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10 Canadian Housing and Economic Trends to Watch in 2013: Part 1

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.

Cheers,

Ben

 

NOTE: All images are property of TheEconomicAnalyst.com and may not be used without written consent.

 

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Ben Rabidoux
By Ben Rabidoux

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19 Comments

  • @mortgage_tree said:
    • 1 year, 3 months

    Well done! Love some honesty like this. Keep it up.

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  • Damien said:
    • 1 year, 3 months

    Thank you a lot for your good work.

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  • Mark77 said:
    • 1 year, 3 months

    What about lending spreads? Typically the economy will demand higher rates of interest, as a percentage of the benchmark rates at various places on the curve, for collateral that is either poor quality, or is viewed as likely to become poor quality in the near future. My personal prediction is that the Canadian banks will be rather pro-active in raising these spreads, essentially rationing credit to the Canadian housing market, in the next year.

    What will the banks do with the extra money and the excess capital that they've been hoarding to support their balance sheets? Pay it out as dividends and share buybacks to shareholders. Thus driving a number of years of excellent returns to bank shareholders. Unless some other investible sector appears in Canada and drives a lot of loan demand, its quite possible that Canadian bank payout ratios will grow to 100% or more in the coming years, the result of excellent profitability and decades of below unity payout ratios, real estate divestitures, etc.

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  • jesse said:
    • 1 year, 3 months

    Dividends and buybacks have a funny way of ending up as deposits... no matter what.

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  • Mark77 said:
    • 1 year, 3 months

    Sure. And the banks will need a new source of deposits because there will be far less coming from the RE vendor industry, whether it be resale or new construction housing.

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  • jesse said:
    • 1 year, 3 months

    Banks in net will get the same deposits no matter what. The question is how quickly, on what terns, and with what risk, they can make new loans.

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  • wjk said:
    • 1 year, 3 months

    The recent sneaky $50B increase in the private mortgage insurance limit suggests Jim Flaherty backpedaling on mortgage tightening could be another 2013 trend.

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  • Mark77 said:
    • 1 year, 3 months

    The genie is already out of the bottle though. Mortgage credit in the United States has almost never been looser, with basically anyone being able to fog a mirror and without existing RE debt being able to buy a house these days on FHA financing, or with historically low 30-year rate deals (and even 1% mortgages if one goes variable -- apparently Mark Zuckerberg has one of these loans!). Its not stopping the declines there though, aside from the recent dead-cat bounce.

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  • Sebastien Borduas said:
    • 1 year, 3 months

    First I want to say that the presentation you did for LePoidevin Group was really good. I did watch it on youtube and I think it is a very accurate picture of the Canadian market.

    I live in Montreal and I can say there is a real disconnect in the real estate market. Almost all areas in Montreal is having this problems. You should do a conference here.

    I was shopping a few month ago for a 2 bedrooms condo and I decided the hold my purchase for at least 2 year. I'm a first time buyer.

    Why?

    In 500 m radius there was 60 units for sale (new, old).

    - A brand new condos from a developer (350 000$)

    It that has been sitting there empty for 2 years. I asked the developer : is it negotiable? He answered : NO. Funny because a few day ago he lowered is price for the same unit to 309 000$. They have been calling me and sending me special offer every month since then trying to sell me one of their unit..... ahahhahah. Condo fees were 150$/month

    - A 15 year old condo (350 000$)

    It was comparable in term of size as the new one but...... kitchen and bathroom was 15 years old so I was expecting to put 50000$ in renovation. Why buy a used one when it is the same price as a new one??? Also, condos fees were around 350$/ month

    - A brand new condos from a speculator (375 000$)

    It that has been sitting there empty for 1.5 years. I asked the speculator: is it negociable? He answered : NO. Funny because his pictures (on the real estate website) had snow from the last winter. Also, it is not really interesting because your warranty is not as long as a brand new one because the unit is 1.5 year old. You can t chose the fit and and finish because it is build already. Condo fees were 150$/month

    Then I was looking of the municipal assessment of these units above. All of them had were priced at least 75 000$ above municipal assessment.

    My yearly income is 68 000$ before tax. In Quebanana this is above average.

    After tax, my disposable income melt to 3200$/month. According to the bank I could borrow up to 350 000$ with a 5% down payment (I think it is ridiculous putting 5% considering that the RE is going to correct by at least 20% within 2 year). 350 000$ is 5.14x my income.

    I decided to make a budget to see if it was possible to « survive » with a mortgage max out.

    Mortgage : 2100$/month
    Municipal taxes: 300$/month
    Heating: 100$/month
    Condos fees: 150$/month
    Home insurance : 30$/month
    Car insurance : 100$/month
    Internet + tv + cell phone: 120$/month
    Car gas : 120$/month
    Food : 300$/month
    --------------------------------------------------------------
    3320$/month

    I'm already underwater with this hypothetical scenario and I'm sure I forgot many thing such as restaurant, entertainment, saving, etc.

    Bottom line : wait for price decline in Montreal. It is going to hurt a lot of people. Salary didn t match RE price increase.

    Just take the last 5 year where inflation is ~10% (usually salary increase) and and RE price increase 32%.

    Can you explain the 32%-10%= 22%???

    DEBT!

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  • deanincalgary said:
    • 1 year, 3 months

    Good for your for running the numbers. most people don't do that.

    Be patient. You will be rewarded.

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  • Andrew said:
    • 1 year, 3 months

    Link to the youtube vid?

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  • Sebastien Borduas said:
    • 1 year, 3 months
    Reply
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  • Michael in Surrey said:
    • 1 year

    Sebastien, you can rent a 3000 SF mansion for the cost of your first 5 items total $2,680.00
    Buy your condo at 10% down payment and use today's best rate of 2.99% fixed 5 years.

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  • Mike in Surrey said:
    • 1 year

    Sebastien, income tax calculator from TaxTips.ca gives 46168 net income on your $68,000 annual income. So, it's $3847 per month income, not your $3200 take home you're suggesting;

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  • Jim Sparrow said:
    • 1 year, 3 months

    Great post Ben. You bring up an excellent point regarding the Calgary market - capital infusions into the petroleum industry could (will) be influenced not only by the price differential producers are getting for oil but also limited takeaway capacity. It takes several years to get approvals and build a pipeline - existing pipelines are close to capacity now.

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  • Howie Shaw said:
    • 1 year, 3 months

    I am thinking of buying a new(er) townhouse in Guelph , Ontario. Could you give me an expected price and reputable builder. I live in Peterborough, ON. How will this realestate market this year 2013?
    Thank you, Howie

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  • Andrew F said:
    • 1 year, 3 months

    Howie, I think you're expecting too much precision here. How much snow will you get in Peterborough on Feb 18th, 2013?

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  • Larry Les said:
    • 1 year, 3 months

    Ben, I was hoping for some commentary on the decision to increase the funding to private insurers such as Genworth by $50 billion ...

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  • Darren said:
    • 1 year, 3 months

    Wow, pretty interesting, watching the real estate market and other markets such as the government debt and dollar value and interest rates both for borrowing and investing, we should all hold off on buying real-estate, and look at paying down our debts as quickly as possible. I for one am worried about losing the value in my DCPP at work and my retirement investments I have. With the bubbles of what I mentioned above we are in for a ling and changed ride. There is no linger an up and down market. Please in a future post try to give your opinion on these subjects. I find this interesting and would like to have advise on what to do to decrease my loss in the trying times ahead.....

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