The Elusive Canadian Housing Bubble

[don]

Re: The Elusive Canadian Housing Bubble

Oh, Canada, are you in recession?


The string of bad data reports not only applies to the US, economists up North appear to be no better at predicting the weather than US economists.

Variant Perception reports Downside Data Surprises Continue in Canada.

For the past 6 months, we have been alerting clients to the persistent decline in our Canada leading indicator. This is now showing up in numerous Canadian coincident data releases, with retail sales being the latest to miss expectations last Friday. The economic surprise index is now declining sharply and there is little sign of immediate improvement ahead.






PMIs continue to fall whilst building permits and housing starts (some of the best leading indicators to watch), remain negative yoy (top chart). However one of our main themes this year has been that of cognitive dissonance, whereby growth disappoints, but higher excess liquidity supports asset prices.

Canada December Retail Sales

On February 20, the Huffington Post reported Canadian Retail Sales Post Biggest Drop Since April, 2010.

Retail sales in Canada in December posted their largest one-month drop since April 2010, as the cost to fill your gas tank plunged and holiday shoppers spent less.

Statistics Canada said Friday retail sales fell 2.0 per cent compared with November to $42.1 billion in December. That compared with a drop of 0.4 per cent that economists had expected, according to Thomson Reuters.

The drop in sales came as sales at gasoline stations fell 7.4 per cent in December due to lower gas prices, while sales at motor vehicle and parts dealers fell one per cent. Excluding motor vehicle and parts dealers, sales were down 2.3 per cent.

Despite the larger than-expected drop in sales, Bank of Montreal senior economist Benjamin Reitzes cautioned not to jump to conclusions based on the retail sales report. Reitzes noted the rise in popularity of Black Friday sales in Canada has pulled some holiday shopping into November.

Sales were down in nine of 11 subsectors, representing 71 per cent of retail trade.

Canada January Retail Sales

On March 20, the Statistics Canada Retail Trade, January 2015 report showed sales down for a second month.

Retail sales decreased for the second consecutive month in January, declining 1.7% to $41.4 billion. Sales were lower in 7 of 11 subsectors, representing
83% of retail trade.

Lower sales at gasoline stations represented the majority of the decline. Excluding sales at gasoline stations, retail sales were down 0.8%.

Retail Sales in Volume Terms Decreased 1.2%.




Gasoline Station Sales Down Seven Months in a Row

Sales at gasoline stations fell 8.8% in January, reflecting lower prices at the pump. This was the seventh straight monthly decrease and the largest monthly decline since November 2008.

Receipts at motor vehicle and parts dealers (-1.4%) decreased for the fourth consecutive month. The overall subsector decline was a result of weaker sales at new car dealers (-1.8%). Used car dealers (-0.9%) and other motor vehicle dealers (-0.5%) also registered declines. Sales at automotive parts, accessories and tire stores (+2.2%) advanced for the fourth time in five months.

Sales Down in Nine Provinces

Retail sales were down in nine provinces in January. Lower sales in Quebec, Ontario and Alberta accounted for most of the decrease.

Quebec (-2.4%) reported the largest decrease in dollar terms, with widespread declines across most store types.

The decline in Ontario (-1.4%) was mainly attributable to lower sales at gasoline stations.

Retail sales in Alberta (-2.8%) declined for the fourth consecutive month in January, reaching their lowest level since December 2013. The decline was largely a result of lower sales at gasoline stations and new car dealers.

Receipts in Nova Scotia fell to their lowest level since March 2013, decreasing for the sixth consecutive month.

Prince Edward Island (+0.5%) was the only province to register an increase in January.

Seasonally Adjusted Numbers



Economist's Theories on Gasoline

Hey wait a second. Didn't economists tell us consumers would take savings on gasoline and spend it elsewhere?

Yes they did. So there is only one possible explanation: Just as in the US, Canadian weather was much worse than economists initially thought.

GDP Decline in January

Please consider Canada's GDP Probably Down In January, CIBC Says After Disappointing Retail Data.

Canada’s economy likely shrank in January, CIBC said Friday following an unexpectedly negative reading on retail sales from Statistics Canada.

Retail sales fell 1.7 per cent in January, StatsCan reported, the second consecutive monthly decline. Analysts had been expecting a slowdown due to lower gas prices, but they weren’t expecting the broad-based declines that were actually seen: Seven of 11 retail sectors shrank in January, including autos, furniture and food and beverages.

