Canadian Real Estate Slows Inexorably- Part III

We got a better picture today on how well Canadian house prices are holding up. According to the Teranet-National Bank House Price Index (TNHPI), as reported in a Dec. 31 communiqué, Canadian home prices rose 2.1% over the twelve months to October, 2008. This reading contrasts sharply with the year-over-year drop of 10% reported by the Canadian Real Estate Association (CREA) just before Christmas (with its questionable methodology).

While the situation isn’t as dire as CREA data would have us believe, things are slowing down in the housing market. The year-over-year change in the TNHPI has declined since the start of 2008, when it stood near 10%. Indeed, on a month-to-month basis, the index is down 1.1% between September and October.

Here is a breakout by city. Ottawa is the only city yet to show deceleration. Calgary is the only one with a yearly decline. Vancouver and Toronto are showing faster deceleration and are getting closer to showing zero or negative yearly changes.

Metropolitan area	Index level October-08	% change m/m	% change y/y
Calgary	161.37	-1.0%	-7.5%
Halifax	120.33	-1.0%	4.0%
Montreal	122.32	-0.2%	5.9%
Ottawa	118.24	0.6%	5.6%
Toronto	114.79	-1.6%	3.0%
Vancouver	147.65	-1.2%	2.7%
National Composite	128.78	-1.1%	2.1%

So far, the Canadian housing market looks like it’s just going through the typical cyclical downturn where national-level price changes bottom out near zero or slightly below. There is no widespread forced selling due to foreclosures, as exists in the U.S. “Less than one per cent of Canadians are in real trouble with their mortgages,” McGill University economist Tom Velk told CTV News recently.

Of course, it doesn’t help to hear housing doomster Garth Turner (who has another book coming out, in January) say he “expects housing prices will plunge another 30 per cent next year, on top of the 11 per cent drop so far this year,” to quote a recent CP article. The problem with that expectation is that it is based on a faulty premise, i.e. house prices have already fallen 11%. In fact, they are still above year ago levels.

Comments

[WebWatcher:]

Interesting. Could you please shine some lights as how and why Canadian housing market is so different from US? I personally thought it is in similar situation as most of the time Canadian economy is really closely tied to the one US. You pointed out a very refreshing point, please articulate more. THanks.

Jan 01 09:25 AM

[Guero:]

This is a guess but the Canadian housing market probably benefits from the lack of speculative bubble hell-holes like Vegas, Phoenix, Central CA and Miami. Not sure if they allowed subprime also.

Jan 01 10:15 AM

[bill klym:]

In my view,Canadian real eastate is in better shape because regulators and politicians did not yield to the lobbyists and loosen lending rules.It seems to me that so much of the melt down that occurred in U.S. can be traced back to loosening of rules to allow insurers like Aig to take risks that they couldn't take before and to allow lenders like WaMu to make loans that common sense said were toxic.

Jan 01 11:46 AM

[RJMoran:]

Hootie is right. In Canada, you HAVE to have 20% down/ a GOOD credit AND employment history (a VERIFIABLE one. :) ! / and a debt ratio of NO more than 38% of income. Nothing even close to 'subprime' is tolerated up there! That damn 'socialist gov. intervention in markets'! It is what gives their real estate market some sanity and stability vs the 'Wild West on Crack' situation we have here in the US...
And as an interesting aside, the two markets in Canada that inflated the most relative to the other metro areas (Vancouver and Toronto) are the ones experiencing the fastest 'deceleration' as the author put it. They won't hit a wall like Vegas or Miami, but within the 'ebb and flow' of real estate, you can see pullback, though, in relative terms, again with saner numbers of 2-4% and not the 30-50% we're seeing in Southern California, Nevada and Florida, et all! The Vancouver market has the 'push' of the Olympics (2010) and will feel the 'pull' of the decline in Chinese money for a bit. The speculative 'fizz' of it's market has all the heart rate of an old folks home when compared to what we've just been through here in the US!
But yes, the 'stability' is built in and a function of choice...

