that has a lot to offer geographically and culturally.
Magic Bus - The Who 1968
I don't care how much I pay
I wanna drive my bus
to my baby each day
I want it
I want it
I want it
I want it
Source: ArmstrongEconomics.com February 10, 2016
Dear Marty, When talking about negative interest rates and a shift of cash from banks to the stock market from 2017, would that not mean that cash may also shift to property and other assets? Yet I thought that we have seen the high in the property market already? Thanks for your useful insights as ever. SP
Real estate has peaked in REAL TERMS. The sub-prime market that made the high in 2007 was not exceeded. The secondary rally into 2015 was the high-end, so we now have the IRS targeting NYC and Miami in their hunt for money.
The high-end will now decline. The average home will make the transition, but will not be making new highs. In real terms, the high is in. Real estate varies tremendously based upon location. This is due to capital inflows that drive certain markets like Vancouver and Toronto in Canada or New York and Miami in the States. Washington, D.C., held up in 2007-2009 because politicians did not want to lose their jobs. Taxes will also prevent real estate from reaching new highs in “real terms.”
In nominal terms, some areas will make the transition to new currencies; the movable assets will appreciate the most. Those are the assets that you do not have to make annual payments on to hold them annually.
We also have a collapse in long-term interest rates to the point that banks do not want to write 30-year mortgages anymore. As that long-term view collapses, so does the leverage. That will cause housing to decline in “real terms.”
Vancouver is the Poster Child
for a Real Estate Bubble
Interview with Hilliard MacBeth - February 9, 2016
The Foundation of Wealth
is the ownership of income generating enterprises.
The wealthiest households' primary wealth is businesses and shares in businesses. The bottom 90% depend on the family residence as a store of wealth, and on debt as a means of funding asset purchases and consumption.
But now that housing has been financialized and globalized, it is prone to boom and bust cycles like every other risk-on financialized asset.
The key take-away: focus on owning income-producing assets, not a primary residence. The second key take-away: Don't finance your assets with debt; finance your income-producing assets with savings and sweat equity, not borrowed money.
This is why real estate should be looked at through the lens of fundamental appraisal, not simply price comparison.
Vancouver BC continues to rank as the least affordable city out of the 35 largest Canadian cities with a multiple of 10.6 times median household income required to buy a median priced house.
Compared to Vancouver, Toronto's big housing un-affordability spike looks rational if one considers population size (2.5x), and volume of residential sales and absorption rate (both over 2x) and Federal Government funding transfers that are 3.3x more to Ontario than to BC.
The dynamics of size and government compacts with the voter have helped to accelerate, Toronto's housing un-affordability over the last 4 years while Vancouver's un-affordability appears to have triggered a limit to negative cash flow prostration.
MORE DEMOGRAPHIA CHARTS & DATA
99% & 33% in Vancouver & BC
66% & 65% in Calgary & AB
79% & 30% in Toronto & ON
I have added the chart above to the Earnings Employment page.
If you want to live and work in Vancouver now, you have to pay a very high premium for housing; and if you are in the lower percentiles of earners and have to commute to Vancouver for an ordinary service related job, you will have the added commute and time expense from the more "affordable" suburbs.
In BC, the contradiction between years of economic growth and rising insecurity is especially stark. Even at the height of the economic boom of the mid-2000s, median earnings for BC workers were lower than for their parents’ generation in the late 1970s, once inflation is taken into account. BC saw the largest decline in median earnings for full-time, full-year workers of the four Canadian provinces where earnings fell since the late 1970s. And that happened during a time when the provincial economy almost doubled in real terms and real GDP per capita rose by more than 25 per cent.
BC now has the second-highest child poverty rate in Canada and that’s after eight years in a row of having the highest child poverty rate. The story of child poverty is very much a story of low wages. In 2010 (the last year for which we have data), almost half of poor children (43%) lived in families where at least one adult had a full-time, full-year job and a majority lived in families with some paid work (part-year or part-time).
Source: Working for a Living Wage 2013 by PolicyAlternatives.ca
Ontario will probably continue to benefit from Federal Government spending as politicians and other actors hold court for corporate Canada; but for labour, family income has fallen way behind housing costs in a decade of extreme speculation while CPI is still the same as it was in 2004. The next decade has even more wage destruction in store (see PBS video "Humans Need Not Apply" below).
In Calgary and Alberta it's Texas tea that drives incomes and the speculative willingness to bid housing prices up well beyond fundamentals. For the moment, housing costs are backed up by a commensurate rise in family incomes (66% & 65%) over the last decade. But that narrow spread will widen as energy alternatives continue to advance throughout the world and the internet produces more labour saving cost effectiveness.
The challenge will not be housing costs; it will be income distribution. Make sure your income source has a future.
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
Balance Of Trade
Rent Or Buy