Canada Housing in 3-Month Holding Pattern

Bank of Canada governor Stephen Poloz still believes the housing market is due for a soft landing but warns: Look out if it crashes. The central banker made the assessment after release of the latest semiannual financial system review, a kind of stress test on financial weak spots that suggests a crash in Canada’s real estate market would have devastating impact on the economy.

And such a crash could be triggered by a number of events—a recession that causes widespread unemployment, rising interest rates, and even global shocks like failures in China’s opaque shadow banking system. All such events would dampen growth and cut demand and prices for Canadian resource exports. Still, Poloz told reporters at a news conference following release of the report on June 12 that he believes the worst won’t happen. “We still are pretty confident … that we will achieve a soft landing in housing,” he said. “It’s vulnerable but not risky.”

Senior deputy governor Carolyn Wilkins says data backing the soft landing scenario includes a slowdown in housing starts, cooling in the construction of condos, and the plateauing of household debt ratios, although at levels near those that existed prior to the U.S. meltdown in 2008. A crash would have system-wide implications, the report makes clear, affecting highly indebted households, the economy generally, and some financial institutions, such as credit unions, which may be more vulnerable to defaults. In particular, the central bank worries that house prices continue to rise faster than incomes and that certain hot spots like Toronto’s condominium market are over-built. That trend was confirmed by the latest Teranet-National Bank composite house index, which showed overall prices increasing 0.8 percent in May over April.

On June 11, the Paris-based Organisation for Economic Co-operation and Development (OECD) also warned about Canada’s housing market and suggested that Ottawa limit its vulnerability to defaults by reducing the guarantee on mortgage loans. The federal government, through the Canada Mortgage and Housing Corp. (CMHC), insures 100 percent of high-risk mortgages issued by banks, whereas the OECD says most other industrialized countries guarantee only 10 to 30 percent. Poloz would not directly comment on the OECD recommendation, but noted that the government had already announced its “intention over time to reduce its overall exposure to housing sector risk.”

Recently, several large Canadian banks have lowered their five-year fixed rates below 3 percent, although Finance Minister Joe Oliver says he does not see that as a major problem.

In the financial review, the bank said the risk of a Chinese “hard landing” had increased somewhat in the past six months, while conditions in the eurozone had improved. Although regarded as unlikely, a sharp increase in U.S. long-term interest rates, which affect Canadian rates, would also cause problems in the housing sector, it said. “High household debt-to-asset ratios and debt-service ratios would increase the likelihood of bankruptcy if their debt burdens become unsustainable following an increase in interest rates or if their homeowner equity was eliminated by a decline in house prices,” the report said.

Overall, the Bank of Canada sees the risks to the financial system as basically unchanged from December, the last time it reported on the issue, with three out of the four key vulnerabilities coming from outside the country. With this report the central bank is also changing the way it reports on financial system risk by stressing each vulnerability separately without giving an overall rating. But Poloz said in an accompanying statement that the bank’s “level of comfort as policy-makers remains roughly what it was six months ago.” 

ROYAL BANK CUTS MORTGAGE RATES

RBC is now cutting its two-, three-, four– and five-year fixed mortgage rates each by 10 basis points. In an emailed statement, the bank said that some mortgage lenders have recently been pricing at lower rates, prompting it to move.

Royal Bank is often a price leader when it comes to mortgages, and other big banks frequently follow suit after it changes its prices. Its five-year fixed mortgage rate is now 3.69 per cent.

Mortgage prices tend to follow changes in five-year government bond yields because of the impact that those yields have on banks’ funding costs. The yield on five-year government of Canada bonds has fallen from 1.95 per cent on December 31st to 1.71 per cent on January 16th, according to Bank of Canada data, although it fluctuated during that time.

Canadian bond yields tend to follow U.S. bond yields. Yields began rising last May after U.S. employment numbers came in much better than expected, raising hopes for the U.S. economy. Then they shot up further after U.S. Federal Reserve chairman Ben Bernanke suggested the central bank could start tapering its asset-buying program, a signal that he thought the economy’s health was improving.

While the U.S. central bank has begun tapering, December jobs numbers and some other recent data have been disappointing, and caused bond yields to fall.

Most economists still expect that both yields and mortgage rates will tick up gradually through 2014, as the U.S. economy improves and the central bank continues to back off of its asset-buying program, known as quantitative easing.

But as Ms. Richard points out, it is possible that the U.S. economy will prove to be weaker than expected, and that could result in further decreases in bond yields and mortgage rates.

Royal Bank of Canada, which normally issues a press release when it changes its mortgage rates, made this move quietly, simply posting the new rates on its site. 

