TSX trading near 2-year low… 11000 next downside target?

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Toronto housing market – update

I haven’t had much time to write since buying a house and selling my condo… if I can convince myself, I’m never going to move again, that means not buying another principal residence.

It has been over a month since the new mortgage rules took effect… is there any early effect on real-estate markets? Let’s look at the GTA housing numbers for March 2011…

• Year-over-year Prices up 5%
• Year-over-year Sales down 11%
• Month-over-Month Prices up 0.4% vs 5-year average of 0%
• Sales up 15% over 5-year average Sales

I don’t think there is anything to worry about yet but I think we need to keep an eye on Sales numbers… -11% sounds like a lot but 2008-2010 were outliers for Sales numbers

…and mid-April numbers are:

Greater Toronto REALTORS® reported 4,444 sales during the first two weeks of April 2011 – a three per cent decrease compared to the first two weeks of April 2010. The number of new listings was down by 21 per cent compared to the same period last year.

Again, nothing to worry about here either. 3%… however, average prices have shot up!

• Year-over-year Prices up 10.4% vs a range of -3 to +13 % over the last 5 years!! (with that kind of variation, averages become meaningless)
• Month-over-Month Prices up 6% vs 5-year average of 4% !

I have been saying for the last year that this kind of price increases is unsustainable and I reiterate it here.

Resale house prices gone parabolic in York Region – view from G0

I have seen 3 houses in the last 2 weeks and every single one went over asking… this is in Markham/Richmond Hill area.

#	List	Sale Price
1	699900	705000
2	699900	725000
3	745000	758000

Couple Observations:

1. Similar houses in the area sold for under 635k just 6 months ago… that is more than 10% increase in less than 6 months!… If the trend continues, resale house prices will be up more than 20% in 2011!

2. Every single house had more than 3 offers clean offers – no financing, no inspection!

3. And all of them sold in less than 3 days of listing…

3 houses is nowhere near a constituent sample even if they are all in a small city block BUT this is the trend… I have spoken to a few realtors over the last month and that is what they say…

In contrast New Home prices have increased close to the inflation rate… around 2-3%

If you are in real-estate… or not… what are you seeing on ground zero?

Hysteria…Mania? Herding like donkeys? Sensible investors? Speculators? Pent-up demand? No Supply?…

Pouring cold water on ‘improved’ housing activity

Canadian real-estate has received more than its fair share of coverage in main stream media lately…

The quacks at CREA say housing activity  “improved” …

Seasonally adjusted national home sales activity rose 4.5 per cent in January 2011 compared to the previous month, reaching the highest level since April 2010. Led by Vancouver and Toronto…

…

Actual (not seasonally adjusted) national sales activity via the Multiple Listing Service^® (MLS^®) Systems of Canadian real estate Boards came in 6.6 per cent below levels in January 2010. This was the smallest year-over-year decline since May 2010.

…

Now if it hadn’t been for Flaherty’s tinkering with mortgage rules and pulling demand forward and creating a buying panic, sales activity would be lower…agree? I will explain why…Lets look at GTA since it accounts for the biggest share of Canadian housing activity and it led the “improvement”…

The Toronto Real Estate Board publishes mid-month &  monthly sales figures;

Mid-month figures for January 2011

January 19, 2011 — Greater Toronto REALTORS® reported 1,563 sales during the first two weeks of January 2011 – an 11 per cent decrease compared to the first two weeks of January 2010. See details.

Until 15-Jan-2011, sales in GTA were 11% lower than Jan 2010… then on 17-Jan-2011… The federal government acts prudently (in my opinion) and announces new mortgage lending rules… How did those changes affect sales for the rest of Jan 2011?

Monthly figures for January 2011

February 4, 2011 — Greater Toronto REALTORS® reported 4,337 transactions through the TorontoMLS® system in January 2011. This result was 13 per cent lower than the record result reported in January 2010. See details.

So even after taking some heat of the housing market and creating an apparent demand pull, January 2011 sales were 13% lower than Jan 2010… Perhaps 2010 was a record so maybe not a good year to compare?…  Sales were 3.5% lower compared to the average sales from 2006-2010… even when including the paltry 2670 units in 2009!! (it is a clear outlier)

Moving on to Feb…

February 17, 2011 — Greater Toronto REALTORS® reported 3,084 sales during the first two weeks of February 2011 – a 13 per cent decrease compared to the first two weeks of February 2010. See details.

One month since the announcement and sales are lower than last year… if there was no government intervention, logic dictates that sales would be even higher because people (first time home buyers) would rush to buy a home on more favourable terms.

Admittedly though, compared to average Feb sales between 2006-2010, mid-month Feb 2011 sales were 6.2% higher.

via Toronto Real Estate Board.

Housing Update

I have been meaning to post an update on the Toronto housing market but waiting for TREB to release the December numbers (and annual by extension)… which I think should be out any day now.

GTA Housing Update, Sales & Average Price Seasonal pattern

I am shocked to see that the average single family house price for the first half of October 2010 is $444644! This is only two thousand dollars away from the all-time high of $446593 reached in May 2010… I thought house prices peaked in Spring and stayed flat or moved down for the rest of the seasons… but the chart below says something different

I will summarize the above chart to decide when house prices peak within a calendar year:

In which month do house prices peak in a year?

2006	2007	2008	2009	2010
April	Oct	April	Oct	May

And what about Sales activity?

 

2006	2007	2008	2009	2010
May	May	May	June	April

The above chart is based on the average price as reported by the Toronto Real-Estate Board… the following chart is based on the Teranet House Price Index and it tells a much different story… although I wouldn’t interpret the index data in the same way as raw price data mostly because of the index methodology.

