Canadian housing: There’s an obvious oversupply problem in Vancouver, Toronto and Montreal

All three cities face slowing sales and growing inventories

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August resale and housing starts figures are now out for all three of Canada’s biggest cities, and it’s not a pretty picture.

Vancouver

When the August resale data for Vancouver came out last week, the headline news was that sales had fallen to their second lowest level for the month since 1998. Sales were 30 per cent below what they were in August of last year and 40 per cent lower than the August average of the past 10 years.

But the numbers are even worse than the headline reveals. On paper, August 2008 holds the record as the weakest month of the past 15 years. However, it had two fewer week days than August 2012. If calendar differences are taken into account, last month represents the lowest sales volume of any August in 15 years.

At the same time, total months of inventory in Vancouver hit double digits for the first time since 2009. (Months of inventory represents the length of time it would take to sell all the homes listed for sale given the number of sales in the previous month. In other words, it is a quick snapshot of supply and demand: The higher the number, the worse the reading.)

Admittedly, the pace at which homes are being put up for sale has slowed considerably in August from the mid-summer peak, but builders don’t seem to have gotten the memo that demand has been cooling rapidly for months now: the number of housing starts and dwellings under construction, particularly condos, has risen rapidly from the 2009 lows and continues to grow.

In other words, while sale volumes are nearing recession levels, building in the Vancouver region has been booming. Barring a strong reversal of current trends, this supply of new homes will only increase inventory and further pressure prices, which showed the first year over year dip since 2009 according to the MLS Home Price Index.

Toronto

Toronto also felt the chill in August. Sales across all segments of the residential housing market were down by 13 per cent compared to last year while condo sales fell 22 per cent. And though the average resale price trended up, led by outsized gains in detached houses, condo prices actually fell four per cent over last year in the city of Toronto.

While August resales were down 13 per cent, housing starts surged in Toronto, jumping 72 per cent over last year with the multi-unit segment (primarily condos) surging 108 per cent. There are now a record 63,400 dwellings (and growing) under construction in the city at a time when resales, particularly in the condo segment, appear to be weakening.

Even in the “bulletproof” downtown core, which accounts for 30 to 40 per cent of all condo sales in the city, there are flashing warning signs. After registering record highs as recently as May, sales here plunged 35 per cent year-over-year in August, below the 2008 low water mark for the decade. Look at the sudden u-turn in sales:

Here too, the pile of condos with a “for sale” sign is growing. New listings in August were up 25 per cent compared to the same period in 2011, while total inventory remains at all-time highs for August and by a substantial margin.

Montreal

Montreal generally flies under the radar in housing market discussions, despite being the second-largest metropolitan centre in Canada. But the overall market here seems to be in a more precarious position than in Toronto, where the weakness is contained in the condo segment alone.

The latest data is truly ugly. Not only were sales were down on a year over year basis for the first time in 15 months, they fell to the lowest level since 2004.

Meanwhile, the number of listings remains at an all-time high for the month. Months of inventory blew out to nearly 11 in August. While there is some seasonality to the data, a reading above 10 for any length of time is generally associated with falling prices.

It’s like 2008 all over again in some key markets:

The last time the numbers were this bad in places like Vancouver and the downtown Toronto condo market, it was August 2008, but things looked quite different then.

The Bank of Canada overnight interest rate was three per cent and would drop to 0.25 per cent over the next eight months, bringing variable-rate mortgages and HELOC rates down with it. The discounted mortgage rate (the rate borrowers actually get from the bank, as opposed to the overnight rate) was about to plummet nearly 200 basis points in five months, providing a massive boost in affordability.

Chart: RateHub.ca

In addition, the government and CMHC were about to launch an aggressive campaign to insure low-ratio mortgages and purchase them and other insured mortgages off bank balance sheets in an effort to keep mortgage credit flowing.

Today, however, we have the exact opposite dynamic. Rates are near record lows, particularly for fixed mortgage rates and widely expected to rise sometime next year. It is much more difficult for lenders to obtain bulk insurance from the Canada Mortgage and Housing Corporation and I’m now hearing of big banks asking for a greater down payment on conventional mortgages in certain markets where they see a higher risk of a housing correction. Also, the Office of the Superintendent of Financial Institutions Canada has axed cash-back and stated-income mortgages by the big banks while the CMHC has tightened mortgage rules again.