Bank of Montreal dropped its five-year rate to 2.99 per cent early last year, spurring a price battle that angered Finance Minister Jim Flaherty. Mr. Flaherty has taken numerous steps, such as tightening the mortgage insurance rules, to prevent consumers from taking on too much mortgage debt. Policy-makers have been trying to warn consumers that, at some point, rates will rise.

TORONTO REAL ESTATE MARKET In 2014

   Toronto's housing market will remain stable next year, according to Ed Heese, Canada Mortgage and Housing Corporation's (CMHC) Senior Market Analyst for Toronto. CMHC presented its latest forecast for the Toronto Census Metropolitan Area (CMA) at the annual CMHC Housing Outlook Conference.

      At this year's conference, entitled 'Profiling Toronto's Echo Boomer', CMHC market analysts explained how the Echo Boomer demographic will influence homebuying trends in Toronto and provided an in-depth housing market forecast for 2014.

      "Housing markets in Toronto next year will look quite similar to what we're seeing this year. Existing home sales will be up modestly while housing starts will ease," said Ed Heese. "Rental vacancies will remain relatively low, but the rate of increase in rents will slow.

Highlights from today's conference include:

• Total housing starts will ease in 2014 with activity shifting to semi-detached and row homes from single-detached homes and apartments.
• Gradually rising mortgage rates will keep existing home sales growth modest.
• Rising home values will keep more people in rental housing, but additional condo rentals will keep rental supply in balance with demand.
• After lagging in 2013, income growth will match broadly based employment growth.

       "Housing activity in Ontario will slow in 2013 then stabilize by 2014, thanks in large part to an improving Ontario economy, lower inventories of unsold homes and less out-migration to other provinces. Tight resale market conditions for single detached homes, active repeat buyers and improving income growth will allow demand for lower density homes to hold up better for most of 2014," said Ted Tsiakopoulos, CMHC`s Ontario Regional Economist.

CMHC changed forecasts for housing starts in Canada for 2013, 2014

Canada Mortgage and Housing Corp. has tweaked its 2013 and 2014 forecasts for housing starts.

CMHC now expects slightly more housing starts this year and slightly fewer in 2014 than in the previous outlook issued in August.

That will result in a period of relative stability, although both years will be slower than 2012, when there were 214,827 housing units started.

The new forecast is for between 179,300 and 190,600 units this year, with a mid-point of 185,000 units.

That's up from the previous 2013 forecast of 182,800 starts - an increase of 2,200 that is almost offset by a lower forecast for 2014.

CMHC's new 2014 range is 163,700 and 205,700 units, or 184,700 at the mid-point, down 1,900 from 186,600 units in the August forecast.

Price growth next year is expected to be in line with inflation, with the average price of houses sold over the Multiple Listing Service in 2014 coming in at $385,200, compared to $378,000 this year, the Crown corporation says in its latest housing market outlook.

CMHC expects that the number of homes sold over the MLS this year will come in around 456,700, which is about the same as 2012, when 454,005 homes changed hands. It forecasts a rise in sales to 468,200 units next year, with sales rising in the first half of 2014 then moderating during the latter part of the year.

Sales have defied expectations this year. At the start of the summer nearly all economists were predicting a decline in sales for 2013, but the market has since rebounded.

Likewise, housing starts, while generally slowing, have been higher than anticipated. CMHC said Thursday it is anticipating starts to be stable next year, around 184,700 units, compared to 185,000 this year and 214,827 in 2012.

While factors such as employment growth and migration are continuing to support the housing market, "in the new home market, builders are nevertheless expected to limit the number of housing starts while inventories of unabsorbed units, completed and under construction, are drawn down," Mathieu Laberge, deputy chief economist of CMHC, said in a press release. "In the resale market, home buyers have been motivated to advance their purchases and lock-in pre-qualified mortgages given the recent moderate increase in mortgage rates. It is expected that existing home sales will increase modestly in 2014 with improving economic conditions."

It has been difficult to make accurate predictions about the Canadian housing market in recent years. The government has been taking steps to cool it off, and economists have been surprised by its resiliency.

In June CMHC was forecasting a 1.6 percent increase in average prices this year and roughly 443,400 sales.

Its current forecast for starts is also slightly higher than in June, when it expected about 182,900 units to get under way this year. bnn.ca

HOUSING STARTS DECLINE IN AUGUST BUT SALES ARE UP

Housing starts in Canada were trending at 180,291 units in August compared to 193,021 in July, according to the Canada Mortgage and Housing Corporation. 

"The trend in total housing starts continued to be relatively stable for a sixth consecutive month, remaining within a narrow range of roughly 182,000 to 188,000 units since March, 2013," Mathieu Laberge, deputy chief economist, said in a CMHC statement.

The standalone monthly seasonally adjusted annual rate (SAAR) for urban starts decreased by 5.8% in August to 163,102 units, mostly because of declines in multiple starts. They were down 8.4% to 104,704 units in August. The single urban starts registered only a slight decline of 0.9% to 58,398 units.

