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

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

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

The Office of the Superintendent of Financial Institutions (OFSI) sent ripples through the industry March 19th, releasing “draft recommendations” for all federally regulated banks to follow.

We have now learned that the OSFI intends on getting these guidelines finalized for the end of June or early July, with implementation potentially immediate, but most likely within a month or two of the official announcement. Bank CEO’s have been informed of these time frames and are beginning to prepare for what could be a large shift in the way the big banks underwrite mortgages. Here are the highlights from the guidelines (available at http://www.osfi-bsif.gc.ca/app/DocRepository/1/eng/guidelines/sound/guidelines/b20_dft_e.pdf):

* Home Equity Line of Credit mortgages reduced from 80-per-cent financing to 65-per-cent financing.

* Lines of credit to be either amortized, or amortized after a specified period of time (no more never-never plans).

* More stringent income requirements for self-employed borrowers.

* All mortgages to be reviewed upon renewal (currently as long as payments are made, it is unlikely for a bank not to offer a renewal to a client).

* Funds from cashback mortgages are not allowed as a source of down payment (currently only a handful of lenders allow this, but it does mean that “zero down” mortgages are technically available, but with some restrictions.)

* Use of the five-year posted “benchmark” to qualify uninsured terms of one to four years and all variable terms (currently most lenders use a three-year posted or a lower rate to qualify uninsured mortgage.)

* More limits on underwriting exceptions (many recent applications don’t fit the ever shrinking “boxes” with the banks, which means fewer common-sense deals will get approved.)

* Home insurance to be included in debt-servicing ratios (it is currently not included.)

* More public disclosure of statistics pertaining to institutions’ mortgage practices.

* More accountability from management to ensure lenders are adhering to their underwriting guidelines.

Since announcing the proposed guidelines, the OSFI has reviewed comments from the industry and it is changing its opinion on a few items. First, it is becoming more likely that 65-per-cent financing on lines of credit is a done deal, although officials are probably scrapping the idea of a forced amortization on these credit lines. However, the most important comments from the OSFI’s review of the feedback has been that they are likely to withdrawal the requirement to re-qualify at renewal, which has given many in the industry a sigh of relief.

Although many of these above guidelines sound reasonable, having all of these changes come into effect at the same time could have a negative impact on housing markets short term. Potential purchasers may find it more difficult to obtain financing, and investors may find it harder to leverage existing assets to acquire additional properties.

Many in the industry feel that these changes are the government’s way of slowing down accumulation of secured debt and the housing market without raising interest rates.

The Bank of Canada announced June 5 no change in the prime rate, and the consensus is no further changes until early 2013. Many fingers on this decision pointed to ongoing concerns with the European (and therefore worldwide) markets, as well as a relatively strong Canadian dollar and inflation levels at comfortable levels. Until the Euro is more stable, money will continue flooding from European markets to North American markets, keeping interest rates low for borrowers.

For borrowers, this presents a double-edged sword. No longer should they be worrying about getting the best rate on their mortgage (many lenders are currently offering 3.09 per cent on five-year fixed rates), but should be more concerned about getting the money at all. If you are planning on making a purchase this year, the window (especially for investors) may be closing soon.

What is interesting is that these rules are going to be affecting all federally regulated institutions, so we may find that credit unions may be able to offer niche products (like lines of credit over 65 per cent) that major banks won’t be able to offer.

Credit unions will often follow federal guidelines, but may feel that their risk to lend to high-quality clients may not be as severe as the OSFI feels and continue operating on their current guidelines. It might be time to develop a stronger relationship with your credit union again.

Source: Kyle Green, Mortgage Alliance Meridian Mortgage Services Inc.

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Canada’s housing boom will grind to a halt next year, stopped by price declines in the condominium-saturated markets of Toronto and Vancouver, according to a Reuters poll, raising the risk of a broader economic slowdown.

On a national basis, Canadian house prices are expected to rise 2.0% this year before stalling next year with a negligible 0.5% gain, according to median results of the poll, which was conducted last week.

House prices have increased 37% since their trough in January 2009, The Canadian Real Estate Association index showed. All 15 respondents in the poll said the market was expensive, by varying degrees.

