Wednesday, March 13, 2013

Today's links

1---Lost decade predicted for Canadian housing market, vancouver sun
 Home prices boom is now a bust; future increases will mirror rate of inflation
 
Meanwhile, another report warns that a severe economic shock, such as the kind that hit Japan in the early 1990s and California and Nevada in 2006, could knock Canadian housing prices down by 44 per cent. While not predicting the extent or cause of a large-scale house price depreciation in Canada, Moody's Investors Service included the figure in a report on its proposed approach to analyzing the credit risk of non-insured mortgage pools.

"There is some overvaluation in the housing market - home prices have moved away from their underlying economic fundamentals - and that overvaluation has to unwind," said Sonya Gulati, senior economist at TD.

This adjustment, however, will be gradual, she added. "With the U.S., it was a housing market bubble and all of a sudden, a pin came and pricked it. It completely burst. The way you want to think about the Canadian housing market is that there's a balloon that's been inflated but instead of a pin coming and pricking the balloon, the air is going to be slowly let out."

Canadian residential home prices grew by an average of 5.4 per cent a year between 1980 and 2012, climbing about seven per cent per year in the last decade.

The market has cooled over the last six months and will continue its slide over the next few years as tighter mortgage rules, modest economic growth and higher interest rates push prices downward. The economists project a 3.5 per cent annual rate of return on real estate beyond 2015, a low rate that has not been seen since 1980.

However, Moody's Investors Service analyzed housing prices in the event of a pin coming along. A 44 per cent decline would be driven primarily by the phenomenal upswing in Canadian home prices over the past decade, Moody's said.

While house prices in Spain could plummet by a more severe 52 per cent, Canada joins Spain, as well as the United Kingdom and Australia, in the ratings agency's assessment of countries where growth in housing prices over the past 10 years has driven their values away from sustainable market fundamentals and into "overheated" territory.
"As with Australia, Spain and the U.K., we expect house prices in Canada to suffer the most due to the misalignment of current house prices with historic fundamentals," Moody's said.


2---COMMENT: Canada’s reckless banks inflate house price bubble, Boundry Sentinal
 
Virtually every housing loan is insured by you and me with the Canadian Mortgage and Housing Corporation sitting on $600 billion of loans it has guaranteed.
 
The story suggesting house prices were overvalue by just 20% was based on a report from Fitch ratings – a company which rates mortgage backed securities. A less sanguine and more objective estimate of the overvaluation comes from a report by The Economist – which says the figure is 78% as against rents (the highest in the OECD) and 34% (second only to France) as against income. The US is undervalued by 7% and 20% respectively – which gives you an idea of how bad things can get when a bubble bursts, or even if a balloon deflates – the favourite analogy of the wishful thinkers.
 
That 78% over-evaluation means that every new loan the banks make – and the deliberately seductive 2.99% rate – go to people who are going to be saddled with houses that on average are overvalued by 78%. BMO is like a pusher offering cheap drugs to people who apparently can’t resist. The rate offer comes at a time when there seemed to be a smidgeon of rationality creeping into the market. Not if the banks can help it. They know the real story on over-valuation as does the Bank of Canada and Finance Minister Flaherty. That’s why Flaherty chastised BMO for its new low rate. The reckless loan practices of the banks have given Canada the distinction of having the fastest growth of home-ownership of any OECD country – tracking the over-valuation notch for notch....
 
 the problem is that housing is still the only source of real growth in the economy. While most people would assume, from all the talk about the stupendous wealth of the tar sands, that we are a “resource driven” economy, the truth is that resources pale in comparison to housing and related financial services. According to the Conference Board of Canada, the resource sector (energy, forestry, mining, agriculture) accounted for a mere 7% of GDP in 2012 while housing (finance, real estate, construction) accounted for 27%. If the housing market goes south, just what sector does Mr Carney think is going to replace it as a growth driver? He has now given “certainty” that rates won’t rise til late 2014 – something that is supposed to spur business investment....
 
But as David MacDonald, chief economist with the Canadian Centre for Policy Alternatives reported last year, the big banks actually got billions of dollars in backing from the government – $114 billion (7% of our GDP) at its peak in March 2009. According to MacDonald: “At some point during the crisis, three of Canada’s banks—CIBC, BMO, and Scotiabank—were completely under water, with government support exceeding the market value of the company. Without government supports to fall back on, Canadian banks would have been in serious trouble.” They were receiving support through financial programs of the Bank of Canada, the US Federal Reserve and, of course, CMHC. The latter provided cash by buying up $50 billion in the banks’ mortgage-backed securities over just a four month period starting in October, 2008. Over the next twenty-one months while receiving financial backing, the big five made $27 billion in profits.
 
 
construction accounts for about half of China's $8 trillion economy, Chanos estimated and pointed out that while gross domestic product there slowed to a still fairly robust growth rate of 7.8 percent last year, "corporate profitability there imploded."
 
 
 
Data out of Vancouver is simply dismal: home sales were down 29 per cent compared to February 2012. Detached homes are leading the downfall, with sales a whopping 36 per cent below year-ago levels. Condos, normally the whipping boy of Vancouver’s housing excesses, managed to outperform the market — though that still means sales recorded a 25 per cent decline from February 2012.
Toronto managed a bit better — but not much: overall home sales are down 15 per cent and condos 20 per cent.

And February’s cooling winds also swept those areas of the market that were supposed to soften the impact of the slow-down in Canada’s biggest cities. Home sales were down 26 per cent on an annual basis in Regina and 12 per cent in Saskatoon. Even in Calgary slipped a little, with resales edging down one per cent in year-over-year terms. This doesn’t necessarily invalidate the theory that places like Saskatchewan and Alberta will cushion the impact of slowdowns in Vancouver, Toronto or Montreal — home sales, after all, are quite volatile, especially in winter — but it isn’t a reassuring set of numbers.

What are the implications for home values? Well… so far home prices have been holding up quite well. Of the cities mentioned here Vancouver was the only one to post an overall decline (-3.3 per cent in year-over-year terms). Prices movements, though, tend to lag supply and demand shifts, so we could still see a more pronounced correction later on. One worrying sign in this regard is that the ratio of homes sold to homes newly up for sale in January was woefully low — possibly indicating a supply glut.
If prices do fall, there’s little agreement on just how far they might plunge

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