MARCH 06, 2011
It's that time of the month again. Let's once again turn our eyes to the stats released by the big real estate boards and look for developing trends.
You may recall that finance minister Jim Flaherty announced new mortgage rule changes back in January. Those rule changes are set to take effect in mid March and include primarily the shortening of allowable, insurable amortization lengths to 30 years from the current 35 years.
While I suggested that there were some major unanswered questions surrounding just how these new rules would impact the market, one thing was fairly obvious: There would be an irrational surge of home buyers seeking to beat the new rules.
While any surge in buying activity is to be expected this month, the more important data point is the amount of new listings coming onto the market and the associated sales/new listings ratio. I speculated that we may see inventory surge ahead of the new rule changes, which would bode very badly for the market after March 18th.
So how did things shape up? Let's have a look. Click on the city name for the link to the press release and/or data package for that city.
Despite being so close to 'the best place on earth' where rich Asian investors will supposedly drive house prices to the moon, Victoria seems posed to be the first major casualty of the coming correction. Sales had been atrocious for most of 2010. Despite Victoria Real Estate Board putting on a brave face, sales on the island have to be considered a major disappointment in February.
The subtitle of the press release is 'Sales rise in February', evidently a desperate attempt to have unwitting consumers focus on non seasonally adjusted home sales which tend to rise in February to begin with. So while total transactions rose from a dismal 339 in January to an 'exciting' 488 in February, the much more telling year-over-year comparison reveals just how weak the market really is.
Last February, 621 sales took place. This year that total wilted by over 20% despite the last gasp of panicked property virgins....a dwindling pool set to evaporate later this month.
More importantly, while sales tanked, inventory rose 13% from last year's levels. Total months of inventory stood at 7.6 while the sales-to-new listings ratio stood at roughly 38%. While both are far from blood bath territory, they are well into what constitutes a buyer's market. However, what is most concerning is that both sales and inventory have clear and opposite direction in which to head.
In a sign that the bottom is already falling out of the market as the pool of first time buyers is exhausted, the median price of houses, condos, and town homes all fell while the average rose for houses and condos indicating that the remaining transactions may increasingly be represented by residual trade-ups.
With numbers this bad amid what is likely to be the strongest (seasonally adjusted) period of sales this year, it suggests that Victoria may well be hit hard over the course of the year.
The story in Vancouver played out largely as expected with a major ramp up in both sales and listings.
While most of the media attention has been on the rising average house price, little is discussed by ways of the more telling House Price Index (HPI) calculated by the Real Estate Board of Greater Vancouver, which accounts for differences in house size and lot size, age, extra features, etc.
This shows a much more modest 3.1% year-over-year increase across all housing types between Feb 2010 and Feb 2011 suggesting that the 'Hot Asian Money' influence is highly centralized in terms of geography and market segment. While quite possibly serving to buoy values in certain tranches of the market, the true influence of the HAM story is in its ability to persuade the residents of Vancouver that house prices can only march inexorably higher, despite the concrete boundaries of incomes that limit the buying power of the home-grown population. To quote one respected commenter on this site:
"The wealthy don’t make the market. They can drive prices up in exclusive neighborhoods, for sure, but they don’t make the market, they only distort it. The housing decline/collapse/rout will come from simple debt fatigue of ordinary people who live in ordinary houses in any one of thousands of ordinary neighborhoods.
It is not “real wealth” that has blown the bubble. It is debt."
Indeed. The predicted bounce in both sales and inventory materialized as both have trended well above their 10 year average in the past two months. Home sales totaled 3,097, a 20% jump over last February.
Meanwhile, new listings totalled 5,693 in February 2011, a jump of 23.6 per cent compared to February 2010. Total inventory stood 5% higher than year-ago levels.
Months of inventory stood at 3.9, trending towards sellers market territory. Total sales-to-new listings registered at 54% representing a balanced market.
The Vancouver market is playing out largely as expected though with perhaps a bit less inventory than I thought. Nevertheless, the months after the new rule changes take effect will be highly indicative. With more locals soon to be priced out of the market, it is quite likely we will see a near parabolic move in average house prices over the next few months while the HPI stagnates or even falls. After the trade-ups have settled and all that is left is a handful of wealthy foreigners pursuing properties, one must wonder if even they will be as willing to participate once any remaining momentum vanishes.
