Source: Financial Post – Signs of a Canadian housing downturn are everywhere
Any hopes of a rebound in housing demand are slipping away and the signs of a significant real estate downturn are everywhere. National home sales declined 2.1% from January to February, according to the Canadian Real Estate Association, and actual activity came in 15.8% below levels in February, 2012. Almost 80% of local markets posted year-over-year declines in house sales while new listings dropped 60%; worst in Toronto, Vancouver, Montreal and Saskatoon.
A real-estate correction of sorts is already under way in Vancouver and in Toronto’s overbuilt gleaming condominium market. But signs of another bust in the making point directly to the Greater Montreal area, which has as many individual homes for sale right now as Toronto and Vancouver combined — just under 32,000 — while at the same time, it has twice as many condominiums on the market than Toronto. Meanwhile, Quebec City posted a 30% decline in house sales year over year in March while Ottawa has not only seen its MLS inventory spike, its condo market has seen active listings jump by a whopping 40% year over year as prices fell 4% during the same period.
Clearly, government measures last year that were designed to cool this country’s overheated mortgage borrowing and house prices are effective at helping avoid a U.S.-style housing crash. Yet, Canada still ranks along with Finland, China, and Denmark among those countries with the biggest questionable asset bubbles in the world right now. “It’s going to be very difficult for policymakers to orchestrate a soft landing without inflicting significant collateral damage,” says Ben Rabidoux, an analyst at M Hanson Advisers. “We’re in store for something between a U.S.-style crash and a soft landing.”
Booming real estate prices since 2005 have given way to a deepening housing slump that began in late 2011 and shows little sign of improving. Against this backdrop, widespread hope for an elusive rebound sounds almost delusional.
Here’s why: The Canadian economy is highly levered to the real estate market and its derivative industries, such as construction. These housing-related industries account for 27% of the Canadian economy, compared to 24% at the peak of the housing boom for the U.S. In other words, employment in construction and real estate is generally much higher now in Canada than it ever was in the U.S.
Add to that residential housing inventories are at cyclical highs. In recent years, there have been 210,000 housing starts on average annually, but the high-end of the demand has peaked at about 185,000. Having out-built our historic demographic demand, sales are now declining and inventories are rising. Meanwhile, developers and home builders witnessing this carnage are more inclined sit on the sidelines and wait it out. To wit, housing starts declined to an annualized 170,000 in March, down from 178,000 in February.
Bricks and mortar has a psychological component that can breed confidence or banish it just as easily. As house prices rise, people tend to spend more, in fact nine cents of every dollar increase in home equity winds up back in the economy through consumption because folks are more willing to pull equity out of their homes to make other purchases. If house prices are falling, as they have been in recent months, the reverse happens because people are less inclined to pull equity out of a falling asset. “Overall, we think existing home sales will continue to decline with negative implications for the elevated level of home building and broader knock-in implications for domestic demand growth,” David Madani, an analyst with Capital Economics, wrote in newsletter Friday.
If the downturn began in late 2011, pre-dating mortgage insurance rule changes, Madani argues the affordability argument still isn’t enticing greater numbers of Canadians to become homeowners. The reason: people are understandably concerned about falling prices over the next few years.
As long as housing is “still overvalued,” he says, expectations provided the fuel that allowed prices to become “so detached from the fundamentals” in the first place. The International Money Fund concurs, cautioning that Canada’s housing prices were still about 10% overvalued at the end of 2012. And that’s why so many analysts and industry experts are predicting further declines in house sales this year.
Ultimately, the question is whether the government can engineer a more gradual housing price decline that won’t trigger a recession. Rabidoux says good luck with that. “Typically when you have a distortion in the economy, it is rarely painless to rebalance it. We’re in for a relatively painful period.”