Canada’s GDP for January “now looks set for a modest drop,” CIBC economist Andrew Grantham wrote in a client note.

Economists had been expecting that lower gas prices would mean Canadians would spend more on other things, but that doesn't seem to be happening.

"The latest figures suggest that households are becoming more cautious in their spending habits," Grantham wrote, adding he doesn't think Canada will meet the modest 1.5-per-cent growth rate that the Bank of Canada is predicting for the first quarter of the year.

Consumers are showing signs of exhaustion, with household debt levels reaching yet another record high in the last months of 2014, up to 163.3 per cent of disposable income.

Canada in Recession

Flashback, January 31, 2015: Canada in Recession, US Will Follow in 2015

On January 21 when the Canadian Central Bank unexpected slashed interest rates, I wrote Canadian Recession Coming Up.

Following the rate cut, the yield curve in Canada inverted out to three years. Inversion means near-term interest rates are higher than long-term rates.

I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession.

Nine days later, the Canadian yield curve is still inverted. Let's compare what I posted about the curve on January 21 vs. January 30.

Canadian Yield Curve January 21

• [*=left]30-year: 2.044% (Today's Low 1.998%)
  [*=left]10-Year: 1.426% (Today's Low 1.366%)
  [*=left]05-Year: 0.791% (Down 19 basis points, an 18% decline)
  [*=left]03-Year: 0.590% (Down 27 basis points, a 31% decline)
  [*=left]02-Year: 0.560% (Down 29 basis points, a 34% decline)
  [*=left]01-Year: 0.580% (Down 34 basis points, a 37% decline)
  [*=left]01-Month: 0.640% (Down 22 basis points, a 26% decline)

Canadian Yield Curve January 30

• [*=left]30-year: 1.834% (Down 21.0 basis points)
  [*=left]10-Year: 1.250% (Down 17.6 basis points)
  [*=left]05-Year: 0.603% (Down 18.8 basis points)
  [*=left]03-Year: 0.386% (Down 20.4 basis points)
  [*=left]02-Year: 0.392% (Down 16.8 basis points)
  [*=left]01-Year: 0.490% (Down 9.0 basis points)
  [*=left]01-Month: 0.580% (Down 6.0 basis points)

Not only did yields plunge across the board since then, the yield curve is still inverted all the way out to three years.

Recession Has Arrived

There is no point in waiting for further data. The Canadian recession has already arrived.

Canadian Yield Curve March 31

• [*=left]30-year: 1.99%
  [*=left]10-Year: 1.37%
  [*=left]05-Year: 0.78%
  [*=left]03-Year: 0.51%
  [*=left]02-Year: 0.51%
  [*=left]01-Year: 0.58%
  [*=left]03-Month: 0.56%
  [*=left]01-Month: 0.53%

The Canadian yield curve is still inverted albeit very slightly. Instead of attempting to predict the weather, something that is very difficult for economists to do (even in arrears!), perhaps they should watch the yield curve.

Isn't that what they should be doing?

http://globaleconomicanalysis.blogspot.com/#XxHSpgZqH1ltBvPa.99

[santafe2]

Re: The Elusive Canadian Housing Bubble

Quite something to watch. If someone had told us 5 years ago that Vancouver could end up in a state where an East Van working class house with an uninspiring renovation can command $2.2 mills, how many of us would have believed it? Thought so...

Once again these things last longer, inflate larger and ultimately blow up more spectacularly than anything we mortals can imagine.

Reminds me of Spain in 2007. Today you can buy a beautiful condo on the Costa Del Sol for $150k US - less if you aren't picky about the views. It's taken 8 years for the market to really begin to come back. There was also a bubble in solar energy in Spain at that time but that's taking the conversation way off track.

[don]

Re: The Elusive Canadian Housing Bubble

Once again these things last longer, inflate larger and ultimately blow up more spectacularly than anything we mortals can imagine.

Is that why they're called the Masters of the Universe . . . or is that dated?

Doing God's Work

That's better . . . .

[GRG55]

Re: The Elusive Canadian Housing Bubble

This is getting beyond silly and into tulip-mania, in my opinion. $2.2 million Canadian is a pretty good chunk of change and could buy a pretty nice home in a nice neighborhood in almost any developed nation. I'm assuming that this was purchased entirely in cash. If the buyer is foreign (Chinese?), how desperately does the buyer want to leave his current country of residence? (Are things really that awful there?) Housing prices in Vancouver at this point are so insanely high that even the insane can't really believe they will be able to make a profit on their housing purchases. And if profit is the name of the game, I think even the sky-high prices in major Australian cities make more sense than this.