The take-away:

The sudden slowdown in sales in key markets as a result of new lending rules is perhaps the clearest sign yet that the Canadian housing market is being driven and sustained by mortgage debt rather than true fundamentals. In August, Canada’s three-largest metropolitan areas saw significant declines in home sales and growing inventories of unsold dwellings relative to last year at this time. While this may not constitute a trend yet, it should at the very least cause us to ponder the implications of the long-anticipated slowing in the resale market. Indeed, should soft sales persist, and I see little on the horizon to reinvigorate them, they will weigh on prices in these key markets and likely in short order. 




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Canadian housing: There’s an obvious oversupply problem in Vancouver, Toronto and Montreal

  1. Is it possible that at least a small part of the reason that more and more units have a “for sale” sign these days is that people keep talking about prices being on the brink of decline?

    • Wouldn’t that mean that current valuation is more based on perception than, say, any kind of fundamental valuation?

      • What kind of fundamental valuation is there *other* than perception?
        A home costs “X” to build. This happens whether it overlooks a great view or a city dump, yet the “Y” that gets charged is based, in large part, on perception. Perception of the neighbourhood, perception of the view, perception of the color choices made, and yes, perception of the future economy, among other things.

        However, this isn’t just happening now for some mystical reason. This happens always. The current valuation is *always* based on perception rather than fundamental valuations. And saying it like it’s unusual is simply buying into the hype that LKO is talking about.

        • For fundamentals, how about price vs. rent or price vs. income?

          You’re playing semantic games with my use of the word “perception”. I think it’s clear what I mean.

          • Given the context of what you were replying to, it wasn’t. It’s better now though.

            However, I’ll argue that while those metrics were certainly valid in the 50s, given modern financial instruments and technology things are a lot more nuanced now. For instance, price vs income — it used to be a relevant measure because people tended to buy where they lived. So you could look at the income of a particular area and get a rough guideline of the prices that could be charged. These days, however, international buyers are much more prevalent, and with the top 1% of income earners vastly outstripping the rest of the planet, internationally desired areas (such as Vancouver) are playing in a different income bracket than simply the people who live there.

            Price vs. rent is also an interesting one. With new HELOC’s and other instruments, having an equity stake in a place can be a productive asset even if you don’t own it outright. Price vs rent is also dealing with today’s interest rates. Because even with prices as high as they are, the payment is still as cheap or cheaper than rent. If anything, this indicates that housing prices need to rise further.

            Not that I’m saying you or the article writer are wrong. I too believe that prices, specifically of condos in those specific markets, are likely unsustainable. But likely is different from being sure. And that “fundamentals” aren’t nearly as fundamental these days as people think, because the other factors that can influence them.

    • I’m sure it’s a factor. But I’d rather see that than see people blindly hang on because they don’t see the correction coming. The fundamental data doesn’t lie: this collapse is coming; it’s just a matter of when.

      • Except “just a matter of when” makes all the difference. The sun will eventually collapse; it’s just a matter of when. The San Andreas fault will eventually level most of California’s coast. It’s just a matter of when. Interest rates will rise, it’s just a matter of when.

        • Thwim: you hang on in there!

    • @Lord_Kitcheners_Own:disqus Are the signs going up faster? Or simply coming down slower?

    • Yes, price/income, affordability, supply/demand have little part to play. It is all a matter of talking about declines. Right. Burp.

  2. God forbid that prices actually drop to a resonable level so low-income families can enjoy a home and the middle class aren’t mortgaged to the max for the rest of their lives.

    • I really don’t see why that is a bad thing. Are you Bourgeoisie?

      • Too thick to detect sarcasm, commie?

  3. All credit bubbles pop eventually. Even Winnipeg has seen enormous appreciation completely unjustified by economic fundamentals. When Winnipeg experiences a multi-year real estate boom, you know something’s not right. It’s not different this time. And it’s not different here. Wherever “here” happens to be.

    • And how exactly does that reinforce the claim of “oversupply”?

  4. Let me tell you about Montreal: every other Anglo I know is ready to leave. Can you say “glut”?

    • Let me tell you about Montreal: the market has been overheated for years, some people will try to say that the PQ is responsible for the downturn, but in fact the market has just been following the same trend as in other Canadians cities. As for Anglos leaving behind 7 $ daycare, reasonable cost of living, reasonable quality of life and houses which are still well valued compared to other markets, where all they would get is a condo… I call their bluff.

      • You mean $7 daycares you can’t get in for 3 years unless you live in the suburbs? You mean the reasonable quality of life the people in Montreal experience while desperately trying to find a family doctor or being stuck in traffic because yet another bridge/ tunnel collapsed. Also, just because houses in Montreal are less overvalued than in other cities, that doesn’t mean they are well valued. If you look at average salaries in Montreal, the housing prices are absolutely ridiculous and a ticking time bomb. I agree with you that the PQ is not responsible for the downturn. However, it definitely accelerated it.

