TD Bank says tighter mortgage rules should do the job of cooling Canada’s hot housing market in the short term, but higher interest rates will be needed to return the market to saner levels.

The bank’s chief economist Craig Alexander estimates the new rules, which went into effect July 9, will shave five percentage points off sales activity and cut prices by 3% on average during the second half of this year and early 2013.

In the next three years, he expects the combination of the tighter rules and anticipated modest increases in interest rates will result in a 10% price correction on homes.

While it is early, there are already tentative signs that the new rules have tempered sales, if not prices, especially in the country’s hottest markets — Toronto and Vancouver.

The Toronto Real Estate Board reported Thursday that sales of existing homes in the greater municipal area fell 12.5% from last year, although the average price of $479,095 was 6.5% higher.

Meanwhile, the Vancouver board said sales dropped 30.7% in August, while the average price was only 0.5% lower at $609,500.

In July, Finance Minister Jim Flaherty reduced the amortization rate on new insured mortgages to 25 years from 30, bringing the maximum period for paying off a home back to the historic level. It was the fourth time Flaherty had tightened mortgage rules in as many years, incrementally dropping to amortization period from the high-water mark of 40 years.

Alexander says the latest moves, which hike mortgage costs by $140 a month on the average priced home, may be even more effective than the previous efforts in slowing the market.

But if the experience of the previous three moves are any guide, the slowdown will be temporary, lasting a few quarters, after which Canadians will dive back into the market.

For a longer lasting solution to the overheated market, Alexander said Bank of Canada governor Mark Carney will need to hike interest rates to make borrowing more difficult and expensive.

“Interest rates simply cannot stay at current levels indefinitely,” he says in the paper.

On Wednesday, Carney kept the trendsetting policy rate at one%, marking two years that it has remained at the super-low level, and few economists expect him to act before mid-2013.

Canadians have taken advantage of the cheap borrowing costs to buy homes, cottages, cars and other consumer items, but the result is that household debt has hit record levels at 152% of disposable income.

Alexander says debt would even be higher if Ottawa hadn’t begun tightening mortgage rules in 2008.

“Our models suggest that had the government not tightened mortgage rules between 2008 and 2011, the Canadian household debt-to-income ratio would have reached 160% this year,” he said.

That’s about the level the U.S. and the United Kingdom reached before the collapse, although not all factors are similar.

Alexander says he believes the latest rule changes would trim about one percentage point off credit growth.

Source: Julian Beltrame, Canadian Press

The average price of homes sold in B.C. is forecast to fall 7.8 per cent this year, but that doesn’t mean the price of a typical home will drop, the B.C. Real Estate Association’s chief economist Cameron Muir said Thursday.

The average Multiple Listings Service price is down and will continue to fall because fewer single-family homes in tony neighbourhoods are selling, while more less-expensive homes are selling, Muir said, adding that there has been a noticeable lull in demand for single-family homes in Vancouver since January of this year.

As well as calling for a drop in average prices, the BCREA’s third-quarter housing forecast calls for a drop of four per cent in the number of homes sold in B.C. this year offset by an increase of 7.5 per cent next year.

“MLS residential prices are expected to remain relatively stable this year and through 2013, with changes in average price statistics largely the result of a differing mix of home types sold and shifting regional demand patterns,” Muir said, adding that the lull in demand is likely caused by some advance buying in 2011, poor job growth in 2011 and tighter mortgage regulations brought in by the government earlier this summer.

The average MLS residential price in B.C. is forecast to drop 7.8 per cent to $517,500 this year, and remain relatively unchanged at $519,000 in 2013.

Source: Tracy Sherlock, Vancouver Sun

The City of Vancouver issued $1.1 billion in building permits during the first six months of 2012, a 40-per-cent increase over 2011 and the first time in five years that construction has topped the billion-dollar figure for the first half of the year.

“This adds to overall economic growth; it means more construction jobs and related spinoff jobs,” said Helmut Pastrick, chief economist at Central 1 Credit Union.

Pastrick said the B.C. economy as a whole has not been performing as well in 2012 as it did in 2011 and the spike in construction activity the Vancouver building permit values represents, will provide a welcome boost to the economy.

