- Housing market demons
- CMHC passes its stress tests
- Markets at a glance
- LNG project gets go-ahead
The latest housing market reports read like Poltergeist II: Canada is still haunted despite the apparent ghost-busting success of policy makers.
Among the issues are affordability, still frothy prices and the housing-related debts Canadians are carrying.
The focus, as always, is on Vancouver and Toronto, where high prices and eroding affordability are demons we can't exorcise. And rates are rising, and forecast to rise further still.
“Most households can no longer afford to buy property in the top financial centres without a substantial inheritance,” UBS, the big global bank, said of world housing markets in its annual Global Real Estate Bubble Index report for 2018.
Vancouver and Toronto rank in the top four of that index.
Both cities have been the target of federal and provincial measures, notably the commercial bank regulator’s new Canada-wide mortgage-qualification rules that came into effect in January, and taxes and other moves in British Columbia and Ontario.
Vancouver remains a question mark, but economists believe other markets have stabilized, bringing the hoped-for soft landing for the housing sector.
As The Globe and Mail’s Brent Jang reports, the Vancouver area market has slumped, with sales falling in August to a six-year low and prices down from their peak.
Of course, you’ve got to put that into perspective: The average price for a detached home in the City of Vancouver may have plunged 19 per cent from the peak in April, 2016, but it’s still $2.5-million.
The Toronto area market, in turn, is springing back, with August marking the third month in a row that sales rose on a year-over-year comparison. Average prices dipped in August from July when you adjust for seasonal factors, but were up 4.7 per cent from a year earlier, as The Globe and Mail’s Janet McFarland reports.
Many cities in the UBS study are in "overvalued territory," the bank said.
But "bubble risk appears greatest in Hong Kong, Munich, Toronto, Vancouver, London and Amsterdam," it added.
"Major imbalances also characterize Stockholm, Paris, San Francisco, Frankfurt and Sydney."
Here's a look at the issues:
PRICES: ‘LIGHTS OUT’
"Vancouver, whose house prices accelerated to a double-digit rate relative to last year, has a ballooning index score," UBS said.
"In both cities, valuations have trended upward since the late 1990s,” the bank said of Vancouver and Toronto, though both have recently been affected by the new mortgage rules.
"Rising rates, stricter market regulations or an economic downturn could turn the lights out on the party given the high valuations and strained affordability,” UBS said.
Higher mortgage rates and new regulations should ease Toronto's rise, the bank said, but the soft Canadian dollar could again draw foreign purchasers.
In Vancouver, income gains and rent increases have "mitigated" the housing market imbalances.
"As the government tries to contain speculation, the tax burden is rising for high-end property buyers and foreign purchasers," it added.
AFFORDABILITY: THERE REALLY IS AN ELM STREET
Royal Bank of Canada’s latest quarterly study is like something out of Nightmare on Elm Street.
And it just so happens that on Vancouver's Elm Street, there's a home for sale at $6.5-million. Okay, it's got a pool, but still.
"Affordability is a major issue in two of Canada’s largest markets," RBC chief economist Craig Wright and senior economist Robert Hogue said in their report.
“It’s at crisis levels in Vancouver and poses a tremendous challenge for many Toronto-area buyers despite improving in the past two quarters.”
Many other markets have seen "modest deterioration" in affordability, but juggling ownership is "in line with historical norms" if you exclude Vancouver, Victoria and Toronto.
RBC’s study looked at how much the percentage of pretax income needed to cover ownership costs in the first quarter.
In Vancouver, it's a horror show, at 87.8 per cent. Then comes Toronto at 74.2, Montreal at 43.7, Calgary at 43, Ottawa at 36.6 and Edmonton at 28. The national measure is 48.4.
And here's the sequel: "The prospect of more interest rate hikes in the period ahead poses material risk of further affordability erosion in Canada. The odds of this ultimately occurring will also depend on the degree to which household income increases."
UBS, too, noted that in Vancouver, "the already strained affordability will become an acute issue if mortgage rates rise further."
CREDIT: TILL DEATH DO US PART
There have to be some people who are in so far over their heads that they fear they won't part with their banks until they die.
Certainly, many seniors are now struggling with debts after retirement, though overall credit growth is slowing, and the Bank of Canada is less antsy about how much we owe.