Quite something to watch. If someone had told us 5 years ago that Vancouver could end up in a state where an East Van working class house with an uninspiring renovation can command $2.2 mills, how many of us would have believed it? Thought so...

Once again these things last longer, inflate larger and ultimately blow up more spectacularly than anything we mortals can imagine.

[Milton Kuo]

Re: The Elusive Canadian Housing Bubble

Every Central Bank in the world, except perhaps the Fed, is furiously pumping liquidity. What would we expect?

This is getting beyond silly and into tulip-mania, in my opinion. $2.2 million Canadian is a pretty good chunk of change and could buy a pretty nice home in a nice neighborhood in almost any developed nation. I'm assuming that this was purchased entirely in cash. If the buyer is foreign (Chinese?), how desperately does the buyer want to leave his current country of residence? (Are things really that awful there?) Housing prices in Vancouver at this point are so insanely high that even the insane can't really believe they will be able to make a profit on their housing purchases. And if profit is the name of the game, I think even the sky-high prices in major Australian cities make more sense than this.

[GRG55]

Re: The Elusive Canadian Housing Bubble

Wow!

I wouldn't even pay the listed price premium let the the listed price or selling price.

I wonder if we can revisit this one in 5 or 10 years?

-----

Down here it's still a frenzy.

I just returned from running a large event in Queenstown, and their previous low occupancy rate shoulder seasons(between Winter and Summer peaks) have evaporated.

Chinese New Year is now a huge draw card to cater towards for NZ tourism.

Chinese property tourism group tours are chocker.

In all my time in NZ, I've never sen anything like it.

Every Central Bank in the world, except perhaps the Fed, is furiously pumping liquidity. What would we expect?

[lakedaemonian]

Re: The Elusive Canadian Housing Bubble

Wow!

I wouldn't even pay the listed price premium let the the listed price or selling price.

I wonder if we can revisit this one in 5 or 10 years?

-----

Down here it's still a frenzy.

I just returned from running a large event in Queenstown, and their previous low occupancy rate shoulder seasons(between Winter and Summer peaks) have evaporated.

Chinese New Year is now a huge draw card to cater towards for NZ tourism.

Chinese property tourism group tours are chocker.

In all my time in NZ, I've never sen anything like it.

[GRG55]

Re: The Elusive Canadian Housing Bubble

February data in (Vancouver and Toronto remind me of some lyrics from a 5th Dimension song from the late '60s: "In my beautiful, my beautiful balloon...up, up and away".)

Up, up and away indeed!

(Of course, at the rate the exchange value of the Loonie is falling $2.2 million in Canuck bucks will soon be worth not much more than $4.89 US).

Vancouver house sells for $567K over listed price

House at 65 E 26th Ave. was originally listed at $1.6M, sold for just under $2.2M

CBC News
Posted: Mar 27, 2015 11:53 AM PT
Last Updated: Mar 27, 2015 12:42 PM PT

A Vancouver real estate agent who has just sold a home for $567,000 over its published listing price says that underlisting is an accepted selling strategy in the real estate market.

"If the product's right, the timing's right and the inventory is right, it's the right strategy," Paul Eviston told CBC News.

Nevertheless, Eviston said, he would hesitate from using the term "underlisted" in the case of the home at 65 E 26th Ave., originally listed at $1.6 million, which sold for $2,167,000.

"I wouldn't call it underlisted," he said. "I would call it strategically listed to garner the interest level that we wanted to get the result that we got."

Sitting two blocks west of Main Street — both a physical and psychological divide — the home is in an area where prices often exceed $2 million, but the selling price was still a record high, Eviston said.

"It was the highest price per square foot ever achieved for an East Vancouver home," he said.

[thriftyandboringinohio]

Re: The Elusive Canadian Housing Bubble

TBO, let your friend know the government doesn't have a corner on the vig. You always pay it. Smart people understand the vig going in and subtract it from their gross profit. The protection racket is as old as civilization.

+1
i pay mine without complaining.

[GRG55]

Re: The Elusive Canadian Housing Bubble

I suppose we file this under history doesn't repeat but it rhymes....


Is the “Bank of Mom and Dad” itself borrowing to help first-time buyers step onto the property ladder?

