Canada’s hot housing market showed signs of cooling on Thursday as July housing starts slowed more sharply than expected, but housing prices were still climbing in June and analysts said a real slowdown may not come until late in 2012.

Ground breaking on new homes fell to a seasonally adjusted annual rate of 208,500 units in July, according to the Canadian Mortgage and Housing Corp, a sharp slowdown from the 222,100 units in June and below the forecasts of analysts in a Reuters poll, who had expected 213,300 starts.

It was the first time in seven months that the rate of starts fell below the six-month trend, and a government decision to tighten mortgage lending from July was expected to contribute to further slowing as 2012 draws to a close.

“We do expect that the impact of tighter mortgage regulations announced in late June will slow housing demand, but the impact on the construction and starts data is unlikely to show up until later in the year,” David Tulk, chief Canada macro strategist for TD Securities, said in a research note.

This week, Scotiabank forecast that home prices in Canada will fall 10% over the next two to three years. But other economists have predicted as much as a 25% correction.

The hot market has sparked fears of a bubble, particularly in Toronto, Canada’s largest city, and in Vancouver, as low interest rates fueled condominium building and double-digit annual price increases for existing homes.

The bulk of the pullback in July housing starts came in the multiple unit segment, where starts in the volatile condo market in British Columbia braked. That was in line with earlier data that has shown cooling in the Vancouver real estate market.

Multiple unit starts dropped 7.6% to 123,000 annualized units, the lowest level since February. Single unit starts fell 4.0% to 64,000 annualized units.

The slowdown in July pushed starts below the average for the second quarter and suggested the housing sector may not drive Canadian gross domestic product growth for much longer.

Mindful of the U.S. housing boom that was left unchecked until it burst, the Canadian government in July tightened conditions for homebuyers and mortgage lenders in a bid to deflate a possible bubble before it pops. The changes took effect in July.

This week Bank of Canada Mark Carney also stressed that despite global economic turmoil, interest rate hikes were still on the table in Canada.

Other data showed that prices of new homes in Canada rose by 0.2% in June, the 15th consecutive month-on-month increase, and continued strength in large cities such as Toronto and Calgary, Statistics Canada data showed.

The advance matched market expectations and follows the 0.3% month-on-month-gain in May.

Prices in Toronto, which accounts for 26.6% of the entire market, rose 0.3% in June, while prices in Calgary, where the booming energy industry has fueled demand, were up by 0.5%. New housing prices rose in 13 metropolitan regions, were unchanged in six and fell in two. Prices in June 2012 increased by 2.3% from June 2011 compared to the 2.4% year-on-year advance recorded in May 2012.

Source: Andrea Hopkins, Reuters

The number of Canadian homes sold last month dropped more than four per cent from the level in June 2011, the first year-over-year decline in sales volume since April 2011, the Canadian Real Estate Association said Monday.

Resales of homes were also down 1.3 per cent in June from May — the second month-to-month decline — with a total of 46,444 transactions through CREA members. That was down from 48,591 in June 2011, the association said.

The national average home price in June was $369,339, down 0.8 per cent from the same month last year, CREA said.

However, CREA said its MLS Home Price Index — which the association says is a better measure because it adjusts for different types of properties sold — increased 5.1 per cent between May and June 2012.

Prices increased in Calgary, remained strong in Toronto and continued to slow in Vancouver.

“Canada’s housing market lost a little altitude in June, but it’s still flying pretty high,” association president Wayne Moen said in a news release.

“That said, sales activity and average prices bucked the national easing trend in a number of markets, which underscores that all real estate is local,” Moen said.

There have been several reports saying some real estate markets and some types of housing are over valued, although there’s a range of opinions about how much and how quickly prices will decline.

Economists and consumers have been closely watching for signs that demand has softened to the point where prices will start going down.

But the association, which represents real-estate boards and associations that handle most of the country’s property transactions through the MLS system, said Monday the decline in sales activity and an increase in new listings resulted in a “more balanced” national housing market in June.

The number of newly listed homes rose 1.4 per cent in June compared to May, led by the Toronto market. Some 42 local markets, out of 100 markets across the country, registered a monthly increase in new listings of at least one per cent, the association said.

