Yesterday, the Teranet-National Bank National Composite House Price Index for Canada was released. It showed that 12-month home price inflation inCanada was down to 2.0%, the lowest level since November 2009. And given the huge amount of talk in Canada about a potential housing bubble, there is a worry that this is the beginning of a housing bust.
You can see from the chart provided by the house price index that there actually was a housing bust in Canada during the global financial crisis with year-on-year declines reaching 6%. What has separated Canada from other markets where there has been talk of a housing bubble is that Canada was able to reverse this trend and bring the year-on-year change to near record highs in 2010. SInce 2011 however, the pace of house price inflation has ebbed and the talk is now about renewed declines.
The talk of a bust is in part due to the soft numbers coming out of two principal bubble markets in Toronto and Vancouver. In Toronto, there has been massive condo overbuilding in the city center and especially along the Lake Ontario coast on Lake Shore Boulevard and Queens Quay where condos are now replacing former docklands. Anyone who has taken the Gardiner Expressway between western Toronto where and the city center in the last 5-7 years knows what I am talking about. There is a massive array of cranes building condos everywhere as this is “one of the largest waterfront revitalization projects ever undertaken in the world“. However, now sales of condos are plummeting in Toronto and condo leases are rising as owners are forced to become landlords. House prices in Toronto are still appreciating.
In Vancouver, house prices have been falling for some time now as are house transactions. According to the House Price Index, the year-on-year decline in prices is only 1.5%, however – though the decline is greater according to other measures. But this April marked the ninth consecutive month of price declines at a time when the Canadian economy is growing. That tells you that this market decline has not been precipitated by a decline in the broader economy as much as a combination of economic and internal market forces. Vancouver looks to have reached a top. Nearby Victoria is the only other major market that has falling prices nationally with prices now down 3.3% in the past year.
The question is what comes next. First, in the residential housing market, because transaction prices are huge compared to incomes, sales are lumpy because sellers often pull their listings rather than transact at a lower price. That means that consistently lower sales volume is the harbinger of declining prices and we are seeing a large drop in sales volume, particularly in Toronto and Vancouver. Second, the broader Canadian economy is still doing ok but there are troubling signs in the jobs market and in manufacturing data that suggest weakness. For example, the RBC Canadian Manufacturing Purchasing Managers’ Index ticked up in April to 50.1, barely above contraction, after a shock decline in March at 49.3. And the last six months of 2012 were the weakest since the financial crisis, just as they were weak in the US. Third, the Canadian government’s fiscal outlook is going to be a drag on growth and jobs according to the Canadian Parliamentary Budget Office. The PBO estimates that the 2013 budget alone will result in 14,000 job losses by 2016 and have a minor cumulative negative impact of 0.12% on GDP growth. Combining this with cost measures from 2012, gets you to 62,000 job losses by 2016. In sum, the economic and housing market-specific outlook is mixed and not supportive of continued high levels of house price inflation.
Another impediment here is household debt. As of the end of the last quarter, household debt in Canada had risen to a record165.0% of GDP, with the lion’s share of this debt coming from mortgages. The ratings agency Standard and Poor’s has said that because of the slowing of the jobs market and the modest fiscal drag, the next couple of years will be determined by Canadians’ decision to “spend or to save”. And given the high debt levels, we should expect household spending to be restrained. This is borne out in polls that show Canadian consumer confidence waning.
Could this mean a bust, though? No one in officialdom is talking that way but that is the concern. At a minimum, I believe we should count on monetary policy to be loose, not just to offset the fiscal drag but also as a safeguard against a bust.