Jan 01 12:52 PM

[paintismotion:]

I own both residential, agricultural and commercial real estate in the Ottawa area. This area will likely be the safest real estate market in Canada over the next three to four years. Why? the Canadian Federal Government has publicly expressed an interest for 3.8 MILLION more square feet of office space in the region, there is a shortage of commercial land to build on, the local housing market is buoyed up by government employees with steady jobs and the the cost of agricultural land - the good stuff - has been and still is increasing in price (if you can get it). Also. people here, like the writer above states, were not offered Sub-prime deals. Truth is, no one if particularly leveraged here. All that aside there are some signs of strain. For example, second mortgage money for commercial deals is hard to find and demands a huge premium, up from 9 to 12% in some cases to 16% depending on the "opportunity". Clearly private investor money is shy and only investing in the best opportunities.

Jan 01 01:04 PM

[PeakOiler:]

Larry, I have a relative in Vancouver and she told me that house/condo prices have been slammed down hard in the past year or so. She bought a modest home in a nice area for $750,000 two years ago and says now she can't get $650,000. Hot markets can go cold and when they do, it can easily wipe out your entire 15-20% equity, which has happened to my relative.

Sorry, but I do not attach any credibility to the market data showing a gain in the past 12 months. Someone is rigging the numbers.

Jan 01 04:19 PM

[Inflation2009:]

As others have mentioned, Canadian lending policies were, in most cases, much more responsible than in some US markets. However, the prices in the US "bubble" markets are starting to sell at a discount to a fair or "normal" price, causing sales to explode in volume. Listingsupply.com shows that the supply of homes in the US are beginning to plummet. Therefore, combined with new gov't programs, some US markets are better than the Canadian markets in terms of ability to sell, albeit at much lower prices.

Jan 02 01:29 AM

[Inflation2009:]

As others have mentioned, Canadian lending policies were, in most cases, much more responsible than in some US markets. However, the prices in the US "bubble" markets are starting to sell at a discount to a fair or "normal" price, causing sales to explode in volume. Listingsupply.com shows that the supply of homes in the US are beginning to plummet. Therefore, combined with new gov't programs, some US markets are better than the Canadian markets in terms of ability to sell, albeit at much lower prices.

Jan 02 01:29 AM

[James Rider:]

The idea that everything is for the best in the best possible worlds in Canada vs. the US housing market is a fundamentally flawed concept. There are some some uncanny similarities in Vancouver to places like LA where debt to saving ratios, house prices to rents, average incomes to median house prices all look very similar. Canada does not have the same degree of questionalbe mortgage backed lending that occurred in the United States, that is true, however there were for a time 40 year mortgages and generally the banks in Canada also fell into the same trap as those in the US, namely the belief that prices only go up. Real estate values are not independent of the willingness to lend. As economic conditions in Canada worsen as energy prices and commodity prices remain weak, credit conditions will deteriorate, unemployment will rise and house prices in those highly over leveraged markets out west will collapse in a similar fashion as they did in the early 80's after an early commodity price boom bust cycle.

Jan 02 10:02 AM

[pitaking:]

I'm sorry but this article is completely off base. The thought that despite a massive recession and free fall in commodities and the loone, our housing market will somehow decouple from the rest of the worlds housing bubble bursting is crazy. Where ever you found your numbers for the Calgary area is way off. I've just sold my house at a nice profit because it won't be there in 6 months. Alberta was absolutely a bubble and it has popped. Prices are in a free fall, buyers are drying up and speculative money is dumping houses and condos as fast as they can. Bring up any Calgary or area newspaper listings and the most listed phrase will be "price reduced". To top it off, home builders are now dumping their huge glut of recently built and not selling homes at a 15-20% discount to the rest of the market, killing anyone with a resale. As layoffs mount, this will get worse, bottom drops out in spring/summer 09, 30% drop is very realistic.

Jan 02 09:59 PM

[RE Crash 2009:]

This article is very misleading. For starters it compares year end Real Estate Board numbers with the October Teranet Index. In Vancouver the local Real Estate board index dropped 4.1% in November and 2.8% in December. I'm sure the Teranet index will show a similar drop when it releases numbers for these months. Given the current 2.8% month over month decrease you are looking at an annualized decline of over 30%. The Vancouver market is in free fall and there is a record number of units under construction in the city which will just add to the inventory problems. We are already down 14.8% from the peak in May and I expect we will see another 20% decline in 2009.

Jan 06 04:14 PM