Canadian inflation heats up; Why housing won't carry us through a recession; Positive mortgage in arrears data
OCTOBER 21, 2011
Canadian inflation heats up:
Stats Canada has released the September reading of the consumer price index (CPI), which showed a strong bounce in both the core and all-item index. The all-item index rose to 3.2% on a year-over-year basis while the core has finally breached the target 2% boundary for the first time since 2009:
The increase in the CPI was mainly due to higher prices for gasoline and food, although the core index, which strips out these volatile items, rose much more than anticipated, primarily on the back or rising vehicle, clothing, and produce costs.
This surprisingly strong reading certainly reduces the likelihood of a Bank of Canada rate cut, which has widely been anticipated by the bond markets. However, the markets didn't seem overly concerned by this reading. The 5 year Government of Canada bond yield rose just under 6 basis points, while the 3 month overnight interest swap was little changed, and still signals that most traders still believe that the next move by the Bank of Canada is more likely to be down than up.
Why housing can't be relied on to carry Canada through a recession:
That's the title of a great article featured in today's Canadian Business blog. Of course, my position remains that Canada escaped the worst of the Great Recession by pumping leverage into the system. Housing remained robust, which meant spending and consumption wasn't hit as hard, and today we are lauded for having 'prudent' banks and 'conservative' consumers that managed to escape the recession not because of strengthening balance sheets, but for exactly the opposite reason. And with housing at increasingly stretched multiples of income, per-capita GDP, and with it having massively outpaced rents and inflation, it's hard to see how a similar miracle can be counted on to pull us out of another recession, should one hit.
Some juicy snippets from the article:
Canada’s housing market continues to amaze...The seasonally adjusted annual rate of starts stood at 205,900 units in September, up from 191,900 in August and well above expectations. Meanwhile, prices for new and resale homes continue setting records.
Such strong demand for housing is a powerful elixir for the economy. That’s because houses need concrete foundations, softwood framing, asphalt shingles, windows and a veritable army of workers to assemble and install it all. Recent homebuyers also go hunting for furniture, appliances and plenty of other big-ticket items to fill out their new digs. These forces helped Canada weather the recession of 2008-2009 reasonably well, even as other countries such as Britain and the U.S. plunged into turmoil from which they’ve yet to emerge. And now, many commentators expect Canada’s housing market is set for a repeat performance, helping deliver the country from the current global turmoil.
Call me a killjoy, but I’m anything but enthused about our current level of housing activity. It would be wonderful if it were sustainable. It isn’t.
The reason, as any alert reader will readily surmise, is that our housing market is as reliant on healthy credit markets as a junkie is on a ready supply of heroin. Over the last generation consumers have been on a one-way street toward greater indebtedness, both in absolute terms and relative to their incomes. According to Statistics Canada, the ratio of household debt to disposable income stood at just under 150% at the middle of this year.
Well said. And as mortgage debt to GDP ratios seemed to have peaked and as the year-over-year change in mortgage credit outstanding slows to levels not seen since the start of the boom, it seems awfully unlikely that prices can be supported at these multiples of income without either i) robust income growth (not in the cards) or ii) robust credit demand (fading fast). Nevertheless, it may well be different here. Or not.
Mortgage in arrears data encouraging:
The latest mortgage in arrears data (as of August 2011) is out, and it shows a broad decline across nearly all provinces. You can see the data for all provinces in the link. Unfortunately, I only have time to graph out a few of them....so we'll go with the most populace provinces:
It is encouraging that these stats are falling, although I still maintain that one of the principle side effects of a nasty housing correction, which I believe to be quite likely, would be a rise in delinquencies and foreclosures. While people are quick to protest that Canada is primarily a recourse jurisdiction (with the notable exception of Alberta), while most US states were non-recourse, I would be quick to point out that the recourse in most US states only applied to the principal mortgage and not subsequent refinancing, which was one of the hallmarks of their boom....and ours by the way.
The reality is that no one goes into serious delinquency unless they have nothing to lose and have no way to make the payment. And since here in Canada, our bizarre system is set up so that you can pay your mortgage straight from your home equity line of credit, it means that as long as people have enough equity for a HELOC, they have both the ability and the motivation to pay. But take that away, and things get hairy. Fast.
Cheers,
Ben
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29 Comments
"And since here in Canada, our bizarre system is set up so that you can pay your mortgage straight from your home equity line of credit, it means that as long as people have enough equity for a HELOC, they have both the ability and the motivation to pay. But take that away, and things get hairy. Fast."
People can use Credit cards, other lines of credit, cash advance, etc...this is nothing new. Its a way to use your equity to make payments in your home and increase your LTV. Happens in booms and bust.
The key thing Ben is Canada still has great jobs and to your point above, it would take the following
1. Loss of job
2. Eat up UI
3. Eat up severance
4. Eat up savings
and find no job before someone would ever consider missing a mtg payment. This is all before HELOC. Most people will find a new job by the time they eat up all that. Plus many homes are dual income, so that also helps ease the burden when one family suffers a job loss.
