Analyst shorts Canada on housing market slowdown

Ben Rabidoux, Hanson Advisor analyst, says that while Canada’s housing market surged in the wake of the financial crisis – when real estate markets in other developed economies, particularly the U.S., suffered double digit sales and price declines – that strength is not sustainable. And when the housing market slows down, which it has in recent months, it will have serious implications for the overall economy.

“If you look at how levered our economy and our labour market is to this current housing boom, my position has been that it will be very difficult for policymakers to unwind this boom without significant collateral damage,” he says. “If we look at housing-related industries as a percentage of GDP, we’re well above where the U.S. peaked.”

Rabidoux believes that it will be “very difficult for this to unwind painlessly.”

And while Rabidoux admits that there are distinct differences between the U.S. and Canadian housing markets – making it premature to call for a U.S.-style crash in Canada – those differences have been “dramatically overstated.”

He says that at the heart of the U.S. housing bust was “misplaced incentives” and that some of those factors are at play in Canada.

“I work very closely with a number of front-line lenders and mortgages brokers and the consensus across the industry…is mortgage fraud is ‘widespread and under-reported,'” he says. “It’s difficult to make the case that we have run-up our debt levels here in Canada to comparable levels in the U.S., but we’ve only ever done it lending to rock solid borrowers and they did it by lending it to anyone …”

Rabidoux’s remarks come after recent reports that short-seller Vijai Mohan, the founder and portfolio manager at the San Francisco-based Hyphen Fund Management, laid bare his wager against Canada, admitting that nearly his entire portfolio is set up to profit on a downturn in both the housing market and the more than decade-long run up in commodity prices.

Mohan’s investment is based largely on similar themes as Rabidoux — a pullback in soaring Canadian home values and a decline in oil, gas and precious metals prices.

Mohan also said that the mortgage default insurance bought by many banks may not hold once regulators take a close look at underwriting practices. Mohan called this a “put-back,” something that became common in the U.S. in the wake of the housing boom after many financial institutions were alleged to have pursued unethical or fraudulent lending practices.

“The problem with the thinking about the transference of risk here is it all depends upon whether or not mortgage debt was initiated in a proper and complete fashion and our research has uncovered that could be put-back risk in fact for Canadian financial institutions as a result of missteps in the underwriting process,” he said.

Canada’s housing market has shown signs of weakness in recent months.

Sales down overall in June but bright spots include Langley, Richmond and Vancouver’s west side

What do you have when house values dip slightly and sales remain below historical averages?You have “balanced” market conditions, according to the Fraser Valley and Greater Vancouver real estate boards.

The boards reported Wednesday that Multiple Listing Service sales in June declined from May levels and sales for the first half of 2013 have fallen significantly below last year’s activity.

Greater Vancouver MLS sales during the first six months of this year fell 9.1 per cent from last year to 13,646 while Fraser Valley sales dropped 15.7 per cent to 6,714.

Greater Vancouver sales dropped to 2,642 last month from 2,882 in May while Fraser Valley sales dipped to 1,327 in June from 1,379 in May.

“We’d be concerned if we had a lot of new listings coming onto the market but that isn’t happening,” Real Estate Board of Greater Vancouver president-elect Ray Harris said in an interview. “As long as the number of buyers and sellers remains fairly constant, we don’t really have any fear and conditions should remain balanced.”

The total number of Greater Vancouver MLS listings has fallen six per cent in the past year to 17,289. Fraser Valley listings have declined one per cent in the past year to 10,515.

The benchmark price for all Greater Vancouver residential properties sits at $601,900 — a three-per-cent decline from a year ago but a 2.3-per-cent increase from January.

The benchmark price for a Fraser Valley single family home has risen 0.2 per cent in the past year to $552,200 but the benchmark price for townhouses in the region has fallen 2.1 per cent in the past 12 months to $298,700.

There are a few local “bright spots” in the market that are performing well in spite of mediocre conditions elsewhere, said Fraser Valley board president Ron Todson.

He said Langley has a sales-to-listings ratio of 26 per cent, which approaches sellers’ market conditions.

Realtors say balanced market conditions exist when the sales-to-listings ratio ranges from 15 to 25 per cent. Anything below 15 per cent is considered a buyers’ market.

“Things can vary significantly from one local market to another as different factors come together,” Todson said. “I know of some Walnut Grove properties (in Langley) that are selling after being on the market for just five days.”

He said Langley, in particular, is benefiting from the new Port Mann Bridge and better bus service that has improved the commute to Vancouver.

Harris noted single-family home sales in Richmond rose to 115 from 76 a year ago while single-family sales on the west side of Vancouver jumped to 146 from 102 in June of 2012.

He said both sales totals remain below historical averages but are improving as the sales-to-listings ratio — which dipped below 14 per cent in Greater Vancouver early this year – remains steady at 15 per cent.

“We saw price declines in the second half of last year but have gained a lot of that back this year,” Harris said.

Source: Bruce Constantineau, Vancouver Sun