In the first half of 2012, a total of 257,193 homes traded hands over Canadian MLS Systems, up 4.7 per cent from the same period in 2011.

Gregory Klump, CREA’s chief economist, said home buyers didn’t rush to make purchases before the latest restrictions on mortgage regulations came into effect in July.

“That’s a big change compared to what we saw as a response to previously announced changes,” Klump said.

“It will take some time before the compound effect of previous and recent changes to regulations on Canada’s housing market becomes apparent.”

Under new mortgage rules announced in June by Finance Minister Jim Flaherty, borrowers will be allowed to use up to 80 per cent of their property’s value as collateral for home-equity loans, down from 85 per cent.

In addition, the maximum amortization period dropped to 25 years from 30 years for government insured mortgages.

Flaherty also said government-backed mortgage insurance will be limited to homes with a purchase price of less than $1 million.

Source: LuAnn LaSalle, The Canadian Press

The Lower Mainland real-estate market has slowed down over the last two months, compared with recent years, but that hasn’t stopped some large-scale projects from moving through the approval process.

This Monday, James K.M. Cheng Architects will be at the Vancouver development permit board seeking approval of a mixed-use residential and retail development at 8198 Cambie Street.

Intracorp is developing the project across the street from the Marine Gateway project, which is beside the Canada Line’s Marine Drive station. If the permit is awarded, Intracorp plans to build 31- and 25-storey towers on two podium bases of seven and five stories.

The proposal received unanimous support before the Urban Design Panel on June 6. It includes 110 rental units under the city’s Short Term Incentives for Rental Housing program, along with 444 market strata units, two artists’ studios with residential components, and four levels of underground parking.

At the same meeting, Perkins + Will Architects will seek a development permit for Phase 1 of Wall Financial Corp.’s massive redevelopment of Shannon Mews, on the northwest corner of Granville Street and West 57th Avenue. The historic site includes a mansion once owned by sugar baron Ben Rogers, a heritage wall around the grounds, Italianate gardens, and apartments designed by Vancouver’s most famous architect, Arthur Erickson.

The first phase of the project includes three multiple-dwelling buildings with commercial units at grade, according to the development-permit board’s agenda. The architectural firm is also seeking the board’s approval for the restoration of three designated heritage buildings on-site and development of a local energy system.

Wall Financial Corp. obtained city council’s approval last year to increase the number of units on site from 162 to more than 700. As part of the proposal, the company will create a small park, demolish Erickson-designed apartment buildings, and create a hole in the heritage wall.

The third major development of interest is Aquilini Development and Construction’s application to rezone the area around Rogers Arena to allow construction of three towers of 24, 28, and 32 storeys. The company is seeking council’s approval to build 614 market rental units and 20,000 square metres of commercial space.

The west tower would be built just west of the arena, which is owned by the Aquilini family. The east tower would be constructed near the intersection of Abbott Street and Pacific Boulevard. And the south tower would stand on the other side of the Georgia Viaduct from Rogers Arena, facing onto Pacific Boulevard.

The Georgia Viaduct bisects the Aquilini site. Coun. Geoff Meggs has told the Georgia Straight in the past that he favours getting rid of both the Georgia and Dunsmuir viaducts, a move that could result in rerouting traffic either along Pacific Boulevard or along Hastings Street into the downtown core.

Source: Charlie Smith, Georgia Straight

Numbers may not lie, but they can certainly tell different versions of the truth.

Take the year-to-date sales numbers released by the Building Industry and Land Development Association (BILD) for new homes and condos sold across the Greater Toronto Area between January and May. During that time, 8,924 new high-rise units were sold — down 22.4% from last year. Low-rise sales during the same period, though, were up 1.6%, at 8,040 sales.

All of that would seem to signify a bad year for the new high-rise market, and a good year for low-rise — except that’s not the case, says George Carras, president of market analysis firm RealNet Canada, which provided the data to BILD. “It’s down [from last year], but relative to the last 12 years it’s the second best year,” he says of the high-rise market. “In fact, when you do the average of the last 12 years, you’re about 37% above average. You’re still seeing on a relative basis very strong sales over the long term.”

Low-rise, though, is a different story. Though sales of new low-rise homes were higher than last year, they were down 25% compared to long-term averages, Mr. Carras says.

