JANUARY 01, 2012
Happy New Year!
I’m hoping to get a chance to post some 2012 predictions and review my 2011 predictions, which I’m fairly happy with.
In the meantime, I just wanted to share a few thoughts on CMHC after reading through the 2011 edition of their flagship publication, The Canadian Housing Observer.
Readers will know that I have been critical of CMHC over the following:
CMHC’s mandate, which I believe is inherently self-defeating.
CMHC’s massive expansion in insurance in force, which is happening largely without meaningful public discussion of possible risks to the Canadian taxpayer
CMHC’s balance sheet, which is opaque (criticized by Dr. Ian Lee as the most secretive crown corporation in existence), yet from what we do know, bears uncanny resemblance to a pre-bust Fannie Mae’s, a fact that should weird us out.
Let’s keep the criticism parade going! I’m glad the CMHC finally got their act together and released the 2011 Housing Observer on the 29th of December! Nicely done. But here’s the kicker: The data is actually from 2010! There is very little data from the past year even included. Thanks for showing up, CMHC.
The 184 page document has too many interesting tidbits to include in one short post, but I did want to share four that jumped out at me. Well, three actually, plus an interesting thought I’ll steal from Fishy’s real estate blog.
1) Residential investment has doubled in the past decade, well eclipsing inflation and gains in incomes and GDP.
The chart above indicates that spending on new dwellings has doubled in the past decade (interesting considering we’ve built way more dwellings than demographic demand would warrant, see this post for more details). Furthermore, and perhaps symptomatic of the HGTV housing porn generation, renovation spending has more than doubled as well.
This won’t last. And with 8% of the Canadian population employed in construction (historically 5.5%) and renovation spending nearly 2 GDP percentage points above long-term norms, it’s not hard to see how when the housing boom fades, it will significantly pressure the labour market and economic growth....and that’s not even considering the knock-on effects of lower consumer spending and weakness in ancillary industries that are levered to the housing boom.
2) Boomer effects on the market
I’ve written before that the Baby Boomers will have a massive effect on property prices (see here for more detail). I’ve suggested that the greatest impact that they will have is on price compression in the market. The era of the McMansion is over (see here). And as Boomers move to free up housing assets to help fund their retirement and/or to seek more ‘age friendly’ dwellings, it will invariably put additional pressure on larger houses while putting a relative floor under smaller bungalows within city limits as well as condos in areas where overbuilding and investor participation is not rampant (you’re still screwed, Toronto!).
CMHC agrees, and they devoted a chunk of their report to discussing these demographic influences.
While they suggest that these demographic influences will favour smaller dwellings, they seem to miss what this means for larger ones. And if you compress the market so that the top end falls while the bottom end rises, you still end up with a falling average price, which is what CREA reports and is what is widely reported in the news.
Don’t forget that one influential paper by the Bank for International Settlements recently calculated that Canada’s demographic imbalance is significant and, after boosting house prices over the past 40 years, will now weigh on house prices going forward:
It’s pretty easy to visualize in the following graphs:
There is one major take-away points from this trend: If you have to buy, and you have a young family, buy an age-friendly dwelling recognizing that while the price will at best flat-line over the next 5 years (and more likely fall in most Canadian cities), the house you really want will fall further, both in percentage and nominal terms. Position yourself to take advantage of the larger family homes that will increasingly see supply/demand imbalances favour buyers in the coming years.
3) Immigrants are not the saviour of the overinflated housing market
Population growth is often cited as the driver of house price appreciation, which is ridiculous on its own considering it only looks at one side of the supply/demand equation and becomes laughable once we actually look at how many new homes have been built relative to the change in population in Canada’s largest cities (which we’ve done here).
While it’s tempting to look at the near-record high total immigration into Canada in 2010 as being inherently supportive of house prices at unprecedented levels compared to fundamentals, it’s worth keeping in mind that total population growth is still only running at a ‘whopping’ 1.2% annually. (On a side note, the people who most vigorously defend the ‘immigration will save us’ argument are people from Toronto. This is comical since Toronto receives fewer immigrants today than it did 10 years ago.)
It’s also worth remembering that statistically, immigrant households are on average nearly 50% larger than Canadian households. This means that since the bulk of the population growth is via immigration and not natural household formation, the true household formation rate is actually lower than typically calculated. In simple terms, we’ve built WAY more houses than demographics would warrant given the composition of population growth.
CMHC provides some additional colour on this topic, noting that new immigrant households (less than 5 years in Canada) have ownership rates less than half the Canadian population (35% vs 70%). In addition, immigrant households earn on average 30% less than other Canadian households. And since house prices are at unprecedented multiples of income in virtually every Canadian city (see here), it’s hard to see how an influx of immigrant households earning significantly less than the average income will support prices at these levels.
Immigration is NOT the golden bullet solution to a massively overextended housing market.
4) CMHC's board of governors made of housing industry representatives
Kudos to Fishy’s real estate blog for discussing CMHC’s board of governors and highlighting the glaring representation of the real estate lobby on this board: The 10-person board contains 3 developers, 1 CMHC paid employee, 1 real estate broker, and 1 partner in a plumbing/renovation company. From the Fish’s mouth:
A rather small board considering the Hundreds of Billions which are at stake. ...Iam sure they are well meaning people. However I am not reassured. Neither it would seem is the IMF which has called for more supervision.
Where are the well-known Business and Economic Professors from U of T or McGill? Where is the seasoned insurance executive who has dealt with major losses? Where is the representative from the Canadian Tax Payers Association? WHERE is the significant representation of NON-housing interests?