Baby, we got a bubble!?

[interested]

From the Globe:

http://www.theglobeandmail.com/repo...ist-of-softer-housing-markets/article4255113/


Canada joins global list of softer housing markets

STEVE LADURANTAYE

The Globe and Mail

Published Wednesday, Jun. 13 2012, 9:23 AM EDT

Last updated Wednesday, Jun. 13 2012, 10:24 AM EDT
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The Canadian housing market is on the wrong side of the ledger in a survey of global housing prices for the first time since 2008, down 2 per cent from the same time last year when adjusted for inflation as stricter borrowing rules and fading demand cool the market.
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The report from Scotia Economics underlines the difficulties facing markets around the world. Weakness in real estate markets is a direct threat to the banks that financed housing booms around the world, as bad loans threaten their balance sheets.

Canada’s housing market has been on a tear since the end of the recession, with prices well above pre-recession lows in centres such as Vancouver and Toronto. But the boom has fuelled speculation that the country’s market is overvalued, and economists have been anxiously watching for signs of weakness.

“Despite historically low borrowing costs, demand has been tempered by moderate income growth and tighter mortgage insurance rules,” the report states about Canada’s market. “Supply conditions are becoming better balanced in most parts of the country. We anticipate fairly flat sales and average prices over the latter half of the year.”

While the dip is small in Canada, the problems are worsening in other markets covered in the survey. House prices in Ireland have taken a 19 per cent hit, and the country faces a deeper housing slump than the one that hobbled the United States.

“The cumulative decline in prices from their early 2007 peak has reached a staggering 50 per cent,” the report states. “The share of mortgages in arrears three or more months climbed to 10 per cent at quarter end, double the comparable U.S. delinquency rate at its peak in early 2010.”

Other markets seeing sharp declines in the last quarter included Spain, China, Australia, Sweden, the United Kingdom, United States, Japan, Thailand, France, Mexico and Indonesia.Chile, South Korea and Switzerland eked out gains.

“The intensifying euro zone debt crisis, increasing financial market strains and moderating global growth suggest there is more downside risk to property prices in the near term,” the report states.

“Eventually, however, improved housing affordability and pent-up demand will put many of these markets on a firmer footing. The era of ultralow borrowing costs in most developed economies is expected to persist for longer, while many developing economies are moving to reverse prior rate hikes.”

Highlights from the report:

“China’s housing market continues to cool. Adjusted for inflation, the average price of second-hand homes in Beijing were down 7 per cent. The deflating of China’s property boom over the past year follows a number of official measures aimed at reining in credit growth and speculative activity, including stricter residency requirements for buyers and limits on second-home purchases.

The battered U.S. housing market is showing increasing signs of stabilization. Real home price declines slowed to just 3 per cent following an 8 per cent drop in the second half of 2011. The steadying in prices has been accompanied by a gradual, albeit moderate, strengthening in sales.

Switzerland is the only European market in our sample to report appreciating home prices in early 2012. However, Swiss housing also experienced relatively moderate price increases over the past decade, suggesting less overvaluation in current pricing. A low home ownership rate of around 40 per cent, combined with restrictive foreign ownership rules, contribute to its more stable housing market.”
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[CN Tower]

The Canadian housing market is on the wrong side of the ledger in a survey of global housing prices for the first time since 2008, down 2 per cent from the same time last year when adjusted for inflation as stricter borrowing rules and fading demand cool the market.

When adjusted for inflation? In 1 yr??

That's cute. Talk about an orchestrated downturn!

 

[RocketAppliances]

From Bloomberg:

http://www.bloomberg.com/news/2012-06-13/canadian-real-estate-posing-risks-to-economy-oecd-says.html

Canadian Real Estate Posing Risks to Economy, OECD Says
By Theophilos Argitis - Jun 13, 2012 10:00 AM ET

Canada’s growing household indebtedness and rising real-estate prices are posing risks to the world’s 10th-largest economy that may require additional measures to rein in the market, the Organization for Economic Cooperation and Development said.

The Paris-based group of developed nations, in a report on Canada released today in Ottawa, said there are signs of “imbalances†in the Vancouver and Toronto real-estate markets as well as the condominium segment. The report said steps by Finance Minister Jim Flaherty to tighten mortgage insurance rules in recent years have helped.