Put low-rise and high-rise sales together, though, and what do you come up with? A pretty average year so far, he admits — down 12.7% from 2011’s record numbers. Overall, sales from January to May were at 16,964 units sold, compared with long-term average sales of 17,293 during the same time. “You’re almost right on average in total,” he says.

“The main difference, of course, is the shift in the kind of housing. And that’s continuing.”

Another difference is price. With supply down in the low-rise sector, prices are rising there. RealNet calculated the average index price for a low-rise home at $607,893 in May, “the first time it’s ever gone beyond $600,000,” Mr. Carras says. In the high-rise sector, meanwhile, prices have been levelling off in general, though did rise in May to $439,549. “You usually look at a price gap between low-rise and high-rise, and in the long-term it tended to be about $78,000,” he says. “This is the widest gap on record.”

Affordability continues to drive the high-rise market, adds Jasmine Cracknell, partner with Toronto real-estate consulting firm N. Barry Lyon Consultants Limited. The June 21 announcement by Finance Minister Jim Flaherty, reducing the maximum mortgage amortization period to 25 years from 30 years, will see that trend continue, she predicts.

“Affordability will be much more critical … now somebody who qualified for a 700-square-foot condo before will have to get a 600-square-foot condo,” she says. “Some people’s expectations might have to be lowered in terms of what they can afford.”

The result, she adds, will be a market slowdown — the very intention of the change. Did Toronto, specifically, need it, though? Ms. Cracknell doesn’t think so. “It was slowing anyway,” she says.

Source: Lisa Van de Ven, National Post

A new commentary by the Conference Board of Canada is reigniting a debate over just how much influence China’s economy has over Metro Vancouver’s housing market.

Robin Wiebe, a senior economist with the Centre for Municipal Studies in Ottawa, offers the assessment in a column published by the Conference Board, warning that expectations of a slowing Chinese economy “could be considered as big a drag on the Vancouver housing market going forward as anything else, including the city’s notoriously poor affordability.”

Wiebe’s view is that Vancouver’s housing market has historically followed Chinese growth, with the accelerating Chinese economy over the past decade accompanied by surging Vancouver price increases.

“There is a clear correlation between Chinese immigration and real estate activity in Vancouver,” Wiebe said in his column. “In fact, the Chinese immigration peak of 2005 was matched by a peak in existing home sales in that same year. The 42,000 resale transactions that year were nearly 50 per cent above the previous decade’s average and remain a record high for this market.”

Similarly, Wiebe said the pendulum is now swinging the other way with a slowing Vancouver housing market coinciding with reports that China’s economy is cooling.

However, Cameron Muir, chief economist for the B.C. Real Estate Association, said that immigration from China has a far greater effect on Metro Vancouver real estate than foreign investors, and he doesn’t see the local market being greatly affected by a slowing Chinese economy.

“The vast majority of sales are generated by people who live, work and raise families here,” said Muir. “A [Chinese] slowdown might translate into some weakness, but foreign investors account for just a small percentage of sales.”

However, Muir noted that a slowdown might have some impact on areas that wealthy Chinese investors prefer, like Vancouver’s west side or Richmond.

The latest Real Estate Board of Greater Vancouver survey indicates that the number of residential property sales in Metro Vancouver hit a 10-year low in June.

The report noted that Vancouver’s west side, for instance, saw 769 single-detached homes sell in the first six months of 2012, down substantially from the 1,310 that sold there in the red-hot first half of 2011, while Richmond, another of 2011’s Metro Vancouver’s hot spots, saw 603 single-detached sales from January to June compared with 1,111 for the same period of 2011.

Wiebe added in an interview that there are “wealth spillovers” from China around the Pacific Rim, including Vancouver, as the wealthy diversify their assets away from Chinese real estate.

But it’s not just investors who are affected by changing fortunes, he noted, as Chinese immigrants to Canada also have less money to spend on housing locally when China’s economy falters.

He said the financial crisis of 2008 was hard on both Chinese growth and Vancouver house prices, but by 2010 both were once again in double-digits.

Wiebe noted that offshore investors do not need to live in Canada to own a property in Vancouver and it is possible to arrange property management by a professional or a family member.