“It’s certainly a positive boost, Construction is one of the few sectors that is contributing to the economy in a positive way,” he said.

The city said in a news release Thursday that residential, commercial, and industrial construction has gone through a “major rebound,” marking the first time since the 2008 recession that values have surpassed the billion-dollar mark.

According to the city, construction activity added 6,000 new direct and spinoff jobs in Vancouver during the six-month period.

Mayor Gregor Robertson said it is the first time construction values have exceeded pre-recession levels.

The last time more than a billion dollars in permits was issued was the first half of 2007, when the figure hit $1.58 billion.

Adrien Byrne, communications manager for the Urban Development Institute said the spike in permits show that the construction sector in Vancouver is healthy. It should translate into better prices for condominium units.

“Basically, there is a lot of supply coming on in the market. It shows a healthy market,” he said.

Byrne said the UDI is working closely with the city to reduce red-tape and planning hurdles.

“But that’s not the only thing. The market is getting progressively more affordable, which is making some projects a lot more viable than they might have been in the past. And that is supporting growth and development.”

“Developers are sharpening their pencils to be more competitive than the developer across the street. And the winner out of this is the consumer and the homebuyer.”

Key developments that contributed to the 2012 increase include a 22-storey residential building at 999 Seymour valued at $24.2 million and the 36-storey MNP Tower at 1021 West Hastings valued at $75 million.

“These numbers reflect the importance to the economy and to job creation that the development industry has. What we need is for these kind of numbers to continue,” Byrne said.

Commercial and industrial construction have also rebounded. During the first six months of the year, permits were issued for more than one million square feet of non-residential space, up dramatically from the 160,000 square feet that was permitted during the first six months of 2011.

Source: Gordon Hamilton, Vancouver Sun

A new condo report suggests first-time buyers, retirees and population growth will continue to fuel demand and price growth for the compact living spaces over the next few years.

The study by Genworth Canada found that average condo resale prices are expected to rise next year in seven of the eight metropolitan centres studied.

Prices in Toronto are projected to jump 2.5 per cent to $312,352.

The highest increase however, is expected to be in Edmonton where prices could rise 3.2 per cent.
Vancouver is the only city where condo prices are expected to drop, by two per cent to $348,152.

The report stands in contrast to warnings from economists and officials that the condo market in some hot markets is reaching bubble territory that could soon burst.

The Bank of Canada and federal Finance Minister Jim Flaherty have cautioned Canadians repeatedly to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.

The central bank noted certain segments of the housing market that have a persistent oversupply — such as condos in Toronto — face a higher risk of a price correction.

Genworth — which earns revenue from selling mortgage insurance — notes that rising prices for single-detached homes are driving first-time buyers to condos, but retirees also continue to prop up demand.

It suggests that the population is expected to grow in all eight cities studied over the next few years, while employment growth and low interest rates should also support the market.

“This data corroborates our view that the demand for condos in Canada, particularly at the price-point we insure, is well supported by our economy and our population,” said Brian Hurley, chairman and CEO of Genworth Canada.

“For those seeking to own a home affordably in urban centres, condos remain a good option.”

The Genworth Canada report, produced with the Conference Board of Canada, reviewed trends in Quebec City, Montreal, Ottawa, Toronto, Calgary, Edmonton, Vancouver and Victoria.

Census figures for 2011 released in February show multi-unit dwellings — a category that includes condominiums — making up roughly half of all new housing stock, a category traditionally led by detached homes.

The numbers also indicate that Canadians are flocking to urban centres. Toronto’s population jumped more than 17 per cent over the previous census period in 2006.

A recent CMHC report said housing starts and home sales have been strong in 2012 — particularly when it comes to multiple-dwelling units such as townhouses, condos and apartments — but will soften moderately in coming months into 2013.

Source: Sunny Freeman, Canadian Press

While owning a single-family detached bungalow in Vancouver would take up 91 per cent of a typical household’s pre-tax income according to an RBC report, a Vancouver mortgage broker doesn’t expect a huge drop in prices anytime soon.