“Home prices are overvalued by slightly under 10% nationwide (and) most of the overvaluation is concentrated in Toronto and Vancouver,” said Mark Hopkins of Moody’s Analytics, citing a common concern about the two hottest urban markets.

House prices in Toronto, Canada’s largest city and financial capital, are expected to rise 6.6% this year after rising almost 10% in 2011. But that will quickly fizzle into a decline of 0.2% next year, the first fall since 2008.

In Vancouver, the country’s most expensive market and until recently clocking the fastest annual price rises, they are expected to fall 1.6% this year and 2.5% in 2013.

Canada’s housing market avoided the U.S. sub-prime boom and bust that triggered the global financial crisis, in large part because its banks are more closely regulated and more conservative, requiring higher deposits for mortgage lending.

While property prices tumbled in the U.S., Ireland, Spain, and to a lesser extent, Britain, record low borrowing costs that followed the recession spurred another wave of home buying and property market speculation in Canada.

By early 2010, sales volumes and prices were rising by double digits on an annual basis. Figures from one industry group showed that since March 2009, the nadir of the financial crisis, Canada home prices have risen by nearly a third.

Source: Cameron French, Reuters

Calgary’s resale housing market had the highest year-over-year sales growth in May compared with other major centres across the country, according to the Canadian Real Estate Association.

In releasing its monthly MLS data on Friday, CREA said the Calgary market had 2,982 sales during the month, up a stunning 34.4 per cent from a year ago. Nationally, sales of 53,068 were 9.0 per cent higher than a year ago.

Calgary’s average MLS sale price jumped by 3.2 per cent to $429,459 while across Canada the average price dipped 0.3 per cent to $375,605.

Robert Kavcic, an economist with BMO Capital Markets, said sales activity at the national level “has clearly mellowed.”

“While Vancouver softens, Calgary is awakening from a three-to-four-year slumber with sales surging 34.4 per cent in the past year, and average prices within a hair of record levels seen in 2007 as supply conditions have tightened across Alberta,” he said. “Before declaring victory in Calgary though, note that the more representative House Price Index, which accounts for dwelling type, quality, etc., was still about 10 per cent below peak levels in April. May figures are expected next week.”

Wayne Moen, CREA’s president, speaking about the national picture, said “the expected continuation of low interest rates will keep housing markets stable and home ownership affordable and within reach for many buyers in the months ahead.”

“Activity in Greater Toronto is stronger this spring than it was last year, and higher-priced homes are still selling quickly,” said Gregory Klump, CREA’s chief economist. “As Canada’s most active housing market, and one of the priciest, it is still the biggest factor boosting the national average price but its support was less of a factor in May.

“At the same time, the national average price is finding support from Calgary, where sales and average selling prices are up from levels in May last year. Overall, price growth remains modest amid balanced market conditions.”

The average price in Toronto rose by 6.4 per cent to $516,787.

CREA said sales in Alberta rose by 23.4 per cent to 6,984 while the average sale price increased by 4.9 per cent to $374,653.

Also on Friday, CREA released its latest forecast for the rest of this year and for next year. It said MLS sales in Alberta would rise 12.1 per cent this year to 60,250 units and by another 2.2 per cent next year to 61,550.

It said the average price in the province would jump by 2.4 per cent in 2012 to $361,800 and by 2.2 per cent in 2013 to $369,800.

Nationally, sales are forecast to increase by 3.8 per cent to 475,800 this year but drop by 1.1 per cent next year to 470,400. The average price across Canada is predicted to increase 2.2 per cent in 2012 to $370,700 and by 2.0 per cent in 2013 to $378,200.

Source: Mario Toneguzzi, Calgary Herald

Canadian housing market conditions have cooled slightly, with prices down nearly 2% in the first quarter, but the country continues to outperform other developed nations, according to a new Scotiabank real estate report.

The latest Scotiabank Global Real Estate Trends report released today found that the inflation-adjusted national average home price fell by 1.6% in the first quarter of 2012 compared to the same period of 2011.

That compares with a 1.3 inflation-adjusted year-over-year gain in the fourth quarter of 2011.

Canada’s housing market remains an outperformer among developed nations, but conditions have cooled here as well, according to Scotiabank economist Adrienne Warren.

“Price trends are relatively steady in the majority of local markets, though a few, notably Toronto, continue to report strong appreciation,” Warren writes in the report, released today.