With tighter lending conditions coming into effect in recent years and home prices continuing to soar, it appears many Canadians are turning to new, alternative sources of debt such as home equity lines of credit to help finance a down payment...

...

I'm not sure if the driver is parents wanting to get 35 year old Jr. out of the basement once and for all. Or Jr.'s virginal house lust because, well, "Everybody is doing it, and they all got help from their parents!"

Regardless, as I have posted before, up here in the cold, frozen North, the definition of homeless is someone who hasn't yet managed to coerce their parents into lending them the downpayment.

[santafe2]

Re: The Elusive Canadian Housing Bubble

A friend made a compelling argument that you can't totally own real estate.
You can only rent it from the local government, they call the rent "property taxes".

TBO, let your friend know the government doesn't have a corner on the vig. You always pay it. Smart people understand the vig going in and subtract it from their gross profit. The protection racket is as old as civilization.

[thriftyandboringinohio]

Re: The Elusive Canadian Housing Bubble

... I just don't understand this driving compulsion to own a house, when really the bank owns it until the mortgage is paid off.....

A friend made a compelling argument that you can't totally own real estate.
You can only rent it from the local government, they call the rent "property taxes".

[shiny!]

Re: The Elusive Canadian Housing Bubble

I suppose we file this under history doesn't repeat but it rhymes....


Is the “Bank of Mom and Dad” itself borrowing to help first-time buyers step onto the property ladder?

With tighter lending conditions coming into effect in recent years and home prices continuing to soar, it appears many Canadians are turning to new, alternative sources of debt such as home equity lines of credit to help finance a down payment.

Good heavens, that is scary! I just don't understand this driving compulsion to own a house, when really the bank owns it until the mortgage is paid off. How many people who buy houses now can be certain they are going to be employed stay in one place for the next 30 years? Why get tied down and indebted that way? It doesn't make sense to me.

[santafe2]

Re: The Elusive Canadian Housing Bubble

I suppose we file this under history doesn't repeat but it rhymes....


Is the “Bank of Mom and Dad” itself borrowing to help first-time buyers step onto the property ladder?

With tighter lending conditions coming into effect in recent years and home prices continuing to soar, it appears many Canadians are turning to new, alternative sources of debt such as home equity lines of credit to help finance a down payment.

It’s a risky scenario that’s helping fuel a potential bubble in the process, according to Yale lecturer Vikram Mansharamani.

Mansharamani, who teaches a seminar on bubbles at the U.S. Ivy League school, has in recent days joined a slew of international observers, which includes the IMF and Deutsche Bank, in expressing concerns that Canada’s housing market is approaching a potentially sharp correction.

Chief concern
Mansharamani’s chief concern is his belief that many Canadian homeowners are tapping the equity in their homes to lend out to borrowers — such as their children — who otherwise wouldn’t be able to afford a home. Some are also borrowing simply to renovate or use elsewhere.

“Where I get very concerned is in this private mortgage market that’s starting to emerge,” he said in an interview on Bloomberg television late last week.

“You have individual homeowners; respectable, [employed], high-credit quality homeowners who are borrowing off their home equity lines and lending to individuals that can’t get access to credit.”

What evidence is Mansharamani relying on? It appears from his recent blog post the research and opinion of Seth Daniels, an investment adviser at Boston-based JKD Capital. Daniels is part of a team behind a fund that’s betting on a Canadian housing slump.

In an email, Daniels said there are “infinite examples” of this alternative lending market growing in Canada, such as this business. “[You] can also check Kijiji etc.,” he said.

Vulnerable
Mansharamani said Canadians have embarked on a decade-long credit binge that’s helped puff up home values, a trend that’s made the country one of “the most vulnerable large economies in the world.”
And with the crude’s slump taking hold across the economy, the music may be about to stop.

“In this Loonie tune, it seems our Crazy Canadian Coyote has run off the cliff, his feet are still moving, but he has yet to look down,” Mansharamani said in March 18 blog post.

The fund Daniels advises for aims “to find investments that will benefit from a decline in Canadian house prices.”