Historically high levels of indebtedness are “making households vulnerable to a possible decline in real-estate prices,†according to the report. “Further measures may be needed, possibly targeted on certain market segments, if imbalances persist.â€

Flaherty has shortened amortization rules for government- insured mortgages twice since 2008, lowering the limit to 30 years in January 2011. He’s also cut the maximum amount homeowners can borrow against the value of their homes, withdrawn government insurance on home-equity lines of credit, and introduced legislation that prevents lenders from using government-insured mortgages as collateral for debt known as covered bonds.

The absence of a real-estate collapse in the country is one reason Canada has had relatively good economic performance, according to the OECD, which estimates growth of 2.2 percent this year and 2.6 percent in 2013.

Low Rates
Still, a “prolonged period†of low interest rates that have helped fuel the recovery may have increased risks to the financial system, the OECD said. While the central bank can afford to keep “highly accommodative†rates given moderate inflation, it will have to consider raising borrowing costs if “downside risks fail to materialize.â€

Bank of Canada Governor Mark Carney has kept the benchmark rate unchanged at 1 percent for 21 months, even amid signs the economy is approaching full capacity.

The OECD also said the government’s plan to erase its budget deficit by 2015 is “reasonable,†while the country’s strong fiscal outlook gives it scope to respond to any deterioration in the economy.

“Canada’s low indebtedness and well-earned reputation for fiscal probity allow it room to respond by slowing the ace of consolidation as needed,†it said.

 

[interested]

From Bloomberg:

http://www.bloomberg.com/news/2012-06-13/canadian-real-estate-posing-risks-to-economy-oecd-says.html

Canadian Real Estate Posing Risks to Economy, OECD Says
By Theophilos Argitis - Jun 13, 2012 10:00 AM ET






Low Rates
Still, a “prolonged period” of low interest rates that have helped fuel the recovery may have increased risks to the financial system, the OECD said. While the central bank can afford to keep “highly accommodative” rates given moderate inflation, it will have to consider raising borrowing costs if “downside risks fail to materialize.”

B

In a way this argument does not totally follow. If downside risks fail to materialize, presumably there will be little in the way of downward pressure on house prices. They will fall but presumably by a small amount.

If interest rates go up, it is because the downside risks failed to materialize.

Unless we get stagflation like in the 70's, when the economy stalled, inflation was rampant (which I think is an unlikely scenario...hopefully anyhow), house prices should not dramatically fall.

If for example,Europe undergoes a disorderly break up, (or other Black Swan event), if banks fail and credit freezes a la 2008 style, then we could have a major R/E fall even if interest rates stay "accommodative".

 

[interested]

When adjusted for inflation? In 1 yr??

That's cute. Talk about an orchestrated downturn!

+1.
Still doesn't make it wrong however though interesting that they choose to talk about "adjusted for inflation" to prove the point of the article since the argument can't be made on notional valuation, which is all anyone talked about the past few years.

 

[interested]

From the Globe and mail website this morning.

I think it is interesting to read this as it reflects some of my thoughts, that money needs to go somewhere and while many claim they can make lots of money, for most, even the "millionaires in Germany", they are going to Real property/real estate. I am not saying we won't/can't have a bubble here, but I think the article underlines the difficulty and helps explain why property bubbles are occurring and will continue in the forseeable future.

http://www.theglobeandmail.com/repo...st-their-wealth-into-property/article4256340/


Germans invest their wealth into property

James Wilson

Frankfurt — Financial Times

Published Wednesday, Jun. 13 2012, 2:44 PM EDT

Last updated Wednesday, Jun. 13 2012, 2:53 PM EDT
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Looking for the ideal shelter from the euro zone crisis? Germans think they know where to find it: a thatched beachfront house on the North Sea island of Sylt.
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A postman walks pass a Santander's bank office in El Masnou, near Barcelona, June 11, 2012. Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.
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The most coveted streets on the 100 square kilometre island have emerged as Germany’s most expensive addresses, in a survey of luxury property that reveals how the frantic search for safe investments by the country’s wealthiest people has fuelled dramatic price rises at the top end of the housing market.