Demand has cooled due to moderate income growth and tighter mortgage insurance rules. In addition, there are more houses up for sale in most parts of the country.

Scotiabank said it expects the number of sales and average prices will be flat in the latter half of 2012.

By comparison, it found global property markets remain under stress, especially in recession-plagued European countries. Ireland saw prices fall a whopping 18.9% and prices in Spain, which has experienced a housing crash, fell 9.1% year-over-year.

Over the weekend, eurozone finance ministers offered to make $100 billion available to Spain to revive banks crushed by bad real estate loans. However, market reaction suggests many observers didn’t feel the relief was enough.

Most countries covered by the Scotiabank report saw prices decline during the quarter.

“The intensifying eurozone debt crisis, increasing financial market strains and moderating global growth suggests there is more downside risk to property prices in the near-term,” Warren said.

“Eventually, however, improved housing affordability and pent-up demand will put many of these markets on a firmer footing.”

Scotiabank projects that the era of ultra-low borrowing costs will continue in most developed economies, while many developing economies are moving to reverse prior hikes.

The latest figures on Canada’s housing market from the Canadian Real Estate Association are due Friday, measuring the strength of sales and prices in May.

In April, the average home price in Canada was up 0.9% from a year ago at $375,810, while sales on a year-over-year basis were 49,480, up 11.5% from 44,370 a year ago, CREA said.

Continued strength in the housing market, largely due to the staying power of low interest rates, has led some economists to warn the market is overvalued. That could make homeowners vulnerable to a downturn, especially those who have used low interest rates to borrow more than they could otherwise afford.

A report released earlier this week by the Toronto-Dominion banking group projected Vancouver and Toronto home prices will probably experience a downturn of about 15% in two to three years, but not the dramatic drop that hit the United States a few years ago.

The Bank of Canada and federal Finance Minister Jim Flaherty recently stepped up their warnings to Canadians to moderate borrowing on real estate, declaring household debt to be the domestic economy’s number one enemy.

Source: Sunny Freeman, The Canadian Press

The Bank of Canada on Tuesday said it was keeping its trend-setting interest rate on hold and acknowledged risks from the European crisis are leading to a “a sharp deterioration” in global financial conditions.

The central bank kept its lending rate at a near-historic low of 1% – where it has been since September 2010 – and pointed to weaker expectations for global economic growth.

“Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions,” the bank said in its statement accompanying the rate decision.

“The outlook for global economic growth has weakened in recent weeks.”

Many economists have pulled back on their forecasts for a rate increase before the end of the year, while others are now speculating rates could actually come down if global uncertainty continues.

Tuesday’s rate decision comes as Finance Minister Jim Flaherty is to join his Group of Seven counterparts on a conference call to discuss Europe’s debt crisis and the fallout within the region’s banking sector. Bank of Canada governor Mark Carney was also expected to take part in the talks, along with other G7 central bankers.

“The eurozone is slowing and has now affected Germany and France, the so-far more resilient economies in the eurozone,” Otto Waser, chief investment officer at Research & Asset Management AG in Zurich, told Bloomberg Television.

“We see some policy response emerging. We’re going to be talking more rescue measures in Europe. I don’t think that’s going to really stabilize the economies.”

On Wednesday, the European Central Bank will meet to decide on its key interest rate, ahead of critical meeting of European leaders on June 28 and 29 called to discuss the debt and banking crisis.

In Canada, economic growth in the first quarter of this year was just 1.9%, on an annualized basis, matching the fourth-quarter increase, as consumer spending slowed to a three-year low.

On a monthly basis, gross domestic product edged up 0.1% in March from February.

The Bank of Canada had forecast growth in the first three months of 2012 at 2.5%.

“While the U.S. economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected,” the bank said Tuesday.

“More modest global momentum and heightened financial risk aversion have reduced commodity prices.”

The central bank acknowledged that growth was “slightly slower than expected” in the first quarter, “underlying economic momentum appears largely consistent with expectations.”

“In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth.”

However, the bank slightly rephrased its view of excess capacity in the economy, characterizing it as “a small degree,” rather than the “somewhat smaller” than anticipated wording in its previous rate statement.

“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary stimulus may become appropriate.”

Source: Gordon Isfeld, Financial Post