Mortgage broker Dave Foran said he expects the market to pick up in September, once the normal summer lull is over.

While prices have come down a bit during the lull, those decreases are not reflected in the latest RBC Economics Housing Trends and Affordability Report, released Monday and which covers the second quarter of 2012, said Robert Hogue, senior economist at RBC.

It found that “extreme unaffordability conditions” in the Vancouver housing market are dragging down the provincial and national measures as well.

“Housing affordability in British Columbia remained poor and worsening in the most recent quarter,” said Robert Hogue, senior economist at RBC. “The situation is far less severe in other parts of the province. In Victoria, for instance, the share of income needed to carry the costs of a mortgage at market prices for some housing types is almost half that of Vancouver.”

Hogue said he expects the next quarterly report will show improved affordability due to falling prices, but that an interest rate hike early next year would send the cost of owning a home in Vancouver upward again. RBC expects the Bank of Canada will raise interest rates in the first quarter of 2013, Hogue said.
Foran’s clients seem to be on the same page as RBC.

Foran said he has a higher-than-average number of clients with pre-approved mortgages waiting to see if prices will come down, while many don’t want to wait because they’re concerned about interest rates going up.

“Some are being quite cautious, while others are jumping in to get a good interest rate,” Foran said. “I don’t see a huge drop in prices coming or a huge increase in interest rates.”

While Foran agreed that single family homes in Vancouver are not very affordable, he said there are many other options, such as townhouses or condos, that are still within reach.

“A lot of the builders are getting away from single-family homes,” Foran said. “I think people are going where they can afford.”

Vancouver has the least affordable houses in the country, by far, although resales are falling and the market has cooled. Year-to-date resales have fallen 18 per cent in Vancouver, compared to a year ago, while the Real Estate Board of Greater Vancouver reported that July sales were the lowest total in the region since 2000, with sales 31.2 per cent below the 10-year July sales average.

The new housing price index slipped 0.9 per cent in Vancouver in June 2012, compared with June 2011, Statistics Canada reported earlier this month, while the MLS Home Price Index composite benchmark price for all residential properties in Greater Vancouver over the last 12 months has increased 0.6 per cent to $616,000 and declined 0.7 per cent in July 2012 compared to June 2012.

New mortgage rules were brought in last month that shorten the maximum amortization to 25 years from 30, which is also expected to dampen the market.

Despite these factors, affordability declined for all housing categories, with the RBC measures for Vancouver going up between 0.4 percentage points and 2.2 percentage points in the second quarter.
The report says that in Vancouver, home ownership costs, including mortgage payments, utilities and property taxes, take up 91 per cent of a typical household’s monthly pre-tax income. As a comparison, Edmonton’s affordability measure is 32.4 per cent and Toronto’s is 54.5 per cent.

Source: Tracy Sherlock, Vancouver Sun

The Canadian real estate industry is in a tight spot these days.

With home-ownership rates headed for record levels and the federal government tightening lending rules to cool the market, the question now is whether we have reached the saturation point.

Bank of Nova Scotia economist Adrienne Warren says that when the latest census figures come out next month she expects us to be in the elite company — depending on your view — of countries with more than 70% of households owning their own homes. Based on the 2006 census, we were at 68.4%. “It’s similar to the U.S., U.K. and Australia when they came up with the mid-decade census,” Ms. Warren said.

Some countries, like Italy and Spain, could be as high as 80% while in others with expensive real estate, like Switzerland, home-ownership rates are more like 30%, she said.

Ms. Warren said the biggest jump in home-ownership rates going into the 2006 census was among young people buying condominiums. Do we need another census to tell us that that group expanded or can we just look up at the cranes across the country? “It was people in their early 20s buying as opposed to waiting until they got older. It probably continued,” Ms. Warren said.

Interestingly enough, the United States is believed to have cracked that 70% threshold before the bottom fell out of its housing market.

Already Ottawa has stuck a pin in the housing balloon with new rules, including a restriction that limits amortizations to 25 years, which ultimately increases monthly payments for consumers and limits how much they can borrow.

The Office of the Superintendent of Financial Institutions added its own rules tightening up regulations for financial institutions.

