According to OECD chief, overvalued house prices will not lead to a crash … that’s not how economy works.
Now you wonder what will lead to a crash … perhaps real estate bubble is a phenomenon during the Great Depression only ?
MICHAEL BABAD The Globe and Mail
One of these things is not like the other
The OECD may rank Canada’s real estate market as one of the most overvalued in the world, but don’t equate that with bubbly.
Angel Gurria, the secretary-general of the Organization for Economic Co-operation and Development told The Wall Street Journal that Canada’s housing market, which has cooled of late, is not in bubble territory, and, separately, that the Canadian economy is in decent shape.
“An overvalued housing market and a bubble are not the same thing,” Mr. Gurria said.
“The housing market has been building very steadily over a period based on growth, jobs, good income, and a Canadian economy that’s been in good shape,” he told the news organization’s David George-Cosh on the sidelines of the economic conference in Montreal.
“Frankly, it’s not a bubble in the sense of great big speculation in the property. I think there will be a cull in some investment in the sector, which will see prices stabilize over time.”
Last week, an OECD study ranked Canada among the top three where overvalued properties are concerned, behind Belgium and Norway. It also warned of potential trouble in the event of a shock, though no one is projecting that.
Mr. Gurria’s comments come as a fresh reading today showed Canadian home prices rose 2 per cent in May.
While prices in Vancouver and Victoria sank, others climbed over the course of the year, according to today’s Teranet-National Bank house price index.
Canada’s housing has cooled as sales have plunged, though prices have remained intact after Finance Minister Jim Flaherty’s attempts to tame the mortgage market and engineer a soft landing.
Today’s reading matches the 2-per-cent gains of April, meaning it’s still the slowest increase since late 2009.
But prices in seven of the 11 cities studied did better than the national average.
Quebec City chalked up gains of 6.5 per cent, Calgary and Hamilton, 5.8 per cent, Winnipeg, 4.6 per cent, and Edmonton 4 per cent.
In Toronto, which along with Vancouver has become the focus of the country’s real estate angst, prices rose 3.9 per cent.
Month-to-month, prices rose 1.1 per cent from April.
In Vancouver, prices rose 0.7 per cent on the month, though they slipped 0.8 per cent in Victoria.
“Although stronger than expected, May’s price increase from April is not exceptionally large,” said senior economist Marc Pinsonneault of National Bank.
“Indeed, it is below the average of 1.2 per cent in May in the last 12 years (including a recession year),” he said in a research note accompanying the release of the index.
“Without Calgary and Edmonton, the composite index would have risen just 0.9 per cent in May, the second-lowest increase for that month in the last 12 years. So, last May’s increase in the composite index is not a display of strength in the Canadian home resale market. However, it is consistent with an overall balanced market … as soft conditions in most of the eastern provinces and B.C. are offset by tight market conditions in the Prairies.”
Mr. Pinsonneault added he does not expect “a marked acceleration” in annual prices in the near future.
Mr. Gurria also praised former prime ministers Jean Chretien and Paul Martin for putting Canada on the path to fiscal health, where it stands today under the Harper government.
“All together, I’d say that Canada is reaping the rewards of past virtue and also present good practices,” he said. “It would be good if there were many more countries like that.”
The talk of overvalued homes is no property bubble is a result of relentless price increase of real estate, usually a sign of market about to crash. Well, that is according to convential wisdom, OECD obviously has a more sophisticated technology to evaluate the situation.
Canadian house prices rose 1.1 pct in May from April – Teranet
Canadian home prices jumped in May from April as a spring rebound in sales continued in most cities, offsetting a couple of weak markets, the Teranet-National Bank Composite House Price Index showed on Wednesday.
The index, which measures price changes for repeat sales of single-family homes, showed overall prices rose 1.1 percent in May from a month earlier. It was the ninth time in 15 years that May prices were up 1.0 percent or more from April.
The index was up 2.0 percent from a year earlier, which matched the April rate and marked the smallest 12-month gain since November 2009.
Again, according to OECD, prices are likely to go up forever. Well, at least this is the reality in Canada ?
Why are home prices so high and when will they fall?
Loose credit fuelled the boom, analysts say, but a correction is coming
By Mark Gollom, CBC News
A recent report from the Organization for Economic Co-operation and Development that revealed Canada has the third most overvalued real estate in the developed world offered few surprises for analysts who say the market is heading for a price correction.