The seasonally adjusted annual rate of urban starts increased in Ontario, the province with more than a third of the population, and held steady in Atlantic Canada. They decreased in the other regions - the Prairie Provinces, British Columbia and Quebec.

On Monday this week, Statistics Canada reported an increase of 4.1% to C$2.2 billion for single-family dwellings in building permits issued in July by municipalities, and a 4.2% increase to C$1.9 billion for multi-family dwellings, over those issued in June. These increases occurred in six of the 10 provinces. They did not offset the 12.8% plunge recorded in June, Statistics Canada said.

Also in recent days, regional real estate boards reported increases in sales of existing homes, propelled by fears of higher mortgage interest rates coming, according to analysts and real estate agents. They ranged from 52% higher in Greater Vancouver, year-over-year, and 21% in Toronto and ranged from +30% to roughly +10% in other major urban centers.

NEW MORTGAGE RATES. August 2013

TERM	POSTED	OUR RATES *
6 Month	4.00%	3.95%
1 Year	3.09%	2.79%
2 Year	3.14%	2.69%
3 Year	3.65%	2.99%
4 Year	4.54%	3.09%
5 Year	5.14%	3.39%
7 Year	6.35%	3.84%
10 Year	6.75%	4.19%
Variable Rate		2.60%
Prime Rate		3.00%
BenchMark Rate		5.14%
Cost Per $1000		$4.93
* Rates may vary provincially and may be subject to change without notice.   Cost per $1000 based on 5yr fixed term rate compounded semi-annually. Call Alexandre Malkhassiants for details: (416) 723-9383

CANADIAN HOME PRICES IN JULY 2013

The Globe and Mail report says, that home prices in Canada increased in July, reaching a record high, but the slower monthly growth in prices hints at the possibility of the housing market, presently at a strong point, may once again be cooling. This was revealed  through analytics on the Teranet-National Bank Composite House Price Index. The metric is a measurement of price changes for repeat sales of single-family residences, and for July, prices increased 0.7 percent from the month of June. This represented the fifth monthly increase in a row and a higher increase than in June from May, but was modest in comparison to the gains made in previous months. Year-over-year, the index is up by just 1.9 percent from July 2012 numbers. The statistics above are congruent with previously released analytics that suggest Canada’s housing market has indeed recovered after the launch of more stringent mortgage policies in July of last year.  A few economists are still forecasting a burst of the housing bubble akin to that in the U.S., but a rally in sales in the spring months point to what can be called a “soft landing” in analyst parlance. Canada Mortgage and Housing Corp. said in July that, because of the weakness during the first half of this year, it forecasts about 448,900 sales of existing homes during 2013, down from 453,372 last year. But it expects sales to rise to about 467,600 units next year, with prices growing at roughly the same rate as inflation. Royal Bank of Canada economist Robert Hogue said the next major test the market now faces will be in late 2014, when interest rates will likely rise at the same time as a large number of newly built condos come on stream. While the market appears to be on a modest upward trajectory for the moment, there are some factors that could weigh on it this year. Mortgage rates are likely to trend up. The job market could continue to be worse than expected. And CMHC says that “lower population growth among the 25-to-34-year age group … will moderate growth in the pool of first-time home buyers.” “Higher mortgage rates of late have led to some erosion in affordability,” Toronto-Dominion Bank economist Sonya Gulati wrote in a research note. “This should keep a lid on sales growth in the second half of the year, but positive annual sales gains are slated for 2014.”There also remains the possibility that if the market shows too much of a resurgence, the government will act to rein it in again. “Sales dropped sharply in August last year, so we may see some year-over-year increases in sales and average prices next month that would reflect weakness in the rear view mirror,” said Gregory Klump, chief economist of the Canadian Real Estate Association. “Canadian home sales have staged a bit of a recovery in recent months after having declined in the wake of tightened mortgage rules and lending guidelines last year, but the numbers for July suggest that national activity is levelling off at what might best be described as average levels.” Home sales in the first seven months of this year are 4.6 per cent below the first seven months of 2012. The average selling price of existing homes in July was $382,373, up 8.4 per cent from a year earlier. CREA said much of that is because of the resurgence in Vancouver and Toronto, which tend to be pricier markets. The MLS Home Price Index, which attempts to adjust for any change in the type or location of homes that are selling, was up 2.7 per cent. That’s a slightly faster pace than the 2.3-per-cent annual increase in June. “A tightening [though not yet tight] market balance has put a floor under average prices, with 23 of 26 cities posting gains in the past year,” Bank of Montreal economist Robert Kavcic wrote in a research note. Calgary, Winnipeg and Edmonton were among other markets that saw significant year-over-year sales increases last month, while Ottawa, Halifax and Montreal posted declines.