Dismal returns from many assets during the financial crisis, and growing doubts over promises by politicians and central bankers to maintain the euro as a cast-iron store of value, are pushing many more of Germany's 800,000-odd millionaires to protect their wealth by buying property, according to a report by Engel & Völkers, a German property agency.

“People have had terrible experiences with other investments - mutual funds or shares. They want something tangible,” said Kai Enders, Engel & Völkers’ board member for residential property. “Prices are rising faster at the luxury end than in the rest of the market. People perceive that the better the location is, the safer the investment is.”

Prices for waterfront properties in Hamburg, the Bavarian Alps and other beach resorts have risen up to 60 per cent in the past three years. Prices in big cities such as Berlin and Munich are also rising quickly: Berlin, where top properties rarely fetched more than €5,000 per square metre before the financial crisis, now has property developments selling for up to €15,000 per sq m, according to the report.

The incipient boom contrasts with the situation in Germany before the financial crisis, when property prices barely budged even as bubbles developed in many other countries including the U.S., U.K. and Spain.

Apart from Berlin, where Mr. Enders says a few Spanish and Greek residents are buying property to try to protect their wealth amid fears of a possible euro zone exit, the German housing market is largely driven by domestic money.(my comment: this is the one big difference in Germany...no or little outside "hot money" chasing their housing market...at least not yet) Sylt, where prices have reached €35,000 per sq m, has long been a playground for the German elite but is barely known outside the country.

With the Germany economy outperforming the rest of the euro zone, interest in buying property is unlikely to abate. The Bundesbank on Tuesday raised its forecast for economic growth this year and said the upturn should continue in 2013, with another decline in an unemployment rate that is already at a post-reunification low.

German property prices have a long way to go before they reach levels seen in the spots most favoured by the world’s wealthiest. Prices in Sylt, for example, are less than half those at the top of the London market.

“There is still a great deal of upward scope if one considers top locations abroad - be it in New York, London or Paris, the Côte d’Azur, on the upmarket ski resorts of the Alps,” Mr. Enders said.
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[marsh]

Carney sounds alarm on Toronto condo boom
JEREMY TOROBIN
OTTAWA — The Globe and Mail
Published Thursday, Jun. 14 2012, 10:59 AM EDT
Last updated Thursday, Jun. 14 2012, 7:27 PM EDT

Mark Carney is sharpening his warnings about Toronto’s overheating condominium market.
In his semi-annual assessment of Canada’s financial system, released Thursday in Ottawa, the Bank of Canada Governor and his policy team reiterated that high personal debt is the main domestic risk, especially since Europe’s economic crisis threatens to spin out of control and cause job losses or falling home prices to which overstretched households are vulnerable.
That line of argument is more than familiar to anyone who closely follows the central bank.
But Mr. Carney and his officials went further, spelling out their concerns about excessive building in Toronto’s condo sector, and strongly suggesting that supply-and-demand fundamentals are out of whack owing to speculators’ willingness to pay inflated prices.
“Adjusted for population levels, multiples [condo and apartment buildings] under construction in major metropolitan areas, especially Toronto, are above historical highs,” the central bankers said. “If these units are not absorbed by demand as they are completed over the next 18 to 36 months, the demand-supply imbalance will become more pronounced.”
Moreover, they said, investors’ so-far-insatiable appetite has caused construction to outpace “demographic-based demand,” making the market “susceptible to changes in buyer sentiment.”
The comments suggest Mr. Carney is not sufficiently encouraged by anecdotal evidence that some developers are backing off plans for new condo projects as prospective buyers become more cautious. Both he and Finance Minister Jim Flaherty – who has three times since the recession moved to tighten mortgage-eligibility rules and cool the housing market – have openly worried that Toronto’s condo boom could end in a crash.
To highlight the dangers of overbuilding, central bank policy makers pointed Thursday to Calgary’s experience in the years leading up to the global financial crisis. Construction of apartments and condominiums in that city peaked in 2008, they noted, and by 2010 a glut of unsold inventory had caused prices to plunge 20 per cent from 2007 levels.
In general, Mr. Carney and his team said the potential for the global backdrop to deteriorate further means that, even as the pace of debt growth in Canada slows, those who are most indebted are becoming “especially vulnerable” to financial shocks such as job losses or falling home prices.
“The high indebtedness of the household sector and elevated valuations in the housing market require continued vigilance,” the bank said, adding that inflated prices in certain markets and stronger-than-anticipated sales and construction “are of increasing concern.”
The European situation is making it harder for Mr. Carney to use interest-rate hikes to tame borrowing and lending, despite his repeated warnings to Canadians that rates will eventually rise.
Although total household credit is growing at a slower annual pace – 4 per cent from November through April, compared with 6 per cent from May to October of last year – the debt-to-income ratio, already 151 per cent, will likely rise because of “muted” income growth, the bank said.
And that’s even if Europe’s troubles don’t worsen to the point that Canadian businesses start laying off workers as their sales prospects dim.
For instance, a three-percentage-point increase in the jobless rate could see the share of household loans in arrears rise to 1.3 per cent, according to a stress test by the central bank. (That may not sound like much, but it is more than double the rate in the fourth quarter of 2011.) Still, observers noted that while an escalating European crisis would exacerbate the household debt problem, that does not mean that anything close to the U.S. subprime mortgage market collapse in 2007 is in the offing.
“I’m not suggesting delinquency wouldn’t go up slightly, but people who say the system is going to crash and burn like in the U.S. are collapsing two unlike situations,” said Ian Lee, a business professor at Carleton University in Ottawa, who is also a former banker. “In the U.S., they didn’t have government-insured mortgages, we do, and they didn’t require down payments, and we do.”

