Archive for November, 2010

Further Thoughts on Canadian Housing

Monday, November 29th, 2010

Visiting Vancouver last week, some of the clients at meetings were commenting on house prices in Vancouver and the lower mainland of BC, complaining at how expensive they were and how they had risen sharply in the aftermath of the Winter Olympics in February this year. One smart and successful advisor was renting and had been for several years, determined, as he put it, not to be seduced into jumping into a market that was not only the most expensive in Canada in absolute price terms, but also the most expensive by fr in affordability (price to average salary). According to the Average House Prices table in the Globe’s report on Business section this Saturday, November 27th, the price of the  average house in Vancouver is approximately $715,000, a 60% increase compared to its level of $$450,000 5 years ago, and to Toronto, the next most expensive city, where the average house sells for $450,000 today, only up 30%  from $350,000 5 years ago.

According to the Teranet-National Bank House Price Index, Vancouver has seen its average house increase 9.2% in price over the 12 months to September 2010, and is up 3.9% year-to-date. This compares with a 7.9% year-on-year increase nationally and a 4.4% increase year-to-date, so in fact Vancouver has fallen behind the national average so far this year, but it undoubtedly remains by far the most expensive city in Canada. One point to remember, however, is that Vancouver went through a prolonged property bust between the end of the major wave of Hong Kong migration in 1994 and the replacement of the perceived high-tax, business unfriendly NDP governments of Mike Hargrove and Glen Clark in 2001. According to the Teranet-National Bank index, average Vancouver house prices rose 34% between early 1990 and the end of 1994, but then had fallen 7% in nominal terms by April 1999, and were still below their December 1994 level as late as April 2002. They then doubled in just under 6 years (January 2008) and peaked in August that year, before falling 12% over a year to August 2009. It’s true that prices have recovered to new all time highs but compared to 2 years ago, they are barely ahead. 

On a housing affordability basis, using the RBC survey’s definition of  the costs of owning a home with a 25% downpayment, a 25 year mortgage with a 5 year fixed rate and including utilities and property taxes, Vancouver is by far the most expensive city, with 78% of median national pre-tax income required to cover these costs for a standard 1500 sq ft 2 storey house compared to a 25 year average of 63% and 68% for a 1200 sq ft bungalow compared to a 25 year average of 57%. It’s unsurprising that so many Vancouverites buy condos , where affordability runs at 40% for a 900 sq ft unit, although even these are expensive compared to the long term average of  32%. For Vancouver, along with other resource based markets such as Calgary and Edmonton, choosing when to buy your house seems almost as important as where to buy.

Canadian House Prices-A Bubble or Not?

Sunday, November 21st, 2010

Every Saturday, the Toronto Globe and Mail’s Report on Business section publishes a table of Major City House Price Changes, with one week being the percentage change for the 5 biggest and smallest changes in individual cities in Canada over 1 year, and the next week being the change over 5 years. There has been much debate in Canada, and from outside observers, as to whether the Canadian housing market was overvalued, and whether, as in the case of the US, the UK, Ireland and Spain in particular, a bubble was forming in the property market. Pessimists pointed to the high level of house prices to average wages, and the high level of household indebtedness in Canada, which is now higher than the US and the UK. Furthermore, having experienced a 2 year decline between 2008 and early this year, which in some of the hotter markets such as Vancouver, Calgary and Edmonton, had seen falls of 20% or more, prices nationally have recovered, and for the country as a whole, taking the National Bank/Teranet Index of house prices, prices were up 12% in the 12 months to August, 2010.

Optimists focus on the differences between the US and European markets and Canada, including but not limited to the much better mortgage underwriting practices of the Big 5 Canadian banks, including verifying borrowers’ incomes and the requirements imposed by the Canada Mortgage and Housing Corporation (CMHC), the 100% government owned mortgage insurer, which requires a 5% downpayment to insure a mortgage, and reduced the maximum term of insurable morgages to 35 years in 2008. In Canada, the lender has recourse to all of the borrower’s assets, not merely the house itself, as is the case in 46 of the 50 states in the US, making it much more difficult for borrowers to walk away from underwater mortgages, and there is no tax deductability for mortgage interest, unlike the US. Lastly, the CMHC stands ready to purchase any eligible mortgage from the banks, so the C$400 billion or so of mortgage assets on the banks’ books are in effect liquid government debt, and the government actually bought billions of mortgages from the banks in late 2008 and early 2009 to ease any liquidity problems.