“Accordingly, Chinese wealth probably has a larger affect on the Vancouver housing market than immigration numbers alone suggest, since Chinese investors can buy homes here while remaining there.”

Wiebe noted that China is typically the largest source of immigrants to Vancouver, accounting for nearly a quarter of all arrivals in 2010.

“These immigrants need a home and have supported housing demand growth in British Columbia for several years. Some come to B.C. with a significant amount of wealth and, thus, a strong appetite to invest in the housing market.

“Catering to Chinese residential demand is big business out here; the Chinese Real Estate Professionals Association of BC lists over 200 members on its website.”

Source: Brian Morton, Vancouver Sun

Many a child has delighted in popping a wad of Bazooka gum in their mouth, chewing vigorously, and then trying to blow the biggest bubble possible. The resulting end is inevitable – a sudden burst and then pulling the pink gum off their face.

Housing bubbles are not as much fun. But they can be just as sticky, messy and unpredictable.

Bubbles are as difficult to define as they are to spot. However here are a few definitions: Unsustainable patterns of price changes; deviations in prices that can’t be explained by fundamentals; and the mass refusal to acknowledge reason. We often don’t know with certainty that a bubble has existed until after it has burst.

The typical pattern of a housing bubble starts with price increases that are associated with euphoria as homeowners become wealthier. As wealth continues to increase, a mania may occur, and more buyers rush in as further price increases are forecast.

Eventually an event occurs – perhaps a change in government policy, increased interest rates, or a reassessment of market values – that leads to a pause in price increases. Some investors who borrowed heavily may find themselves under water, unable to make mortgage payments, and forced into distress sales. As prices decline, a crash and panic may follow.

During the 2008-2009 financial crisis, Canadian house prices fell by only 8 per cent – and then recovered by 2010. House prices have doubled since 2002, with annual growth of 5 per cent above consumer inflation. Vancouver, Victoria, and Toronto rose at much faster rates. With the current high prices in these cities – even with some recent weaknesses – have they been experiencing bubble-like symptoms? By two conventional metrics, the answer is yes.

The first measure is the price-to-income affordability index: The average house price relative to average disposable income in that city. The higher this ratio, the less affordable a house becomes and the more susceptible the market is for a decline in prices.

Over the past 25 years, the ratio in Canada has been about 3.5 times, but has recently been 4.5 times – almost 30 per cent higher. Since 2007, this ratio has grown faster in Canada than in almost every other major developed country. Recently in Toronto and Victoria the ratio was over eight times, and in Vancouver, despite recent price drops, about 10 times.

The other measure is the price-to-rent index, which is analogous to the price-earnings ratio for stocks: how much it costs to buy a house relative to annual rents (rents are like the earnings one could derive from owning a stock). Since 2007, this ratio is up 20 per cent, which again is among the fastest in developed countries.

According to recent analysis by the Economist, Canadian house prices are overvalued by 32 per cent relative to income, and by 76 per cent relative to rents, for an overall average overvaluation of 54 per cent compared with long-term averages. Only a handful of countries such as Belgium, Hong Kong and Singapore were more overvalued.

The key lesson we learn from history is that housing bubbles do burst. In Finland, house prices almost doubled between 1987 and 1989, but by 1992 were about 50 per cent off the 1989 peak. Japan experienced a real estate bubble between 1985 and 1990. House prices in Britain have declined by more than 20 per cent from their recent peak, in Spain by more than 25 per cent, in the U.S. by more than 40 per cent and in Ireland by 50 per cent.

Closer to home we have previously witnessed large price drops with slow recoveries. In Vancouver, prices dropped from 1995 to 1999, and it took until 2003 for prices to surpass previous peaks. In Toronto, prices dropped from 1989 to 1996, and it took until 2001 for prices to recover.

There are several key lessons for potential buyers, particularly in hot markets. Keep your emotions in check when considering a house purchase and don’t feel pressured to rush in; consider saving and waiting a few years. Ask yourself if you can service your mortgage under a scenario with interest rates 2 to 3 per cent higher than currently, especially in three to five years or when you may need to renew your mortgage. Consider your horizon: Don’t equate speculative short-term flipping strategies with long-term home ownership.

