JANUARY 01, 2013
Part two of this series can be read here.
First off, Happy Holidays and all the best for the New Year!
On the housing and macro economic front, 2013 is shaping up to be…..interesting, to say the least. While I no longer enjoy the free time to blog on a regular basis, I will endeavor to keep readers ahead of the big trends by posting as often as my schedule permits. I do appreciate the loyal readership.
Because posts are infrequent, and will remain so for the foreseeable future, interested readers may want to sign up for email notifications of new posts, or follow me on twitter for some daily commentary….@BenRabidoux
I’ve received a number of inquiries about what 2013 will hold. I'd like to highlight 10 housing and macro economic trends I’ll be watching closely in the New Year.
Of note: Readers in the Toronto area who are interested in housing and investment-related topics may want to join me for a free seminar in February. Details here.
1) Will Vancouver sales stay this weak? Will inventory surge in the Spring?
It’s now widely recognized that Vancouver is in correction mode, which I wrote about in early August as the leading indicators began to deteriorate. Every house price metric is now in negative territory on a year-over-year (y/y) basis. With the current supply/demand imbalance, there is little chance of a reversal of this trend in the near-term.
Final sales for December will come in over 30% below last year’s total, which itself was the second weakest December in over a decade. There’s no way around it: This was a terrible month for sales. I've added the projected month-end sales totals to the chart below:
A key metric to watch going into the Spring is total inventory. New listings slowed to an absolute trickle in December, and total inventory should fall dramatically after January 1. Even at that, we’ll be starting 2013 with an unusually high number of total listings. Any hope of a soft landing in Vancouver will require a tepid spring for new listings and at least a modest rebound in sales on a y/y basis. But if sales remain this weak relative to historic norms while inventory rises substantially, expect price declines to accelerate.
On that note, buyers hoping for a repeat of 2009 where sales went from record lows to record highs in 6 months might want to consider that an unprecedented drop in interest rates plus massive mortgage liquidity measures by the government are simply not in the cards this time around. Slowing population growth also doesn’t help (a topic I'll discuss in the next post).
2) Toronto condos: How many completions on deck?
It’s no shock to readers of this site that the condo market in Toronto is very weak at the moment. This is particularly true of the downtown condo market, where sales are off 33% y/y while inventory is up 35% y/y. I've warned of the many risks to this market, most recently in this article.
What’s interesting to me is that this is the area where rental demand is very strong, leading to some widely-reported bidding wars on rental units earlier this year.
This will be a key trend to watch. A strong rental market is unquestionably supportive of real estate values, but below are some points to ponder:
i) Despite the strong rental demand in very key areas, total annual growth in rents in the GTA is less than 4%. Still, this is above the growth in condo values in the region, so the price/rent ratio is slowly compressing, which is necessary.
ii) The key metric to watch in 2013 is the total completions in the downtown core. Speaking to a well-known condo research firm, there are an expected 15,000-18,000 completions scheduled for next year in the downtown core alone. Nearly 30% of the condos have historically become part of the rental pool, but that trend has risen lately. One condo research firm has estimated that as many as 50% of the condos currently under construction in the GTA will enter the rental pool.
If this holds true, we could be dealing with as many as 9,000 new rental units added to the downtown market in 2013. IF this many condos complete in the downtown core, and IF we are still talking about a tight rental market next year at this time, my outlook on this market segment will moderate significantly. Until then, I remain very bearish.
3) Ottawa and Montreal: Will media headlines turn against these markets as they have in Vancouver and Toronto?
It’s shocking to me that Montreal’s unbelievably ugly resale market has not attracted more national media attention. Outside of Montreal, where a few reporters have written about current market trends, the rest of the country seems oblivious to growing imbalances in Canada's second largest metros. The charts below need no commentary:
Likewise, Ottawa has seen a growing imbalance in supply and demand, primarily caused by surging supply. New listings have been VERY high all year. Perhaps the media has overlooked this growing imbalance because Ottawa’s real estate board shamelessly refuses to disclose inventory numbers, a practice that keeps the media and consumers largely in the dark. Nevertheless, the new listings and sales/new listing ratio speak to this growing imbalance.
I said in an earlier post that the media will likely clue in to these markets in Q1 2013, barring a strong reversal in current trends. I still think this is likely.
4) Will Calgary continue to buck the national trend?
I track Calgary data quite closely, but I know the sales and inventory trends are similar in other Alberta markets.
Bottom line: Low inventory, low units under construction, strong sales, strong population growth all means that Calgary is lacking any sort of meaningful trigger for price weakness in the near term.
That’s not to say that Calgary is poised to return to its “glory years” in 06-07 where prices were rising +40% y/y. Far from it. And it’s not to say that house prices are anywhere near their long-term norms relative to underlying fundamentals (they’re not), but if any market could theoretically pull off a “soft landing”, this is it.
But for that to happen, Alberta will need continued strong growth in its resource sector. On this front, econo-geeks will want to watch the price gap between Western Canada Select oil (from the tar sands) and the often-quoted West Texas Intermediate oil. There is now a +$30 gap between the two, with the Canadian oil trading at a substantial discount and well below the $70-$80/barrel break-even price for new oil sand projects. Should this trend persist, it’s not difficult to see investment in the oil sands slow, and perhaps significantly. Needless to say, this would have serious implications for the economy and labour market in the province, at least over the longer term. Alberta has always been notoriously boom/bust. Oil prices well below the point at which new projects are economical is one development worth watching closely.
5) Will interest rates remain near record lows?
Unless Mark Carney’s replacement in July represents a massive change from the central banker mold, don’t expect the overnight rate to budge this year, meaning variable rate products will also see continued rock-bottom rates.
That said, it could be an interesting year in the bond market, which primarily determines fixed interest rates. Canada has an enormous amount of debt maturing in 2013, which raises the risk of interest rates rising.
Given the appetite of foreign investors for Canadian bonds, this seems like a small risk at present. But evidently the Bank of Canada is not taking any chances. They’ve been increasingly aggressive in expanding their holdings of Canadian bonds.
In general, I’d expect rates to stay very low through 2013. If rates do rise meaningfully, it will be seen in fixed rate products first.
My next post will deal with the other 5 big trends to watch closely.
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