“The government is saying you should not be a homeowner if you cannot afford it,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc.

The Canadian Real Estate Association released data last week that showed home prices across the country had actually slipped 2% from a year ago to an average of $353,147.

“We are at the peak of home ownership in Canada,” Mr. Tal said. “In fact, we are probably too high and it will probably go down.”

It’s not that 70% is some type of threshold we can’t break through but renting is becoming that much more attractive as the gap between home ownership and renting costs widens.

It’s impossible to argue against the emotion of owning your home or the advantage of forced savings that comes with a mortgage — a clear edge for people with no financial discipline.

The principal advantage is you can leverage your investment by putting only 5% down because the government will back your mortgage with the bank. But leverage means nothing when your investment is decreasing in value — it just compounds your losses.

If you consider that average $353,147 home with a 5% down payment, it will cost you close to $1,600 in monthly mortgage costs, even at today’s 3% interest rates with a 25-year amortization. Canada Mortgage and Housing Corp. said in June the average two-bedroom apartment in new and existing structures was $887 a month. Add in other home-ownership costs like taxes and the gap widens.

Beyond the current expansion, there’s no arguing against the long, steady price appreciation of housing, which has been going on for decades, but there is an alternative to home ownership if you want upside exposure to the market.

Michael Smith, an analyst at Macquarie Equities Research, has published a report for the past five years comparing condo returns to apartment real estate investment trusts.

“REITs win,” said Mr. Smith, adding in a report in January the REITs would have returned 31.5% over the past year compared to a condo return of 12.4% in Toronto and 6.1% in Calgary. Going back another four years, the numbers are even more in favour of the public vehicles.

“What I would say now, since I did the last study, is if anything the outlook for the REIT versus the condo is even more compelling given where the condo market seems to be correcting,” Mr. Smith said.

Sam Kolias, chief executive of Boardwalk Real Estate Investment Trust, Canada’s largest apartment owner, says he is already seeing the push back into apartments.

“If you wanted to be hedged against housing [going up], you could rent and buy stock in our company,” said Mr. Kolias, who added that occupancy rates have climbed close to 99% as house prices have risen steadily. “We’ve never been as full as we are now.”

While this may all be bad news for housing, Phil Soper, chief executive of Royal LePage Real Estate Services, still sees room for expansion.

“There is nothing magical about 70%. The U.S. rate fell from this rate because of a collapse in their financial system,” said Mr. Soper, who points out home ownership in the U.S. is still about 66%, even after “one of the worst meltdowns.”

He said one key driver of the housing market that has not changed is the rule that allows consumers in with just a 5% down payment.

“We have public policy in place that supports home ownership,” Mr. Soper said.

Okay, you can probably still get into the housing market. But with prices falling and the gap between renting and carrying a home widening, the question is do you really want to make that investment?

Source: Garry Marr, Financial Post

Home prices continued to decline across the country in July, according to Canadian Real Estate Association data released Wednesday.

The Ottawa-based group said the average price of a home sold last month was $353,147, a decline of 2 percent from a year earlier. The year-over-year decline in June was 0.8 percent.

“Prices are off their recent peaks in Greater Vancouver and Greater Toronto, but remain above year-ago levels in most markets,” the group said in a release.

Activity was up from the previous month in Kingston, Ont., Chilliwack, B.C., and Calgary, offset by fewer sales in Toronto, Newfoundland and Labrador, and Edmonton. Actual sales across the country were up 3.3 percent overall from a year ago.

Much of the decline in the national average can be blamed on Vancouver’s volatile market.

An economist at BMO Financial Group called it the “Vancouver Manouevre” since price drops in the West Coast city brought down the national average despite 19 of 26 cities experiencing year-over-year increases.

The city’s average sale price dropped more than 12 percent to $667,462 from $761,763 last year.

A senior economist at Royal Bank of Canada said the city’s lack of affordable homes is pulling down the market.

“We still believe that Vancouver is probably the most stressed market right now because of extremely poor affordability,” said RBC economist Robert Hogue.

“Plot the resale figures over the last year or so and you see a fairly significant decline in resales, so I think that this does the fit the definition of correction,” he said.