It is extremely difficult to know why or when a bubble of any kind is about to burst. Perhaps the recently announced rule-tightening related to government-insured mortgages could be a catalyst. Remember that it was more than three years before the bursting of what we now call the tech bubble that Federal Reserve Board Chairman Alan Greenspan made his famed cautionary speech about “irrational exuberance” in stock markets. As Mark Twain noted, history may not repeat but it sure does rhyme. Let’s keep in mind that bubble rhymes with trouble, as well as rubble.

Source: Stephen Foerster, The Globe and Mail

The Real Estate Board of Greater Vancouver (REBGV) is heralding a buyer’s market in Vancouver, but if prices are still going up, how can this be true?

The following is part of an article written by Harvey Enchin for the Vancouver Sun:

A buyer’s market is loosely defined as a market condition in which supply exceeds demand.

So, the REBGV was technically correct in declaring Vancouver a buyer’s market this week. Sales of houses, townhomes and apartments dropped 27.6 per cent last month to 2,362, units from 3,262 in June 2011.

While it may be true that buyers were presented with more choice and faced fewer rival bidders than a year ago, the fact that sales volumes were down is meaningless without an accompanying downward adjustment in price. And that hasn’t happened.

Metro Vancouver prices were up on average by 2.6 per cent from January to June, while West Vancouver and Whistler were up 7.1 per cent. In fact, the benchmark price for a detached home in Vancouver is up 3.3 per cent from a year ago to $961,600, or roughly 14 times the annual median household income. The average ratio of house prices to median income in Canada at the start of 2012 was 4.6 times.

Just because the real estate industry has heralded a buyer’s market, doesn’t mean it’s time to buy.

CREA’s forecast earlier this year called for a slight dip in property prices in 2012 — which is looking increasingly unlikely — and a rebound in 2013. However, TD Bank sees a price decline of up to 15 per cent over the next two to three years.

Academics who specialize in real estate finance — namely Tsur Somerville at the University of British Columbia and Andrey Pavlov at Simon Fraser University — are on record saying price changes won’t happen overnight. It might take six months for sellers to lower their expectations. Neither deigned to declare the current state of affairs a buyer’s market.

Eventually, tighter mortgage rules, high household debt, rising interest rates, overbuilding of condominiums and townhomes, and a slowdown in offshore investment will begin to bite and prices should start to decline.

The economic model of supply and demand is supposed to be a determinant of price, so unless practitioners of the dismal science have got it all wrong, the price of real estate — even in Vancouver — should soften sooner or later. Probably later.

One can understand the real estate industry’s hope for a buyer’s market — its members need sales to earn a living. But existing conditions in Vancouver, and other places in B.C., constitute a buyer’s market only if money is no object.

Source: Harvey Enchin, Vancouver Sun

Although one prominent forecaster recently warned that a substantial drop in housing prices is on the horizon, other analysts continue to have a more optimistic outlook.

More likely, the average price in Canada will be about flat for the foreseeable future, says economist Robert Hogue, who follows real estate for the Royal Bank of Canada.

Hogue agreed with Craig Alexander, chief economist at the TD Bank, that home prices have outrun income growth for years, bringing a decline of 10 to 15 per cent within the realm of possibility.

But he didn’t agree with Alexander that such a drop is probable — or that tough new mortgage-lending rules will be enough to trigger it now.

Economist Adrienne Warren at the Bank of Nova Scotia is also moderately optimistic. New rules that require an insured mortgage to be paid off more quickly will increase mortgage payments, but “I think this will just cool the market faster for first-time buyers,” not tip prices into a decline, Warren believes.

That’s not to say that prices will remain steady across the country. Homes in Vancouver are out of reach for many and those in Toronto seem headed in that direction, making these cities considerably more vulnerable to a fall in values.

But Montreal and most other cities are not significantly overvalued as long as mortgage rates remain low, says Sal Guatieri, an economist at BMO Capital Markets. “What that means is that the market has time to correct,” he believes, without the need for a big reversal.

Outside of the two highest-priced markets, Guatieri thinks national home price gains will sputter to a halt over the coming year, then plateau for a few years.

Indeed, most analysts had expected to see prices stabilizing earlier this year. This hasn’t happened, perhaps because warm weather and promotional rates on mortgages in the spring stimulated some sales that would otherwise have occurred this summer.