On top of his teaching duties at Yale, where Mansharamani heads a class on financial booms and busts, his bio says he is “an experienced global equity investor.”

http://globalnews.ca/news/1900283/ca...yale-lecturer/

[don]

Re: The Elusive Canadian Housing Bubble

Don’t look now but slumping crude prices are hitting the Canadian housing market like a freight train. Energy accounts for 10% of Canadian GDP and around 25% of exports and the swift fall in oil prices is having a profound effect in the nation’s oil producing regions. Take Calgary for instance, where single-family home sales fell 34% last month. As the following chart shows, Alberta derives some 30% of its provincial revenues from energy royalties and as one TD analyst quoted by the Calgary Herald recently noted, “the effects of significantly lower oil prices had already turned up in resale activity, with sales in Calgary and Edmonton down more than 40 per cent and 30 per cent respectively, from October to January [and] as resale activity slows, prices usually follow.”



Depressed crude prices will create a $7 billion annual revenue shortfall for the province while GDP growth, which had been running at around 4%, is expected be just under half that this year, with some analysts predicting the economy will contract. Here’s CIBC’s outlook for instance:


The Alberta government’s own assessment of the economic situation is deteriorating rapidly.
From the Alberta fiscal update:

The impact of lower oil prices on real economic growth is expected to be less severe than on incomes. Alberta’s real GDP, the volume of goods and services produced, is expected to expand in 2015, but at a much slower pace of 0.6%. This is down from the Second Quarter forecast of 2.8%.

Although there are some similarities between the current [oil] price correction and previous ones, there are also key differences. Marginal extraction costs are significantly higher than in the past, with few sources of cheap supply remaining. In addition, current excess supply on the market can be attributable to price levels that encouraged the extraction of higher cost crude, rather than shrinking demand.

More broadly, there are significant signs that the housing market is starting to turn. For instance, the New Housing Price Index fell 0.1% in January. This was the first decrease at the national level in nearly a half decade.



Here’s more from The Herald:

Two housing reports released Thursday indicate year-over-year price gains for the Calgary market but on a monthly basis the real estate sector is starting to see declines indicating a correction is on its way.

“The abrupt shift in housing demand and supply conditions in some parts of the country indicate that potentially severe housing corrections have already begun. In Calgary, for example, the slump in existing home sales and jump in new properties listed for sale suggest that house prices will decline by 15 per cent this year,” said David Madani, economist with Capital Economics.

“Preliminary sales and listings figures for February reinforce this view: home sales fell by 35 per cent from a year ago, while the total number of properties listed for sale jumped by over 107 per cent.”

As you might imagine, the pain is particularly acute in the country’s oil boom towns. Here’s The Herald again:

Just take a look at what’s happening in the heart of Alberta’s oilsands industry as crude’s price collapse continues.

MLS sales of single-family homes in Fort McMurray and its surrounding area have plunged so far this year. In February, sales were down by a whopping 66 per cent from a year ago, at just 48 units. That followed an annual decline of 53.19 per cent in January.

...and more from RBC:

Softening demographic fundamentals likely will weigh on Alberta’s housing sector. Already there are signs of impending housing market downturns in Calgary and Edmonton, although these so far primarily reflect a loss of confidence caused by the sharp drop in oil prices rather than weaker population growth. We project home resales to decline by nearly 16% in 2015 in Alberta and housing starts to moderate from 40.6K units last year to 27.5K units this year.

We estimate that the direct impact of lower capital spending in the energy sector will reduce Alberta’s real GDP growth rate by more than 1.5 percentage points in 2015. Indirectly, the effect will spread to employment, net migration, the housing sector, consumer spending and, possibly, public sector spending. Our updated forecasts assume a decline in employment during the first half of 2015 in Alberta. Job losses could be as much as half the jobs created in 2014.

This isn't at all good for the country as a whole because as the Globe and Mail reports, Alberta has been a critical piece of the economic puzzle for Canada:

Alberta contributed one-third of Canada’s economic growth [in 2013] and is by far the fastest-growing province in the country again this year. Since the beginning of 2013, nearly half the jobs created in the country were in Alberta

Considering all of this, have a look at the following chart which shows the complete and total decoupling of Canadian housing prices and crude.




Bringing it all together, it appears as though the 50% decline in crude prices may spell the end for the long-running Canadian housing boom. The data looks abysmal in oil-rich Alberta while at the national level, it looks as though January marked a tipping point. Add to this the fact that Canadian households are more leveraged than they have ever been as the following graphic from Statistics Canada shows:


* * *

We'll leave you with the following from Laurentian Bank:

Canadian consumers are highly leveraged and thus cannot continue supporting the growth of the economy like they have done over the past decade unless jobs are added at the same pace as they are in the U.S. The housing sector is also fully valued.