But a B.C. real estate economist said speculation of a market correction in Vancouver is unwarrwanted, as the economy continues to heal.

“Typically to see a price correction you need to see a macroeconomic shock — recession, very high unemployment, for example — or you need to see interest rates go up very dramatically in a short period of time. Both of those we don’t see on the horizon,” said Cameron Muir, the British Columbia Real Estate Association’s chief economist.

He said one-third of the market is first-time buyers, of which the market has no shortage.

“As long as we have first-time buyers that can get into the market to buy the homes from the people who are moving up, moving over, moving down, then the market should remain healthy,” Mr. Muir said.

Meanwhile, Toronto experienced a cooling, with prices increasing at a slower rate of 3.9 percent year over year, which BMO economist Douglas Porter called a “just-right” pace in a note Wednesday.

Mr. Hogue said the market across Canada is moderating and low resale numbers in the past three months were a result of compensation for a strong winter market and do not necessarily spell an impending pronounced correction.

“We believe that much of this easing was payback for a stronger-than-expected start to the year when warmer than usual weather this past winter and mortgage rate promotions by financial institutions provided a temporary boost to activity,” he said.

The Canadian Real Estate Association said tighter mortgage and lending regulations seemed to have cooled Canada’s national housing market, even in the bigger markets.

“Recent changes to mortgage regulations were widely expected to temper sales and prices in Greater Toronto and Greater Vancouver, and the data released today confirms that,” said Wayne Moen, president of the association, in a statement.

Finance Minister Jim Flaherty said Wednesday it may be too early to determine the extent of the impact of mortgage insurance reform, but that market moderation is a good thing.

“We want to avoid, obviously, the kind of thing that happened in the U.S. market, the Irish market and other markets in the Western economies with respect to their housing. So we want to have moderation,” he told The Canadian Press.

Source: Julia Johnson, Financial Post

Canada Mortgage and Housing Corporation is forecasting a stable housing market for British Columbia with light upticks in sales numbers, average prices and housing starts in 2013.

“Factors in 2013 driving the housing market are expected to be a little bit stronger,” Carol Frketich, B.C. regional economist for CMHC said. “There is expected to be a bit of a pick up in job growth next year, economic growth and demographic growth as well.”

Housing starts will increase to 28,500 homes for this year in B.C., from 26,400 starts in 2011, and then rise to 30,100 homes in 2013, CMHC said.

Most of the growth in housing starts for 2012 has been in multiple-family housing, but in 2013, multiple-family housing starts will level off, while single-detached homes start to rise, Frketich said.

“We tend to see more single-detached home starts when resale market conditions are stronger, so that’s why we’ve got that stable level of single-detached this year,” Frketich said. People who are looking to buy can find homes on the resale market.”

She said CMHC expects 9,900 single-detached housing starts in 2013, up from 8,900 this year. That compares to 11,500 in 2010.

Average prices, which are down about five per cent in Vancouver this year from last year, are expected to climb about 2.6 per cent by 2013, both in Vancouver and across B.C., Frketich said.

The average MLS price in B.C. is forecast to be $522,200 for 2012, down 7 per cent from 2011, but should increase to $537,700 as resale activity picks up next year, CMHC forecast. The resale market in B.C. will maintain balanced supply and demand conditions through 2013, CMHC said. The number of sales will continue to moderate through 2012, but should also pick up in 2013, Frketich said.

Vancouver renters will be looking at lower vacancy rates and higher rents for the fall, Frketich said. The vacancy rate is projected to fall to 1.1 per cent in October from 1.4 per cent in October 2011, while the average rent for a one-bedroom apartment will climb to $1,005 from $964 in the same time period.

Nationally, the CMHC is forecasting a moderate slowdown in new-home construction starts as well as sales of existing houses.

The CMHC national forecast suggests next year will be somewhat softer than estimates the federal agency issued in June, while 2012 may be somewhat stronger nationally than previously expected.

Nationally, CMHC estimates there will be between 196,800 and 217,000 units of housing started in 2012. In 2013, CMHC now estimates national housing starts will be in the range of 173,000 to 207,400 units.