 

[CN Tower]

Carney sounds alarm on Toronto condo boom

The government equivalent of a father telling his son not to juggle sharp knifes.

If Carney truly wanted to temper the speculation without damaging the market all he would need to do is pressure Harper to force tighter land regulation policies that forced municipalities to hold back granting developers higher densities until excess supply is absorbed. Although that would interfere with the free market clearly, it would result in significantly less damage as the harm would basically be contained to urban, downtown land owners, most of whom are probably unencumbered anyway.

That's if he really wanted to prevent a collapse and not just pretend that he does for posterity and to cover his posterior.

 

[rbt]

If Carney truly wanted to temper the speculation without damaging the market all he would need to do is pressure Harper to force tighter land regulation policies that forced municipalities to hold back granting developers higher densities until excess supply is absorbed.

He can't do this. Municipalities (and land use) are under the control of the provinces. The feds meddling in Vancouver and Toronto housing policy (those are the only 2 areas with issues at this time) would be way out of line.

They could reduce CMHC coverage by requiring a 15% downpayment or similar, but again that would need to be country wide and Toronto is the only problem spot.

I suppose they could offer Ontario a fat cheque (replacement for lost Land Transfer Tax and HST revenues) to convince McGuinty to change zoning around Toronto temporarily or to require developers hand out a market fact sheet with the purchase agreement. Market fact sheet might indicate (factually from Teranet) what the current status of the market is.

 

[cdr108]

Carney sounds alarm on Toronto condo boom

But Mr. Carney and his officials went further, spelling out their concerns about excessive building in Toronto’s condo sector, and strongly suggesting that supply-and-demand fundamentals are out of whack owing to speculators’ willingness to pay inflated prices.
“Adjusted for population levels, multiples [condo and apartment buildings] under construction in major metropolitan areas, especially Toronto, are above historical highs,†the central bankers said. “If these units are not absorbed by demand as they are completed over the next 18 to 36 months, the demand-supply imbalance will become more pronounced.â€
Moreover, they said, investors’ so-far-insatiable appetite has caused construction to outpace “demographic-based demand,†making the market “susceptible to changes in buyer sentiment.â€

“I’m not suggesting delinquency wouldn’t go up slightly, but people who say the system is going to crash and burn like in the U.S. are collapsing two unlike situations,†said Ian Lee, a business professor at Carleton University in Ottawa, who is also a former banker. “In the U.S., they didn’t have government-insured mortgages, we do, and they didn’t require down payments, and we do.â€

but but but the r/e industry keeps saying that Toronto's annual influx of new immigrants outpaces construction ?!?
were they lieing ???

yeah, having gov't-insured mortgages is such a great thing, .... being back-stopped by the taxpayer, et al.