Many say the signs are already evident — home sales are slumping, demand is down and housing prices will likely follow suit. As for when, how far or how hard prices will fall, that still remains a guess.
“The housing market is an accident waiting to happen. If there is some sort of macro shock, there’s a lot of dead air where house prices are now and where historically they should be,” said Ben Rabidoux, creator of the blog Economic Analyst, which looks into housing and mortgage trends. “And there’s a sort of saying that a market waiting for an accident to happen usually finds its accident. And that’s how I would describe it.”
The OECD report used two housing measures — the price of the average home compared to what it could be rented for and the home costs compared to the average salary.
The report found that based on rents, Canadian real estate is overvalued by as much as 60 per cent and in terms of prices to incomes, real estate is still as much as 30 per cent overvalued.
“There is no denying we’re overshooting, vis-a-vis rent, vis-a-vis income, vis-a-vis demographics. So the OECD is not adding anything here to the debate,” Benjamin Tal, CIBC deputy chief economist, told CBC News. “That’s old news.The interesting question is not that we’re overshooting, it’s what will be the corrective mechanism, namely what kind of mechanism will we see bring it back to normal.”
Availability to credit-fuelled housing market
The reasons for the high-priced market vary. While low interest rates certainly contributed to the housing boom, Rabidoux said much has been fuelled by the availability of credit.
“It’s not like we haven’t seen periods of relatively low interest rates in the past and even in those periods we found that prices weren’t in the extreme like they are today,” Rabidoux said. “I think it’s very clear — it’s not so much the interest rate itself, it’s that really what we’ve seen in the last decade has been an unprecedented credit boom. And that’s what’s really driving these housing prices.”
Land constraints and an influx of immigration may have played some role in housing prices in Toronto and Vancouver, but Rabidoux said you would have then expected prices to have only been affected in those areas but not others.
“When you look at different metros across the country, you will find [almost] every one of them has seen a parabolic rise in house prices starting around 2003 without fail. And in my mind the most logical explanation is that this is credit driven.”
Thirty years ago, credit was much tighter than it has been in the past decade, Rabidoux said. As early as 2008, someone could walk into a bank and apply for a 40-year-mortgage, fully government insured for zero money down.
Today, while cash back mortgages are still available and people with a little creativity can still get 100 per cent financing, the government has tightened up the rules, including, most recently, reducing the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years.
“Collectively, we are still a lot looser than we were in the past, but that’s changing,” Rabidoux said.
However Tal of CIBC said government regulations are working to slow down the market.
‘Waiting for prices to go down’
“We are seeing resale and sales and supply and demand all down. So the only thing we’re waiting for is prices to go down. And that will happen.”
He believes any adjustment to the market will be a “soft landing” and that Canada, doesn’t and won’t have the preconditions of a U.S.-style crash, namely a huge increase in interest rates or the same risky subprime mortgage market.
“I believe we will correct, but the correcting mechanism will be a more boring correcting mechanism,” he said.
“Maybe prices will go down 10 per cent a year or two years from now. Then they will stagnate for a while until the fundamentals catch up.”
David Madani, an economist at Capital Markets, said it’s difficult to predict when house prices might come down. In the U.S, for example, prices began falling about a year after sales decreased, he said.
“There’s usually a lag,” he said. “And we’re at a point roughly at about a year, because home sales began to decline … in Canada early last year. So we’re at the one-year mark.”
Two years ago, his firm predicted an eventual market correction of about 25 per cent, but he admits that getting the timing right is tricky.
“It’s a long-term view. Trying to forecast something like this is almost next to impossible. It’s hard enough forecasting other areas of the economy like GDP and interest rates and things like that.”
“It’s something that’s going to play out over a few years. It’s not something like the stock market where you’ll get these sudden violent movements. Housing markets, when they’re booming, they’re booming for several years and then when they slow down and slump, they slump for several years.”
Susan Pigg is obviously not a fan of OECD as well …
Housing market shows ‘ominous’ signs of downturn: report
Pace of decline mirrors early stages of U.S. slump, says Capital Economics.
Canada’s housing market is showing “ominous” signs of the same slowdown that hit the U.S. housing market before its devastating meltdown so it’s too soon to celebrate a soft landing, says Capital Economics.
“Home building in Canada is on an ominous downward slope, similar in many ways to what happened in the early stages of the slump in the U.S.,” says economist David Madhani, who first predicted a downturn in house prices of up to 25 per cent two years ago.