The national average price for property sales through CREA members is forecast to be between $351,300 and $378,400 in 2012 and between $358,000 and $395,800 in 2013, CMHC said Tuesday.

Source: Tracy Sherlock, Vancouver Sun

Price declines in Vancouver dragged the national average home price lower in July, even as most markets saw slight increases compared to the same month a year ago.

The Canadian Real Estate Association said yesterday the national average price for homes sold in July 2012 was $353,147, down 2 per cent from the same month a year earlier.

“Prices are off their recent peaks in Greater Vancouver and Greater Toronto, but remain above year-ago levels in most markets,” the agency said in a release.

Overall, the sales activity was up 3.3 per cent across the country, meaning more homes sold in July 2012 than changed hands in the same month in 2011. But the number of newly listed homes fell 3.3 per cent in July compared to the previous month.

The average price was higher in 7 out of 10 markets, CREA said, but declines in the large Vancouver market dragged the national average lower. Stripping Vancouver out of the equation would have resulted in a 1.1 per cent average annual gain, CREA said.

“The national housing market remains firmly entrenched in balanced market territory,” CREA said.

The slight real estate slowdown is a reflection of Canadians’ wariness of taking on more debt, TD Bank said in a note following the release of the data. Job growth has effectively stalled over the last few months, owing to an uncertain outlook for the global economy, the bank noted.

“From an economic risk perspective, the moderation in the resale housing market is a positive development,” TD economist Francis Fong said. “Slowing the pace of debt accumulation and housing activity now reduces the risk that households will get into financial trouble down the road when interest rates do eventually rise.”

TD has been calling for a “modest correction” of between 10 and 15 per cent for some time, Fong says. “Today’s report provides some evidence that that correction is now beginning to take place,” he noted.

Source: CBC

Three Canadian cities have again cracked the top five on a ranking of the world’s most liveable places.

In the latest report from the Economist Intelligence Unit released Tuesday, Vancouver ranked third, followed by Toronto and Calgary in fourth and fifth respectively.

The Canadian cities were bested only by Vienna in second and Melbourne, which topped The Economist’s Liveability Ranking.

The annual survey of 140 cities uses more than 30 factors to gauge the state of healthcare, education, infrastructure, stability, culture and environment — rendering a score out of 100.

Vancouver lost marks only for petty crime rates, availability of quality housing and congested road networks, with report authors citing a series of infrastructure projects such as the new Evergreen transit line “that will no doubt have a long-term benefit, but in the short-term they can be disruptive.”

Toronto received a “Tolerable” rating (as opposed to Acceptable) for roads, public transit and housing while Calgary waned in temperature ratings.

Calgary Mayor Naheed Nenshi mused that his city’s spot on the ranking proves a “thriving business community, and a vibrant cultural scene that is attracting people from around the world” ­— echoing comments from Stephen Harper’s speech at the Stampede last month when the Prime Minister declared the Alberta metropolis as the greatest city in Canada.

The only other Canadian city to make the Economist list was Montreal in the 16th position.

Australia was the only country to outperform Canada, posting four cities in the top 10. The authors say the trend among the most liveable cities shows a preference for “mid-sized cities in wealthier countries with a relatively low population density.” Canada’s density is 3.40 people per square kilometre, while Australia’s is 2.88.

The results vary little from the last ranking released six months ago, with Vancouver maintaining the third spot after slipping from first place in 2011.

Most of the top-tier countries are separated by fractions of a percentage — the first-ranked Melbourne is scored 97.5, only 1.8 points higher than 10th-place Auckland, N.Z. The Economist Information Unit uses the ranking to provide suggestions on how businesses should compensate employees working abroad in cities “where living conditions are particularly difficult.”

It’s one of several studies of its kind, but economic development experts in the listed Canadian cities say The Economist report’s catering to business communities could lead to tangible benefits.

“It’s certainly circulated to an audience of potential investors and investors that may be interested in relocating to our city,” said Randy McLean, a strategy director at the City of Toronto, adding good scores in categories like education will help attract top management talent and their families.

Source: Jake Edmiston, National Post