1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Dec	Dec	Dec	Dec	Dec	Dec	Dec	Aug	Dec	Aug	Dec	Jul

It is clearly towards the end of the year and that is obviously due to the inherent inflation!

Update: Forgot to include seasonal sales pattern from Teranet House Price Index  data… Sales peak in the summer months of Jun-Aug

1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Jun	Aug	Aug	Jul	Aug	Jun	Aug	Jun	Aug	Aug	Jul	Jun

GTA housing market in September 2010

House prices across GTA increased in September 2010 keeping in line with the monthly trend of positive month-over-month change.

2010	Sales	Average Price	YoY (%)	MoM (%)
January	4986	$409,058	19.04%	-0.70%
February	7291	$431,509	19.43%	5.49%
March	10430	$434,696	20.07%	0.74%
April	10898	$437,600	13.47%	0.67%
May	9470	$446,593	12.89%	2.06%
June	8442	$435,034	7.69%	-2.59%
July	6564	$420,482	6.34%	-3.35%
August	6232	$411,012	5.95%	-2.25%
September	6310	$427,329	5.03%	3.97%

The average price for September is about 4.3% below the recent peak in May 2010. The monthly price increase of 4% is quite surprising given the softer sales numbers.

Price-to-rent ratio

One of the metrics used by housing analysts, economists and real-estate investors to determine fair value of a house is the Price-to-rent ratio. One of the two simple and sometimes contested metrics (price-to-income is the other).

I think the burst US housing bubble should be a great post-mortem learning exercise for Canadians, especially those active in the housing market (agents, realtors, mortgage brokers, banks, buyers, sellers, etc)

I’ll get to the point now, the chart and summary below (via GreaterFool) shows the price-to-rent ratio globally for the last two decades.

The data is normalized with 100 being the long term average. Here are some quick take aways:

• Japan’s real estate continues to slide into an abyss
• US housing market doesn’t seem so bad now, does it?
• not surprised to see Spain at the top but am surprised at Canada being second
• data hides a lot of regional disparities – for example, within the US, Florida and California would trump Spain
• Ireland is ahead of other markets in correcting – but it also started earlier

Here is a long-term chart of price-to-rent ratio for US

Many US financial/economics bloggers have blamed the government/fed for not reading this very apparent bubble sign among many others.

Where does that leave us? While I couldn’t find a central source of rents across the nation, I put together data from the Toronto real-estate board to come-up with this chart…

Note: I have used a crude way to determine the average rent and price but the focus here is trend, the level is clearly out of whack since early 2000.

When you compare the top graph of global price-to-rent ratios to the one above, I think it can be reasonably deduced that the Price-to-rent ratio has only gotten worse since 2007.

I would really appreciate your thoughts/comments on this topic.

Americans buying Canadian homes or vice-versa?

I think it is well known that  lots of wealthy boomer Canadians own winter houses/condos in the southern US sunny states… According to David Rosenberg, this might be whats keeping the housing market buoyant (relatively) [emphasis mine]

With regard to the U.S. housing market, we see that a saviour is in the making — Canadians flocking en masse for cheap subprime real estate south of the border. See U.S. Housing Calls to Canadians on the front page of the USA Today.

He also points out that Americans are buying condos in Toronto?!?!

Meanwhile, the cranes that dot the Toronto skyline remind me of the late 1980s (though interest rates are thankfully a fraction of those levels today) and there is plenty of anecdotal evidence that it is Americans (and Asian investors too) who are coming in and gobbling up these (overpriced for the most part) condo units. Was this part of the Free Trade Agreement — condo swapping?

This is news to me. Where is the evidence?

While on the topic of cranes in Toronto, on a recent visit to Mississauga, I noticed there were many more cranes than in downtown Toronto today… circa 2005 Toronto?

Breakfast_with_Dave

GTA Housing Update – Real vs Nominal

As previously mentioned, I have been posting some stats/chart on Greater Toronto Area (GTA) housing market and only now am I trying to fully understand the dynamics…

David Leonhardt at Economix (NY Times) has an interesting post on mortgage rates and (real) house prices

“Anyone who argues that home prices do not seem headed for another big decline will probably hear some version of this question. Interest rates are historically low right now. They will surely rise at some point. All else equal, higher rates should push down home prices.”

This got me thinking about the Canadian housing market – is there a correlation between mortgage rates and house prices? The following chart plots the average (nominal) house prices in Greater Toronto Area (GTA) against the 5-year (undiscounted) mortgage rates… the right half of the graph i.e. circa 1990 onwards, there is clear negative correlation between house prices and rates i.e. rates going down pushes house prices up.

David correctly points out that this relation didn’t hold in 1980s when mortgage rates shot up… house prices kept increasing!

David concludes:

“My best guess for why the two don’t correlate more closely is the role that psychology plays in housing markets. Prices just don’t move as quickly as economic theory suggests they should.”

Jake at EconomPic compares real house prices with real mortgage rates… see chart for GTA below

Note: The right scale showing real mortgage rates is inverted to better emphasize the correlation

Caveat: I’m using really crude data here: Average house prices instead of an index like the Teranet House Price Index… Unfortunately there is no index for Canadian house prices prior to 1990s.

The only conclusion I can draw from the real prices/rates chart is that Real Rates lead real house prices… the green line follows the direction and trend of the red line with a lag factor. This reinforces my conclusion from yesterday’s post that another demand push might be in the cards due to “ultra low mortgage rates”