"Happens in booms and bust."
So there is a bust side of the story?
"has great jobs"... "many homes are dual income"...
how about current indebtedness of household measure? does borrowing have an upper limit?
Please back up your comments with statistics and sources. Not convincing, my friend.
"Its a way to use your equity to make payments in your home and increase your LTV"
Exactly, it's a ponzi scheme. People are consuming using their lines of credit while they use income to pay the mortgage. It's too bad they don't realize their hard working labor will get wiped from existance as soon as the market turns.
Hourly Earnings/CPI http://i54.tinypic.com/2pslgye.png
BOC Financial Stats http://i53.tinypic.com/5l9gtj.png
Sorry Appraiser, people have pushed themselves as far as they can go. We're entering the danger zone now.
Great chart on inflation and wages. I may use this in a post if it's alright.
Sure, use these if you want.
http://i53.tinypic.com/ei5ts7.png
http://i54.tinypic.com/15x1hqr.png
I find it amazing that the western world is starting to de-leverage from the massive credit bubble yet Canadian continue to party like it is 2007. We must think that we are not connected to the rest of the world or we choose to ignore the black swans in our back yard. Our day of reckoning will come
Anyway I read an interesting article in the Vancouver Magazine (which I find pretty forward thinking for a magazine that supports the status qou) on an underlying currents on the Vancouver housing market and the exodus of the middle class in this city. If you have the time it is worth the read.
http://www.vanmag.com/News_and_Features/Gone
Dave, thanks for the link to the article. Interesting (depressing too).
@ Dave - this is a great problem to have as a city. What you will always notice in this new story is that people don't want to rent, they want to "own" Talk about entitlement. The guy wants to live in Kits and can't afford it. Cry me a river, everyone would love that. Hell, I wish I could have 5 places in Rosedale or Bridle Path.
He wants to have roots, unfortunately, he is choosing one of the best spots in the top cities in the world. Good Luck.
One last thought, inflation is 3.2% after tax return on 5 year bonds (40% tax rate) is .972% for a inflation adjusted return of -2.23%. I guess this is why money is still pouring into real estate. As far as safe investments go (ie real estate/ GIC/bonds) real estate is the only game for those chasing returns.
The smart money is willing to except the lower rate of return for capital preservation (ie the bond market).
really interesting piece Ben! So the banks are in good shape and in case arrears go higher they will diligently foreclose.
Interesting Van article Dave, and a great post Ben. Sad that people have to consider moving from their family and friends in Vancouver just so they can live above ground. Many of us have been waiting a long time for the elusive real estate correction. Where I live in small town Canmore, Ab it appears to me that real estate prices are crumbling. But 80 km to the east in Calgary there is no such action. To equate it to the equities market, there are numerous sentiment indicators such as VIX and Market Vane which are only really of benefit when the market is at extreme extremes. What these prove is that the market does not turn until it has sucked as many people, especially financial advisors, into believing the market is only going in one direction before it turns.
From the tone of the article attached it appears the real estate world in Vancouver, TO, Sask and other places is wearing people down to where they are becoming convinced prices are not coming down and complacent about the potential for a downturn.
I have studied the global markets, made my assesment, placed my bet and now I am going to wait to re-purchase real estate until it is in my favor. Even if it takes a few more years.
As a side note it appears that real estate in Canmore is still selling from $350 and up per square foot range. We rent a very nice place for $.83 per square foot per month, and the landlord pays most costs. I can hand him back the keys on 30 days notice. Not a bad deal - for now.
For the record, the core inflation boundary is not 2%. The BoC has a target range of 1-3%, which Flaherty clarified quite succinctly yesterday.
It is a complete fallacy that people are using their line of credit to pay their mortgage in any meaningful volume. I can't put it any plainer than that - and there is no way of 'proving" otherwise. Gut-feelings don't count.
The facts are clear. CREA number are up both in sales and volume. TREB numbers are oustanding. Mortgage in arrears have been falling all year long and are now below 3% in Ontario.
I cannot fathom how all of this news is somehow bad for real estate, unless of course one's bias is so skewed that rationality simply evaporates.
Of course the Emperor's tailor will be the last one to admit there are no new clothes.
"It is a complete fallacy that people are using their line of credit to pay their mortgage in any meaningful volume. "
Actually I think there is pretty significant evidence that it is somewhat common in B.C. Ben discussed it in a post a few months ago and I seem to remember you commented on it too. Perhaps Ben can dig up the link.
Well Joe Q. - nothing but the sound of crickets. For good reason too. There is no evidence. It is a wild guess on the part of our gracious host.
When bubbleheads see the real estate market thriving and mortgage arrears falling, cognitive dissonance replaces rational thought.
Want reality? Check out this foreclosure map of the US and hover your mouse to see foreclosures vs sales listings for every state. http://www.realtytrac.com/mapsearch/us.html
Many American dreams to own a home are becoming just another foreclosure statistic and it's getting worse.