The housing market — especially Toronto’s condo market — has somehow defied the skeptics so far, with house prices flattening and condo prices declining just slightly since tougher mortgage lending rules were implemented last July. But Madhani says all signs are now pointing to a looming downturn.
“There seems to be this view that we’ve achieved a soft landing because everything is declining slowly, but the pace of decline is more or less in line with the early stages of the U.S. slump,” he said in an interview Friday after issuing his state-of-the-market note.
Canada’s decade-long housing boom is every bit the “credit-driven asset bubble” that has burst in the U.S., Spain and Ireland, he said. It is “premature to sound the all-clear siren for Canada.
“Like so many other developed economies that have experienced unsustainable housing booms over the past decade, Canada exhibits similar ominous symptoms of overvaluation and overbuilding,” his report says.
Housing starts have already declined significantly, interest rates remain low, and government belt-tightening will mean less hiring and fewer increases in pay. At the same time, Ottawa has tightened mortgage lending rules, making it harder for first-time buyers to break into the market, and the pressure to buy has eased considerably given that “the pace of house price appreciation has slowed materially and, in some markets, prices either have stagnated or already begun to decline,” says Madhani.
Investors, who have largely fuelled the boom in condo development in Toronto in particular, are highly unlikely to continue their buying spree for a few reasons: The rising inventory of units for sale, which may put downward pressure on prices over time; continued uncertainty over where the market, and prices, are heading; and rent yields, which have sunk to historic lows.
While developers have pulled back on new condo launches, and slowed starts on some that have already been announced, the inventory of new units is still likely to climb over the next year, “possibly to levels above those witnessed towards the end of Canada’s 1987-1990 housing bubble” when prices declined considerably, says the report.
“Although the higher inflation and interest rate environment that preceded the 1990s housing bust are not evident this time around, they don’t have to be. The classic symptom of oversupply is just as real as before.”
Madhani echoes economist Will Dunning, who this week predicted 150,000 Canadian jobs could be lost in construction and housing-related industries as the housing sector continues its slump.
Meanwhile, our neighbor down south got this to say …
US home prices up, Canada steady; Toronto set to cool
by Fiona MacDonald
American housing prices headed up in the first three months of the year, while prices on the Canadian side of the border held steady according to the Scotiabank (TSE: BNS) (NYSE:BNS) Global Real Estate Trends report released Friday.
Buoyed by improving economic conditions, the US market — which approaches record levels of affordability — saw home prices increase in the first quarter of the year for the highest year-on-year percentage climb in a decade.
Meanwhile, Canadian home prices had levelled out on an inflation-adjusted basis in accordance with more balanced market conditions, with average prices being unchanged year over year in the first quarter, according to the report.
Demand remains robust nation-wide, the report says, although some cooling is evident due to tougher mortgage refinancing rules and slowing employment and income growth. The report forecasts further downside risk to sales and prices.
Toronto’s housing market was examined specifically in the report, with a “rebalancing” being noted in the market due to “affordability pressures, inventory build, changes to mortgage insurance rules and more cautious lending policies,” according to a company statement released with the report.
“Sales and construction have already shifted notably lower in Toronto, and prices are beginning to level out,” said Senior Economist Adrienne Warren.
“We expect this adjustment process to continue into mid-decade, with downside risk to prices, particularly in the condominium market where supply additions are expected to outpace underlying demand.”
The report also posted a series of figures tracking the mixed fortunes of global economic winners and losers, noting that housing prices continued to fall in the beleaguered nations of southern Europe while prices trended upward in emerging nations in Asia and Latin America.
Spain was the weakest property market included in the report, with average inflation-adjusted houses taking an 11 per cent dive year-on-year in the first quarter of the year. A decline of 7 per cent on the same inflation-adjusted basis was recorded for Italy in the second half of 2012, with France’s housing market seeing a drop in prices of 3 per cent in the first three months of the current year.
Ireland’s property market is arresting the rate of decline it had previously been experiencing with house prices down 4 per cent year-on-year in the first quarter of 2013, the smallest annual decline since 2008.
Figures covering the housing market in the UK also seemed to indicate a steadying, although the report cautioned that gains in London were distorting results to mask moderate declines in much of the country.
“Highly stimulative monetary policy conditions, reinforced by additional easing measures internationally through the spring, should provide support to the interest-sensitive housing sector,” said Warren.
“However a faster and more synchronized improvement is contingent on a strengthening in global economic activity, labour markets and consumer confidence.”
“Mirror, mirror on the wall, who is right after all ?”