Lastly, and perhaps most importantly, the Canadian economy is in much better shape than the US and western Europe, owing to its large resource exposure, and its conservatively run banking system not needing to be bailed out by the government, both reducing the size of the government’s deficit, and making the banks willing to continue lending, albeit in a somewhat more conservative fashion. Looking at the 5 year changes in major city house prices as of November 2010, the Canadian national average house price is up 34.1%, a situation very different from that of the US, UK, Ireland or Spain. Amongst the 5 cities with the largest increases in price, all of them are western cities with exposure to the boom in resources, with the Saskatchewan pair of Saskatoon and Regina up 110% and 91% respectively, nickel town Sudbury up 63% and Winnipeg in Manitoba and Edmonton in Alberta up 62% and 60%. Of the 5 cities that have the lowest increase in prices over the last 5 years, the common theme is exposure to sectors dependent upon the US domestic economy. Thus Windsor, opposite Detroit, St Catherine’s in the Niagara peninsula and  Durham, which includes the GM plant in Oshawa, just east of Toronto, are up only 6%, 17% and 18% respectively, while forest products-dependent Thunder Bay in western Ontario is up a mere 7%. The other laggard, however, may surprise; it is Canada’s largest city, Toronto, with a 29.5% increase since 2005. To a certain extent, this reflects the importance of the auto industry to the economy of southern Ontario, with the Ford plant at Oakville and the Chrysler plant at Brampton, both western suburbs of Toronto, suffering along with GM from the downturn in demand for autos in the US. An unbiased observer would probably feel that house prices barely keeping ahead of inflation in a country’s largest city would not indicate that a bubble was fully formed, even though the price to average wages level was certainly high compared to historical levels. With 5 year fixed rate mortages going for 3.44%, the present level of house prices seems sustainable in the absence of sharp increases in interest rates, up 0.75% to a still very low 1% in the last 6 months. Likewise unemployment, which has fallen below 8% as the 400,000 jobs lost in the recession have all been regained, does not seem to pose a major threat at the moment.

Republicans Gain Biggest House Win in 60 Years

Friday, November 5th, 2010

The Republicans won 60 seats in the House of Representatives in the 2010 mid term elections, the biggest win for any party since 1948 and larger than their Contract With America win under Newt Gingrich in 1994. Driven by the wave of Tea Party anger at intrusive wasteful government, the Republicans also picked up 6 Senate seats, including Democratic strongholds such as President Obama’s former seat in Illinois and Pennsylvania, where Democrats outnumber Republicans by 1.5 million. However, the Republicans may once again have been lucky, in that they failed to win several seats which should have been easier to win, such as senate leader Harry Reid in Nevada, the state worst affected by the property collapse and Delaware, where Tea Party candidate Christine O’Donnell’s admission of dabbling in witchcraft lost a winnable seat.

Why lucky? Given the strongly held opinions of the numerous Tea Party freshmen, Republican control of both houses of Congress might have led to unduly radical actions such as the attempted shutdown of government by Newt Gingrich in 1995, or the attempted impeachment of Bill Clinton in 1998. Given the present mood of suspicion towards both parties, any attempt to overplay their hand by the Republicans could risk their present strong position. While it is likely that the size of the Republican majority is such that President Obama and the Democratic Senate will compromise over such issues as the extension of the Bush tax cuts for the next few years and agree to modify carbon emission legislation, given the President’s track record over his first two years, it is hard to see much coming out of this election except gridlock. This is probably a good result, given the uncertainty caused by the enormous volume of legislation introduced by the Democrats in the last two years, and business may even be willing to begin hiring again and increase capital expenditures.

However, it is a mistake to remark, as commentators on MSNBC were doing, that the President’s party always loses seats in midterm elections, although both Bill Clinton and George W Bush gained seats in 1998 and 2002. The size of the Republican House win, with independents voting 55% in their favour against 44% in 2008, and with the demographics of their vote including majorities amongst older, better educated and wealthier voters and almost equality amongst female voters indicates that unless the economy turns around dramatically in the next 18 months, the Republicans will regain control of the Senate and probably the presidency if they choose an electable candidate. It will be up to Ben Bernanke and his latest U$600 billion quantitative easing package to carry the load after this election.