Might as well display the foreclosure stats for the moon, for all it relates to Canada.
Appraiser's right. No comparison. On the moon, housing is bound by fundamentals. Here it only goes up. In perpetuity.
Wow, Greg, based on this map there are plenty of properties for the wealthy Chinese investors to get a bargain now in the West Coast area, they do not need anything in Vancouver as they can buy 2 in a better climate for a price of 1 in Vancouver. There is no problem for them to buy a property in US now, my son spoke to his Chinese friend from a very wealthy family (they bought few homes here for an investment awhile ago) and they are saying that before there were some limitations to get a permanent status in US and to buy a property - but now it became very easy (some regulations were changed), so they are buying in US now more - but it seems that the pressure of the increased demand from China is not driving the market there so much as it did in Vancouver. I wounder why.
Olga, its not the house or vancouver's crappy weather anyone after -it;s that a property tax of 2500$ gets all my kids and family free healthcare and top school. You dont' get that in the US
Too bad Immigration Canada has just announced they are cutting back on family class immigrants that includes parents, relatives and grandparents. They want temporary foreign workers that work for peanuts and will go back home if they don't sustain a job.
Immigration Minister Jason Kenny said:
“We have to calibrate those limits based on our country’s economic needs, our fiscal capacity,” he said. “There is no doubt that the people who are coming who are senior citizens, they have much, much lower labour market participation and much higher level of utilization of the public health system.”
Don't expect a free ride with a conservative government. Immigrants will soon learn the Canadian dream wasn't all that they expected it to be, rather it was just another way for the government to steal people's savings. Are you an immigrant living in Canada? Now you're stuck paying Canada's debt too.
Free healthcare and top school? LOL, nothing is free and you'll soon learn how things are paid for in Canada.
"You dont' get that in the US"
Somewhat true. But instead I have the freedom to choose to pay for healthcare in the US if I have money that I worked hard to earn. Here, no such luck. Take a number and join the queue to see the doctor, my friend. Want state of the art treatment even if you don't mind paying for it? Sorry, can't get it here because the government does not have the funds to make it available. In the name of equality we keep everyone chained to the Titanic so we can all go down together holding hands singing Kumbaya. We're such 'fair' people.
If they can afford to drop $1-2M on a house in Vancouver they can afford the best healthcare and schools anywhere in America.
I'm from the US and studied health policy. Even people who believe they can pay "out of pocket" for health care soon find the bills to be much, much higher than they would be here for equivalent services due to, among other things, the insertion of private insurance for major medical and surgical care. In addition, cash does *not* buy better health outcomes in the United States. People with insurance receive better care than people without insurance -- even people with cash but without insurance. But money can buy a good insurance policy, and perhaps help override the impact of pre-existing conditions (especially with changes in the health-care law) -- that's what money can buy. And yes, money can buy your way into a top school district, but if your children need help or accommodations, they might not be made to feel welcome amid all the high achievers. They might pull down the scores the school wants to promote. So on balance, more money = good, but not necessarily in the way people think because it's a different culture with a different system.
When housing crashes, what will be the effect on the CAD? Will it nose-dive like it did in 2008?
Toronto, October 24, 2011 — Greater Toronto REALTORS® reported 5,770 condominium apartment transactions through the TorontoMLS® system in the third quarter of 2011, representing a 24 per cent increase over the same period in 2010. The average selling price increased by almost nine per cent to $333,352.
Read 'em and weap bubbleheads.
Not as impressive as it sounds Appraiser, as 2010 was one of the worst sales years in recent memory. Check http://guava.ca/indicators.html. In fact 3Q2011 home sales in the GTA were comparable to previous years -- close to 2005-2007. Prices are way up because listings numbers were down this year, 15-25% below 2010 levels, matched only by late 2009.
If I had all my eggs in the RE basket I would instead be asking why the inventory situation in the GTA is so bad. If there is so much money to be made in RE, why aren't more people putting their homes up for sale?
Get real Joe Q. Take a close look at the average number of days it takes to sell a house and the price increases year after year. Sneezing at a 24% increase in sales volume and a 9% rise in prices is totally disingenuous to say the least.
I can never get over you bubbleheads. Heads so deep in the sand that positive news is somehow negative and negative news is simply amazing.
Don't change the tune Appraiser -- you're being tricky with the numbers. Tooting about a 24% YOY increase in sales isn't so meaningful when the reference year was one of the slowest in recent memory. Relative to 2004-2010 3Q2011 sales numbers were slightly better than average, that's about it.
Look at both sides of the supply-demand equation to get a better idea of where things are. The number of sales in the GTA was about the same in Aug 2005 as in Aug 2011, but in 2005 there were 5,000 more houses on the market. Of course it's going to push price increases above the long-term trend. Again, if you are a keen watcher of the GTA housing market you need to be asking why the number of properties being listed is so low by historical standards. Thousands more units were listed for sale in 3Q2010 (or 3Q of pretty much every year) than in 3Q2011. Why?