Cool chart on behavioural dynamics applied to real-estate
I have added Canada to Barry’s chart which shows the relative position of US housing
via The Big Picture.
CMHC released its quarterly housing forecast today and has changed for the 6th time, the forecast for 2010 average resale house prices!
Here is a chart showing the forecast for 2010 average resale price… the first forecast in Jan 2009 was for resale house prices in Canada to average $288100… compare that to the most recent forecast of $338900. (note the standard deviation of the forecast is $25500!)
CMHC expects resale house prices to increase in 2011
For 2011, the forecast hasn’t changed as the market conditions demand…CMHC still expects house prices to increase 1% in 2011… notwithstanding the fact that house prices have dropped about 5% the past 2 months…
|Forecast Date||2011 Forecast Resale Price|
i.e. Total number of houses in Canada = Half the number of Vacant homes in US.
In the US, there is debate within government, media and blogosphere on the role of government in the housing market… primarily in response to the poor performance of Government Sponsored housing Entities (GSE) – Fannie & Freddie… The housing GSEs were established to promote home ownership… so to fix Fannie & Freddie, home ownership needs to be fixed.
Home ownership rate (HOR) is the proportion of households who own their home (either outright or with a mortgage).
What is the situation in Canada? Since Canada supposedly lags the US housing market by a couple years… I am going to try and analyze where Canada stands and how we got here…
The Canadian housing GSE – Canada Mortgage & Housing Corporation (CMHC) was established in 1946 to solve housing shortage after WWII. Today it plays a major role in promoting home ownership by providing mortgage loan insurance since 1954.
Note: Unlike the US, census in Canada is every 5 years, the next one in 2011. We can perhaps expect home ownership rates to decline if Canada indeed lags US but given the recent frenzy (see here) in housing market I somehow doubt that home ownership rates will decline… just yet. Will Canada experience a housing crash like the US? I don’t think so… see earlier posts (here & here).
So what caused home ownership rates to rise dramatically from mid 1980s to 2006 in Canada? This chart tries to answer that…
As mortgage rate decreased, home ownership rate increased… BUT the role of 2-key CMHC policy changes along the way is grossly understated…
- 1986 - Introduction of Mortgage Backed Securities – reduced the funding cost for mortgage providers by letting non-bank financiers enter the housing market, thereby increase competition and reduce the cost of mortgage for a home buyer… I do not know where we would be if there was no MBS (I believe securitization is a great financial innovation)!
- 1990- 5% Minimum Downpayment – this policy change provided a huge boost to housing demand…especially from first-time home buyers.
- 1999 - 0% Down payment & 40 year mortgage terms…lets not go there, we all know how it ended!
0% down and 40 year term mortgages are no longer “legal” and are not insured by CMHC since 2008. This policy change was introduced due to rampant speculation in the housing market and a precautionary effort by Jim Flaherty to avoid a US style housing collapse.
Note: 0% down mortgages are still available by working around government policy.
Housing inventory i.e. number of homes available for sale is increasing since the beginning of 2010. See chart below and excerpt of accompanying note from Scotia Capital Economics
…in a typical year, the non-seasonally adjusted line shows inventories peaking by the very end of the year and into the very beginning of the next year. Inventories are typically low during the summer months after the Spring market has settled down. But this time, the non-seasonally adjusted stock of outstanding listings on the open market is rising appreciably during the summer. More important is that the seasonally adjusted overhang that compensates for such distortions during the year has the overhang now pushing back up towards the range of late 2008 and early 2009. On a seasonally adjusted basis, it would take about eight months to clear out the total number of listings on the market at current selling rates assuming selling activity remains unchanged [emphasis mine]
Increasing inventory is not good… we are following the same trend from mid-2008 to Spring 2009 when inventories rose from 6 month to 10 months and prices fell about 15-20%… the economic outlook then was uncertain and it is now “unusually uncertain”…
S&P 500 – technically doesn’t look good… fundamental bias to the downside after today’s unemployment claims
TSX – not so bad, holding support at crucial averages (50 & 200 day)
The previous two releases (May & June 2010) for this indicator also showed a substantial slowdown in housing activity.
Today’s release from Statistics Canada is no different:
The composite leading index slowed to a 0.4% increase in July, after a gain of 0.7% in June. Most of the slowdown originated in the household sector, where three components fell. None of the seven other components decreased.
The housing index continued to retreat from its recent highs, declining 4.1%. Both housing starts and sales contributed to the decline. The slump in house sales was reflected in a 0.6% drop in furniture and appliance sales. Demand for other durable goods posted a fifth straight decline.
This negative housing news combined with the recently released mid-month housing activity by CREA should clear all doubts about a slowdown in housing… housing slow is here and here to stay for another 12-18 months.
Back to the leading indicator… in case you are wondering what is the leading indicator supposed to lead? Well, again here is StatCan’s definition:
The Canadian Composite Leading Indicator is comprised of ten components which lead cyclical activity in the economy and together represent all major categories of Gross Domestic Product (GDP). It thus reflects the variety of mechanisms that can cause business cycles.
I wonder what is the lead time… i.e. by how many days/weeks/months/quarters/years does the leading indicator lead the economy? In other words, if the leading indicator rises in a given period, when is the economy expected to follow the leading indicator… Again, according to StatCan
Average lead times can be highly variable, and the leading index will always be more volatile than GDP since the components are specifically selected as representing very sensitive indicators of total demand and output.
That didn’t answer my question…anyone?
Mid-month report out for GTA house prices drop again… on track to drop for 3rd consecutive drop for a total drop of 7.5% (412934/446593 -1) from the May 2010 peak:
|Aug 2010 (mid-month)||July||June||May||April||March||February||January|
watch out… negotiate hard before purchasing a house