Archive for September, 2010

You ain’t seen nothing yet, Prime-1.00 Variables

September 27, 2010 4 comments

Pettis Law #17: You have not entered into the final stages of a bubble until you hear repeated use of the phrase “You ain’t seen nothing yet!”

via China Financial Markets

That is the concluding remark of Michael Pettis from his rather shorter article on excessive railroad investment in China and (ironically) the growing demand for luxury goods.

I wonder if Law# 17 applies to Canadian housing…given today’s housing affordability report and remarks like these (via Canada Mortgage Trends):

John Bordignon, EVP Strategic Development at Paradigm Quest, says, “Consumers have been asking for adjustable rate mortgages (ARMs) more and more, which in my view is one of the reasons we’ve seen such competitive pricing.”

Let me remind you that one of the biggest reasons why US housing went bust was because of variable rate mortgages or ARM – adjustable rate mortgage as they are called down south.

“In the broker channel at least 65% of the volume has been ARM versus fixed,” says Bordignon. “Historically it’s the other way around—65% fixed, and the balance ARM.

I wonder if there is a way to find out…something akin to MBA (Mortgage Bankers Association) in US. My guess is that CMHC has to have this data.

Anyway history always repeats itself… and we will return to historic norms with or without a housing bubble.

George Hugh, Vice President, Lending Sales at ING Direct, tells us: “We can’t expect much more discounting.” Hugh senses that profit spreads on variable mortgages are near their minimum.

“We’re in very abnormal market conditions. Mortgage pricing is being driven by excess demand for mortgage business from balance sheet lenders (big banks).  For the most part, these needs are being driven by securitization and other debt issuance programs.  In addition, the Big 5 banks still have a ton of deposits where they pay ‘zero’ interest…and they have to put that money to work. This excess demand is causing mortgage spreads to deteriorate. But now we’re pretty well at a floor.”

Again, it was excess demand for securitized products (MBS or RMBS to be precise) that goosed the great housing bubble.

Another cause of the housing crisis for very low mortgage rates… needless to say, rates in Canada are still pretty darn low.


Price-to-rent ratio

September 25, 2010 5 comments

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?

September 24, 2010 Leave a comment

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?


World Equity Markets – Performance from 52 week high/low

September 21, 2010 2 comments

Equity markets in India and Canada are just shy of their 52-week highs! Chinese stocks are struggling to reach new highs and could very well be on their way down

Actually, the SENSEX has reached new 52-week highs in recent days and is up 25% from its May 2010 lows.

GTA Housing Update – Real vs Nominal

September 21, 2010 5 comments

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”

Detailed Analysis of GTA Housing Market – up to August 2010

September 20, 2010 2 comments

I have been posting housing stats for a couple months now but I never thought about seasonality… housing moves in cycles – like a lot of other markets – due to two major factors: weather and school.

The seasonal trend is very clear from this sales chart – sales increase from January to May, then slowly decrease from June to August, pick-up marginally in September and then decline gradually with a sharp drop-off in December

The next logical question is how does seasonality affect prices?

To look at the seasonal trend, I have charted the month-over-month change in resale home prices since 2005.

Even though most market pundits and MSM claim 2009 to be an anomaly, I think the 2009 monthly price trend sticks well to the seasonality.

Here is a line chart with the same data as above (take your pick 😉

(Note: Legend is same in all charts)

This table summarizes the above chart and shows the direction of price movement in a given month:

Period Price Direction
November-January, Jun-Aug Decreasing
Feb-May, Sep-Oct Increasing

So how does this fit into the current numbers ?

Well, GTA prices declined about 8% from Jun-Aug… believe it or not GTA prices declined between 5-8% from 2006-2008, only in 2009 they declined by 2%… so the current trend should not be alarming. Similarly, the decline in Sales is almost in line with previous sales decline of 25-30%.

Is this good news?

To answer this, lets look at the year-over-year changes

Again, line chart with the same data as above year-over-year column chart

(Note: Legend is same in all charts)

The yearly downtrend is against the seasonal uptrend… so the next couple months/quarters should be key.

Low mortgage rates might again drive demand!

Even though prime rate has risen by 75bp or 0.75%, variable mortgage rates have not increased proportionally due to heavier discounting by mortgage brokers/banks.

Before Bank of Canada increased rates, the lowest Variable Rate was around 1.75%. Today, even after a 0.75% increase in rates, the variable mortgage rate is 2.10% – a mere 0.35% increase… so rates haven’t increased as dramatically as the media makes it sound!

Fixed Rates have been dropping in absolute in term due to the recent rally in bond markets… today you can get a 5-year fixed rate mortgage for 3.59%… which is very close to the lowest mortgage rates in 2009!

August 2010 housing numbers

September 18, 2010 Leave a comment

I’ll begin with David Rosenberg’s take on Canadian housing data for August 2010


Existing home sales jumped 4.1% MoM in August, barely making a dent in the four-month string of declines. Even with the increase, the level of sales remains close to lows seen in early 2009. The data have been noisy of late because of the introduction of the HST. We expect the data over the next few months to reflect the fundamental slowing in the housing market.

If you look through the volatility, it’s clear that it’s too early to say that the Canadian housing market has turned any sort of a corner. On a year-over-year basis, sales are down nearly 20%, the third month of double-digit declines. Inventories of unsold homes remain high (inched down slightly to 6.9 months’ supply in August from 7.0 months) suggesting it still remains a buyers’ market. While the Canadian Real Estate Association was quick to point out that prices were “stable”, we must note that the flat year-over-year rate is the weakest since April 2009. In our view, we could see year-over-year comparisons turn negative as early as September.

Some numbers to support David’s view:

August 2010
Average Resale Price $324,928
Year-over-Year Price Change 0% ($324,843)
Month-over-Month Price Change -1.64%
Change vs 2009 1.43%
Change vs 2008 6.54%

Last month i.e. in July 2010, prices were down 3.6% from June 2010.