Calgary has been the worst performing large centre in the country. Yet interestingly it saw neither the frantic rise in sales or the panicked rise in listings as both were virtually unchanged from last year when measured in total MLS volumes.
Where there was a rise in sales in one market segment (single family homes), it was matched by a similar rise in listings. While new listings and sales were more or less on par with 2010 numbers, total inventory was up nearly 10% while average days on the market for all MLS entries exploded to 54 from 45.
Once again we see a dichotomy between average and median appreciation in houses and condos. While the average house price gained a paltry 0.8% in the past 12 months, the median price actually fell 2.7%. Likewise the average increase for condos was significantly more than the median increase (2.6 vs. 0.4).
Total MLS months of inventory stood at 4.5 (balanced) while the sales-to-new listings ratio stood at 46% (also balanced).....for now. It stands to reason that Calgary will resume its march back from unsustainable heights once this current surge of buyers runs its course.
I have to say that of all the big realtor boards across the country, the Edmonton Real Estate Board has consistently been the most forthright in discussing the current reality of their market. I've noted in previous round-ups that the 'spin factor' has consistently been less coming out of Edmonton. While the board nevertheless remains chipper about prospects in the short term (hope springs eternal!) they at least deserve kudos for telling things like they are.
The title of the press release is a case in point: 'February housing prices mirror 2009.'
House prices in all categories have now given back all gains from the past two years. While EREB tried to trumpet the rise in sales from January, the reality is that even with the panic-induced buying to beat the rule change, sales still registered 20% below last year's levels and were the weakest of any February in at least 5 years.
Meanwhile, new listings were up 10% from last February and represented the second highest inventory build in the past 5 years. Sales to new listings registered in at 39% with months of inventory at 6.1.....both moderately into buyer market territory, though not alarmingly so.
Edmonton looks weak! At best the surge in buyers has pushed their market into a weak buyer's market. April won't be pretty.
Canada's largest housing market remains relatively balanced, though sales were off year-over-year by a significant 14%. However, when compared to the past 5 years, sales were in the middle of the pack.
While sales were not significantly higher, neither too was the inventory build as new listings were actually of any February in at least 5 years. Total inventory came in right on par with 2010 levels, though both 2010 and 2011 are highly anomalous when compared to the past 6 years. Inventory is well below typical levels.
Median house prices were up 3.5% over last February's prices. Days on the market fell to the second lowest of any February in at least the past 6 years.
Sales to new listings came in at 54% (balanced) while months of inventory stood at an absurdly low 2.3. The huge unanswered question hanging over the Toronto market is just where all the inventory has gone and when might it reappear. For now, the unusually low inventory numbers are keeping the market tight. Expect sales to slump after the new rules take effect, but how much of an effect this will have in the short term will be determined by the abundance or scarcity of listings in the GTA.
Ottawa's real estate board remains the worst of all the big boards in terms of their disclosure and transparency. Their press releases are terrible. They detail only average house prices (not median for comparison), and they do not detail inventory levels.
So all that we can glean from their foggy press release is that sales were off by 9% over 2010 levels while days on market stood at 33. That's it!
If you live in the Ottawa area, it's time to pressure your board to give up more detailed stats in their press releases. Certainly the information asymmetry that exists between the realtor boards and their customers represents a potential breach of ethics. The only way for the boards to prove otherwise is to make all relevant data available for scrutiny.
Expect prices to remain sticky and perhaps even rise as the average will be skewed higher by the absence of buyers at the lower entry levels. The residual 'trade-ups' will propel the average transaction higher even as volumes stagnate and inventory builds. But the laws of supply and demand will win out.
Rising fixed interest rates (with the potential for a Bank of Canada hike this summer) and an immediate 7-10% reduction in available credit after the 18th coupled with a scarcity of new buyers at the entry level will eventually weigh on house prices. You can't have rising inventory and falling sales without the inevitable realignment of prices under the weight of a supply/demand imbalance. Keep your eye on median prices as the averages will likely become increasingly misleading.
A seller strike will likely ensue once sales stall in April, with inventories rapidly dropping once the reality of the tough selling market becomes apparent. But those who must sell will become the new comparables. And unlike the past few examples of buyer strikes in which demand was reinvigorated via interest rate cuts and monetary stimulus (2008-2009), impending new taxes and slight mortgage rule changes (early 2010), and fairly significant mortgage rule changes (mid January to mid March 2011), there's little left to stimulate new demand, particularly as fixed interest rates rise.