Having said that, the key measure of credit market debt as a percentage of disposable income rose in the second quarter to 169.1 per cent, which means we owe $1.69 for every dollar of disposable income.
And, of course, interest rates are on the rise. Indeed, we're likely to see the central bank raise its benchmark rate again later this month.
“Households’ debt service costs rose to 14.2 per cent of incomes in the second quarter, the highest since 2008,” noted Paul Ashworth, chief North America economist at Capital Economics, and his colleagues, senior Canada economist Stephen Brown and assistant economist Nikhil Sanghani.
They were referring to the household debt service ratio, which measures principal and interest payments against disposable income. And note that mortgage and interest payments top those of principal.
"Moreover, policy rate hikes over the past year have yet to fully feed through to borrowing costs, and the Bank of Canada will probably raise interest rates twice more over the next six months," the Capital Economics analysts said in a recent report.
"That will squeeze households further and push the debt service ratio up to a record high. That, in turn, will weigh on household spending growth and the housing market in the coming years."
Then, as The Globe and Mail's Rob Carrick writes, home equity lines of credit, or HELOCs, have become a norm in Canada.
And, the latest look at balances by Canada Mortgage and Housing Corp. shows, we're up to our necks in British Columbia, our shoulders on the Prairies, our elbows in Ontario and Quebec, and our waists east of there.
INSURANCE: SLOWDOWN, NOT DOWNTURN
The latest results from the mortgage insurance sector, led by CMHC, threw up no red flags.
(We’re switching here from horror flicks to disaster movies.)
Indeed, “CMHC’s (and its peers’) mortgage insurance loss ratio increased year over year, but remains low in our view,” RBC analyst Geoffrey Kwan said of the second quarter.
“Industry loss/delinquency trends continue to be favourable, and suggest we are in a housing slowdown (not a downturn), but we recognize the risks to the housing/mortgage market are higher than one year ago,” he added.
“Focal point cities of Toronto and Vancouver continue to see positive employment and economic growth trends, which is important as they comprise close to 50 per cent of the dollar value of residential real estate transacted in Canada.”
Notably, Mr. Kwan pointed out, CMHC’s second-quarter delinquency rate, at 0.27 per cent, was down two basis points from a year earlier, while the “severity ratio” came in at 29.1 per cent, up 1.6 percentage points from a year earlier, though down 2.8 points from the previous quarter.
The severity ratio looks at claims paid related to original loan amounts, according to CMHC.
So, a declining percentage shows claims falling against the value of insured mortgages, and a rising measure shows claims climbing as a percentage of starting loan amounts, the agency said.
Today, CMHC released the results of stress tests that confirmed “its ability to weather severe but extremely unlikely scenarios.”
The 2018 version of the annual tests showed its capital levels could withstand financial stress, sustained low crude prices, a global trade war, a cyberattack on Canadian financial institutions, an earthquake and a major volcanic eruption, the agency said.
- 2018 has been unruly for housing markets: What’s ahead for your province
- Rob Carrick: How the new NAFTA helps end a generational chance to score big in the housing market
- Rob Carrick: It’s officially normal to have a big, fat balance on your line of credit
- Home sales rise between July and August
- House price inflation in Canada suddenly trails that of 36 other countries
- Janet McFarland: Toronto housing sputters back to life as prices, sales grow in August
- Brent Jang: Vancouver housing sales hit six-year low in August
- How $8-billion in added mortgage costs will squeeze Canadians and the economy
- ‘Cue the comeback’: The reawakening of many Canadian housing markets
- Canada’s housing market scores first annual price gain in months
- ‘Good value for your money’: How downtown condo prices in Canadian cities compare globally
- Carolyn Ireland: Sale by trial and error in Toronto’s housing market
Markets at a glance
LNG project gets go-ahead
A $40-billion liquefied natural gas project in British Columbia has been given the green light by its owners in what will be the largest private-sector investment in the province’s history, The Globe and Mail’s Brent Jang reports.
The project led by Royal Dutch Shell PLC calls for an export terminal to be built in Kitimat on the West Coast.
Exports from the LNG Canada terminal will be shipped to Asia.
Inside the Market
- David Rosenberg: Why the entire Canadian stock market should benefit from the lifting of trade uncertainty