But sales figures for May showed a sales drop in most cities, including Toronto and Vancouver, while the average national price advanced by a moderate 5.2 per cent. True, Toronto sprinted ahead by 7.9 per cent, but Vancouver prices rose by just 3.3 per cent and those in Montreal by 2.2 per cent.

Warren thinks it would likely take a recession to tip prices into a significant decline across Canada. That’s not the prediction of most forecasters, who see modest growth continuing.

A more typical pattern in a moderately overvalued market like Canada’s, she says, would be “a long period of weak price gains” until rising incomes caught up with steadier home values. In the past, such stagnation has lasted for as much as a decade, she notes.

And even in this scenario, markets in resource-rich areas like Alberta and Saskatchewan could keep seeing gains if commodity markets remain healthy.

It’s important to note that the difference between Alexander’s prediction of a price drop and other analysts’ scenario of stagnant prices is merely a question of how fast prices will adjust, not whether they will.

There’s widespread agreement that Alexander’s estimate of average overvaluation in Canada is close to the mark – somewhere close to 10 or 15 per cent. There’s also general agreement that Vancouver and Toronto are the most overvalued markets.

The disagreement is about how the real estate market will react as Canadians approach the limit of their borrowing power – just as new lending rules make a mortgage even more expensive to carry. Both will make the number of eager buyers dwindle.

There’s no doubt that in an expensive housing market, prices can fall. But usually, there’s a clear cause: Canada’s recession brought a one-year slump, while irresponsible lending, speculation and a banking crisis in the U.S. created a much deeper crash that has yet to heal.

But without a powerful prod, homeowners are famously stubborn about avoiding a loss. Many will simply hold off selling if prices are too far below what they expected.

“There’s very little pressure on homeowners” apart from the few forced to sell by a transfer or loss of a job, notes Guatieri. So the market normally just stagnates for a while.

But stagnation isn’t the same thing as avoiding a loss; it’s merely a way of slowing it down. Every year that a home’s price rises by less than the rate of inflation, its true value falls a little. Meanwhile, incomes creep up. After a while — maybe a long while — the market returns to balance.

Source: Jay Bryan, PostMedia News

The number of residential property sales has hit a 10-year low in Metro Vancouver leading the Real Estate Board of Greater Vancouver to declare a buyer’s market.

The announcement is significant since the board has in recent months been calling the market “balanced.”

According to the board’s June report, sales of houses and apartments dropped to 2,362 last month, a 27.6 per cent decline compared with 3,262 sales in June 2011, and a 17.2 per cent drop over the previous month of May.

“Overall conditions have trended in favour of buyers in our marketplace in recent months,” said Eugene Klein, the board’s president, in a news release today.

“This means buyers are facing less competition and have more selection to choose from compared to earlier in the year.”

June sales were the lowest total for the month in the region since 2000 and 32.2 per cent below the 10-year June sales average of 3,484, the report shows.

New listings for detached, attached and apartment properties totaled 5,617 in June, a three per cent drop from the year before and an 18.9 per cent decline compared with the 6,927 new listings reported in May 2012.

“Today, our sales-to-active-listings ratio sits at 13 per cent, which puts us in the lower end of a balanced market,” said Klein.

He said the ratio has been declining in the market since March when it was 19 per cent.

The benchmark price for detached properties increased 3.3 per cent from June 2011 to $961,600, while apartments increased 0.3 per cent to $376,200.

Source: Tiffany Crawford, Vancouver Sun

Good news for homeowners and buyers as the CIBC says Canadians may enjoy historically low interest rates into 2014.

The bank released its new outlook for the global and Canadian economies, and all indicators point to weakening conditions and rising risks.

It says Canada’s economy will barely keep its head above water with growth rates of 2.1 per cent this year and next year, after growing 2.4 in 2011 and over three per cent in 2010.

The main reason, the bank says, is that the global economy will continue to slow, down to three per cent this year, the slowest pace of expansion since the recession.

As well, Canadian consumers are tapped out and governments are spending less.

With this backdrop the Bank of Canada will find it difficult to raise interest rates, says the CIBC, predicting it may wait until U.S. growth picks up sometime in 2014.

Source: The Canadian Press