  5. Some bare Vancouver RE numbers can be found at re.olvius.com

  6. Bring on the housing market collapse! Huzzah!

  7. So the article outlines why house prices may be going down. Housing is a commodity that is bought and sold, and prices vary based on supply and demand, and over time every commodity goes up and down in price. So prices in these markets have been high and the prediction is that due to building levels and mortgage tightening rules, that prices may be going down…so what’s the news?

  8. New Condominium units in Toronto have shrunk in size overall; they’ve gone down by 100 sq ft over the last 5 years on average. We will have to see the impact in the rental market when all the towers now under construction in Toronto hit the market.
    The average size of a new condominium unit in Toronto is 650 sq ft and based on average price, it will cost about $330,000. With rental rates on average $2.20 /sq ft, investors may expect monthly rent about $1,450.
    But will that rent cover the costs for the investor? With 20% down, a $264,000 mortgage at 3% amortized over 25 years, the principal and interest costs would be close to $1,250/month. Monthly condominium fees are about $0.50/sq ft per month on average and property taxes are about 1% of home value. When utilities are added the cash flow becomes negative.
    The condominium market in Toronto, the biggest of its kind in North America for that class of housing, is largely based on a capital appreciation. Most investors finance their condominium units knowing that they will be unable to carry them on a cash-flow positive basis based on present rental rates. The condominium game continues to be about capital appreciation and very small return would shrink the pool of investors.

    • Hear ya. I doubt I would get into the real estate market planning to get money on capital appreciation. I want that cash flow to make sense.

      I’m thinking in other parts of the GTA (not Toronto), the positive cash flow would still be there. Not planning on getting anything until a couple years, so there’s no rush for me at this moment. Will wait and see how this turns out.

  9. Just wanted to highlight the credentials of the author for a moment. Who here doesn’t know that Rabidoux is a part-time instructor of psychology at one of the lowest ranked community colleges in Canada?

    http://www.theglobeandmail.com/globe-investor/investment-ideas/going-against-the-crowd-requires-courage/article4261496/

    http://www.georgiancollege.ca/news/campuses/owensound/owen-sound-campus-raises-funds-toward-cops-for-cancer

    I would advise readers to save their energy for discussions undertaken by actual subject matter experts. Just because anyone can start a blog and create charts these days doesn’t mean you should listen.

    A good rule of thumb might be whether an author has advanced academic qualifications in the subject matter and/or long-term work experience in the area. I’m not taking medical advice from my accountant, but I am asking him about accounting.

    • says the realtor

    • That is cute. When you can’t touch the message, you’re left with the old ad hominem. Always a dead giveaway of a weak mind. Yes, psychology is one of the course I have taught for the college in the past. Why don’t you put your research skills to work and find out 1) what my real job is (I happen to really ENJOY teaching, but it’s not what pays the bills) and 2) who my clients are and perhaps their combined assets under management. Then report back to us with a more informed perspective of whether or not I have anything valid to say.

      • Tell me, Mr Rabidoux, since you like the term ‘ad hominem’ so much as to use it incorrectly: Why don’t YOU state what your “real job” is and who your “real clients are”?

        You are the one who needs to divulge interests for the record. You wrote the blog.

    • some second house salesman just got owned

    • I find the author’s claims to be suspect, if not completely questionable. He certainly knows how to appeal to the great unwashed. Canada’s housing market, save for some specific exceptions (Toronto’s condo market, for instance) is a story of balanced supply and demand. It isn’t by accident that it is that way. The Ne-Cons almost blew it by ‘liberalizing’ aspects of financing, since repealed. Not mentioned by most news reports is that the CMHC advised against liberalization to begin with, but Stevie knew best….

      In the event, this author and the lemmings who blindly swallow his line make a point alright.

  10. Where can I get data like this for Edmonton?

  11. The problem is more like that everybody wants to live on top of each other in the yuppy downtown cores like in yuppy Vancouver including laneways. Pretty soon, they will be selling yuppy boxes on street corners of large cities like Vancouver for yuppies to live in for lack of space for wanting to all be or live in the same place at the same time. I guess this is what the end of times looks like when people go out of their minds for position, position and position in every crawl space in these large cities.

  12. well done analysis — good data, reasoning, and assumptions. thanks! The only question/concern I have is how long can political manipulation prop up housing prices….a fundamentals analysis is eventually correct, but the market can say irrational longer than we (I) can stay solvent.

  13. You placed every single detail about real estate scenario of these cities. Can i get such data for Victoria?

  14. This helped with my geography homework. Thanks for being awesome

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