5% down payments is such a strain, ... how can they expect that of me, especially when i want and deserve my big screen LED tv, new $40+K auto, designer clothing, semi-annual vacations, bi-weekly dinners out,

 

[CN Tower]

He can't do this. Municipalities (and land use) are under the control of the provinces. The feds meddling in Vancouver and Toronto housing policy (those are the only 2 areas with issues at this time) would be way out of line.

They could reduce CMHC coverage by requiring a 15% downpayment or similar, but again that would need to be country wide and Toronto is the only problem spot.

I suppose they could offer Ontario a fat cheque (replacement for lost Land Transfer Tax and HST revenues) to convince McGuinty to change zoning around Toronto temporarily or to require developers hand out a market fact sheet with the purchase agreement. Market fact sheet might indicate (factually from Teranet) what the current status of the market is.

Realize it's provincial jurisdiction but if there is really a crisis approaching I echo your thoughts that Harper could convince Ontario and BC to take drastic steps.

A temporary moratorium on rezoning would be much more effective to reign in speculation than simply scaring the crap out of the entire market! A freeze would probably cause a temporary pause while the repeated warning by Carney send unnecessary shortwaves across the entire spectrum including the majority of purchasers and owners who don't get caught up in it at all.

If you let the development industry build itself into oblivion it shall and it will probably take down a whole lot of innocents along the way. Control the supply of new developments, or at least restrict them better, and maybe we have a better shot at an orderly and steadier market long term.

 

[Riverdale Rink Rat]

They could reduce CMHC coverage by requiring a 15% downpayment or similar, but again that would need to be country wide and Toronto is the only problem spot.

CMHC has tightened standards, as have the banks (anecdotally, at least.) The 'jawboning' has had the desired effect.

Carney's main weapon -- interest rates -- is one he's loath to use, given the fact that the housing asset price bubble is so localized (Vancouver, Toronto, Saskatoon(?)) while raising interest rates effects so many other loans.

So far, I think he's done pretty well, all things considered.

 

[Kenny]

They could reduce CMHC coverage by requiring a 15% downpayment or similar, but again that would need to be country wide and Toronto is the only problem spot.

They should just cap the CMHC at current levels. Only allow the cap to rise at the same rate as inflation.

 

[cdr108]

CMHC has tightened standards, as have the banks (anecdotally, at least.) The 'jawboning' has had the desired effect.

Carney's main weapon -- interest rates -- is one he's loath to use, given the fact that the housing asset price bubble is so localized (Vancouver, Toronto, Saskatoon(?)) while raising interest rates effects so many other loans.

So far, I think he's done pretty well, all things considered.

the housing asset price bubble is NOT localized, it's national fueled by low rates and easy credit.
however, prices in YYZ / VANC are the biggest bubbles.

 

[Riverdale Rink Rat]

the housing asset price bubble is NOT localized, it's national fueled by low rates and easy credit.
however, prices in YYZ / VANC are the biggest bubbles.

http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

Neat interactive tool from The Economist to compare us versus other nations rather than just the US. While we are as elevated as many markets, with the exception of price/rent ratios (which rather surprised me) we're not off the charts.

I disagree with the idea that house prices everywhere in Canada are caught in the kind of bubble dynamics you see in Toronto right now. My family in Calgary (who are in the biz) are shaking their heads at the auction-like atmosphere and hot pricing here in Toronto. Vancouver is actually deflating at the high end, so maybe that bubble has popped already.

The low rates definitely positively impact affordability, and therefore drive prices higher. However, I really have seen little evidence of loosening credit, though -- the Canadian 'Alt A' lenders basically went out of business with the ABCP debacle and the banks are playing things pretty conservatively.

A bubble is not just high prices -- it's high prices + a speculative fervour driving sales to gamblers instead of folks who will be using the asset (i.e. living in the house, in this case.) Even in the insane market here in Toronto, most sales in my 'nabe seem to be to folks who are going to live in the house. The flippers are having to do gut renos rather than quick fixes, so they're not as prevalent as they were even a few years back.

Having said all that: We believed our house was overpriced enough that we sold it to lock in those gains. So, I obviously believe that central Toronto, at least, is 'bubbly.'