Entries from June 2008 ↓

Meltdown? What meltdown?

On Friday, as noted below, BMO economist Doug Porter stated the obvious, that Canada is on a slow but inevitable track to repeat the US real estate experience. This, as you know, is the premise of my book released a few months ago, and even when I wrote it last winter, it was obvous the correction was coming.

The chart above, for example, shows the severe imbalance last month of listings and sales in Calgary, which not long ago was a market on fire. Now, obviously, sellers are bailing out as buyers await the inevitable – falling prices. I expect all major Canadian markets will correct by an average of 10-15%, and some areas will be clobbered with 30% declines by the end of 2008, or the early Spring of 2009.

Does everyone agree? Of course not. Just as there are climate change deniers, so are there housing deniers. The article below, from theMontreal Gazette, gives arguments why this is a great time to buy. Especially if you are a greater fool. — Garth

Is Canada about to follow the U.S. into a meltdown in the price of homes? Until this week, you couldn’t find a credible economist in the country who would have said yes, but yesterday one of the highest-profile figures in the profession, deputy chief economist Douglas Porter at BMO Capital Markets, evoked that possibility in a note to clients.

Nevertheless, this is a comment that shouldn’t be taken too seriously. As other analysts point out (Porter himself wasn’t available for comment yesterday afternoon), Canada’s housing market really doesn’t bear much resemblance to that of the U.S.

Porter made the suggestion in a chart and brief accompanying commentary that highlighted how the steep drop in the pace of Canadian housing price gains this year reflects almost exactly the falling-off-a-cliff plunge in U.S. price gains two years ago.

In the U.S., these slowing price gains were just the first step in what would become a massive decline in national average prices, one so severe that it’s probably the single biggest negative force in the faltering U.S. economy.

It’s this context that gave Porter’s note such impact, especially since it drew an explicit parallel with the U.S. market. But it also acknowledged Canada’s slowdown is a long way from matching the severity of what has since developed in the U.S.

For example, one widely followed U.S. measure, the Case-Shiller index of average prices in 20 large cities, is now down 15 per cent from a year ago. Some cities, like Miami and Las Vegas, are down as much as 27 per cent.

It’s true that a few Canadian cities are showing much smaller price declines – Edmonton down by 4.9 per cent in the past year, Calgary down 2.4 per cent and Windsor down 5.5 per cent – but only in Windsor does this reflect economic distress. In Alberta, the price reversals look more like a hiccup after huge runups.

So is Porter really suggesting that Canada’s housing market is about to follow that of the U.S. down the drain? Apparently not, despite the provocative words. “No, we don’t think we’re headed for a U.S-style bust, said a colleague at BMO Capital Markets, senior economist Sal Guatieri.

The most likely outcome, said Guatieri, is that average prices will creep ahead slowly for at least a year or two – by maybe 3 or 4 per cent, in order to let buyers’ incomes start catching up with years of double-digit price gains. And if the economy slows further, he sees the possibility that national prices could even drop by a few per cent.

Guatieri’s forecast isn’t very different from a recent one perpared by the Toronto-Dominion bank, which also sees a couple of years’ very slow national price gains: an average of 2 per cent this year and 3.5 per cent in 2009. Its forecast regional changes this year range from a gain of 36 per cent in Saskatchewan to a drop of 1.5 per cent in Alberta. Ontario and Quebec are near the national average, with gains of about 3 per cent.

Even if you use Guatieri’s most pessimistic forecast of small price drops for a year or two, its important to understand how Canada’s market is in no way similar to that of the U.S. That’s because price gains slowed for very different reasons.

In the U.S, prices collapsed largely because they had been puffed up by speculation and irresponsible mortgage lending to buyers who could never hope to keep up their payments. There was little if any such lending in Canada, where banks are much more conservative, and only minor signs of speculative buying.

Because so many buyers in the U.S. couldn’t really afford their homes or had overextended themselves to buy for speculative gains, the first hint of prices plateauing caused a rush to the exits.

This fed on itself as houses quickly became worth less than no-down-payment buyers had borrowed. That in turn triggered a wave of foreclosures and forced sales that still continues, driving prices ever lower.

In Canada, said Craig Alexander, deputy chief economist at the Toronto-Dominion Bank, lending standards didn’t ease much, meaning that few buyers got into trouble.

Here, the trigger for a dramatic slowing in price gains – from an annual increase of more than 11 per cent last November to just 1.8 per cent in May – was that homeowners simply decided to cash in, which meant more sellers competing for each buyer.

The number of listings of homes for sale had surged by 16 per cent in May from a year earlier, said Gregory Klump, chief economist at the Canadian Real Estate Association.

Alexander believes that the surge of sellers just reflects the fact that as homeowners saw prices reach higher levels than they’d ever expected, any who had been thinking of selling – perhaps because of impending retirement – decided to grab the money right away. And of course, as price gains weakened, more sellers had the same motivation.

But there are very few distress sales in Canada and voluntary sellers usually refuse to sell at much of a loss. And since banks aren’t auctioning off large numbers of foreclosed homes, there’s no reason to believe that any meltdown is coming.

jbryan@ thegazette.canwest.com

No turning back

The boom has busted in Victoria: here

Finally, a Canadian economist with the gonads to state the obvious: Our housing market will follow the pattern of the American one, which means big price decreases are in the offing. Doug Porter, of BMO Nesbitt Burns, is now echoing what was spelled out in my book, Greater Fool, several months ago. It is inevitable this will happen – sales declines first, price declines second – despite a housing industry trying to squeeze every last drop out of boom times. That it took this long for the reality of this correction to be noted, is the biggest news. With this MSM validation the decline, of course, will accelerate. — Garth

Housing drop looming in Canada

After months of holding fast to the view that Canada will not follow the U.S. into a housing decline, one economist is now raising the spectre of an overall drop in prices north of the border.

Canadian home sales are down by 13 per cent year-over-year so far in 2008, and price appreciation has slowed markedly to a 1.8 per cent year-to-date gain. When charted out, these data suggest Canada is tracking the U.S. housing market fairly closely, at a two-year lag, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc.

“It’s a bit unnerving to see how Canadian performance is beginning to look like that of the U.S. two years down the line,” Mr. Porter said. In the past 10 years, the price of a detached, two-storey home in Canada has risen by an average of 129 per cent, according to a recent study by Royal LePage Real Estate Service. However, this year sales are down, listings are up, and while prices have mostly stayed in positive territory, a few markets have showed signs of cracking.

Last month, three cities posted slight year-over-year declines in house prices – Calgary, Edmonton and Windsor-Essex. In the West, the declines look like modest corrections to markets that got ahead of themselves, Mr. Porter said. More concerning is weakness in cities where economic fundamentals are much less stable, such as Windsor and Thunder Bay, he added.

“The most interesting question is, what will happen to the middle ground? Will cities like Toronto, Montreal and Ottawa, which have fairly robust markets but have not been blessed by a booming underlying economy, end up seeing home price declines, too?”

Economic fundamentals including strong job growth and low interest rates suggest that Canada is still in pretty good shape, and that declines in this “mass of cities” is an outside chance rather than a probability, he said. So far, Canada is not even close to experiencing the 8 per cent price drop and 20 per cent decline in existing home sales that has taken place in the U.S. this year, but that doesn’t mean there is no cause for concern, he added.

“There are a litany of reasons why the Canadian market is different,” Mr. Porter said. “But even a very pale version of what we saw in the U.S. would not be good news.”