canada’s strained housing markets
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Canada’s Strained Housing Markets. March 7, 2013. Derek Holt Vice-President, Scotiabank Economics. Outline. 1. Macro backdrop & the Bank of Canada 2. Canadian Housing: Strains Mitigating Factors Why It’s (Somewhat) Different From the United States Pockets Of Concern. - PowerPoint PPT PresentationTRANSCRIPT
Canada’s Strained Housing Markets
Derek HoltVice-President, Scotiabank Economics
March 7, 2013
Outline
1. Macro backdrop & the Bank of Canada
2. Canadian Housing:
a) Strains
b) Mitigating Factors
c) Why It’s (Somewhat) Different From the United States
d) Pockets Of Concern
The Macro Backdrop –
BoC On Hold Throughout 2013-14
-4
-3
-2
-1
0
1
2
3 %
Source: Bank of Canada, Statistics Canada, Scotia Economics.
Scotia's Output Gap
BoC's output gappost-GDP revision
Will Canadian Spare Capacity Narrow Or Widen?
Spare Capacity Will Prevent The BoC From Hiking Through 2013-14
Even The BoC’s Output Gap Doesn’t Go Into Excess Demand By 2014
Canada’s Current CPI Softness Could Be Returning Us To The Past
-1
0
1
2
3
4
5
6
7
8
90 91 92 93 94 95 96 97 98 99
US
Canada
CDN CPI: Back To The 1990s?
Source: Statistics Canada, BLS, Scotiabank Economics.
CPI, y/y % change
Among The World’s Best Corporate Balance Sheets
Source: Statistics Canada, Quarterly Survey of Financial Statements, Scotia Economics
2. Canadian Housing
a. The Strains
Canada Is At A Cycle Top In Housing
Source: Statistics Canada, Census of Population, U.S. Census Bureau, Housing Vacancy Survey, U.K. Office forNational Statistics, Census of Population, Australian Bureau of Statistics, Census of Population and Housing.
60
62
64
66
68
70
72
1991 1996 2001 2006 2011e
%
Home Ownership Rate
Canada
Australia
U.K.
U.S.
95
100
105
110
115
07 08 09 10 11 12Source: OECD, Eurostat, UK National Statistics, Scotiabank Economics.
Real consumer spending indexed to 2007Q1 = 100
Canada Is At An Exhausted Point In The Consumer Cycle
Canada
U.K.
US
Euro zone
Japan
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1971 1979 1987 1995 2003 2011
0
2
4
6
8
10
12
14
1971 1979 1987 1995 2003 2011
Source: MLS, Statistics Canada, Scotiabank Economics.
C$ bns, nsa, 4-quarter moving average
Canadian Renovation Spending
% of personal disposable income, nsa, 4-quarter moving average
Canadian Renovation Spending At A Record High
Sharply Cooling Canadian Housing Resale Markets
-40 -30 -20 -10 0 10 20
Vancouver*
Regina
Victoria*
Toronto*
Thunder Bay
Montreal
Halifax
Durham Region
Ottawa
Sudbury
Quebec City
Hamilton
Canada
25 Major Markets
London
Saskatoon
St. John’s
Calgary*
Kitchener-Waterloo
Saint John
Winnipeg
St. Catharines
Windsor
Edmonton
Canadian Resale Transactions
volume of transactions,
y/y % change, January 2013
Source: CREA, QFREB, Scotiabank Economics. *February data.
% share of mkt, Jan 2013
4.6
1.5
0.6
2.4
0.3
1.5
6.7
0.9
1.2
1.9
67.9
100.0
3.0
1.9
0.5
2.6
2.1
1.3
8.9
0.4
18.6
1.2
0.8
5.8
Canadian House Prices In Early Decline Phase
-10 -5 0 5 10 15 20 25 30
Saint John
Vancouver*
Ottawa
Kitchener-Waterloo
Victoria*
Winnipeg
Windsor
St. Catharines
Edmonton
Canada
Toronto*
25 Major Markets
Sudbury
Montreal
London
Saskatoon
St. John’s
Hamilton
Durham Region
Regina
Calgary*
Quebec City
Halifax
Thunder Bay
Canadian Home Prices
y/y % change, January 2013
Source: CREA, QFREB, Scotiabank Economics. *February data.0 50 100 150 200 250
Windsor
Thunder Bay
St. Catharines
London
Durham Region
Saint John
Victoria*
Kitchener-Waterloo
Canada
Toronto*
Hamilton
Ottawa
Sudbury
25 Major Markets
Halifax
Vancouver*
Edmonton
Calgary*
Winnipeg
Saskatoon
St. John’s
Regina
Canadian Home Prices
cumulative % change from December 1999
Source: CREA, Scotiabank Economics. *February data.
100
120
140
160
180
200
220
240
00 03 06 09 12
Canada – Teranet National Bank House Price Index
US – Case-Shiller Home Price Index
Source: Teranet National Bank House Price Index, S&P/Case-Shiller Home Price Index, Scotiabank Economics.
index:Jan 2000=100
Home Price Indices – Repeat Sales Metric
Canadians Have Higher Debt… But Stronger Balance Sheets
* Includes households, non-profits and unincorporated business.Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics.
70
85
100
115
130
145
160
1990 1995 2000 2005 2010
Canada*
US
household credit liabilities as % of disposable income
Canadians’ Debt-To-Income Now Higher…
14
18
22
26
30
1990 1995 2000 2005 2010
Canada*
US
household debt as % of assets
… But Less Debt Used To Buy Assets
Canada’s Debt Service Burden Is At An All-Time High
Source: Bank of Canada, Statistics Canada, Scotia Economics.
0
5
10
15
20
25
30
1982Q1 1986Q1 1990Q1 1994Q1 1998Q1 2002Q1 2006Q1 2010Q1
Canada's Household Debt Service Burden
interest payments on all debt + mortgage principal payments (% share of after-tax PDI)
Source: Bank of Canada, Statistics Canada, Scotiabank Economics.
Principal
Interest
Total
Distorted by accounting change
No Leverage Apart From Household Debt? Think Again
• Condos have driven all of the rise in housing starts for years…
• …estimated 45-60% of Toronto of new condo sales over recent years have gone to investors not for primary occupancy….
• …5-15% down payments at sales office openings imply +/- 10 times gearing…
• …then flip when the project goes live
• Leveraged equity has been behind this
Will Canadian Housing Starts Follow Sales Like They Did In The US?
0
1
2
3
4
5
6
7
8
0.0
0.5
1.0
1.5
2.0
2.5
04 06 08 10 12
Source: U.S. Census Bureau, NAR, Scotiabank Economics.
unit millions
Housing Starts & Resales Declined Simultaneously in the U.S.
unit millions
Housing Starts (LHS)
Resales (RHS)
Scenarios For Housing Starts
100
120
140
160
180
200
220
240
260
05 06 07 08 09 10 11 12 13
Source: CMHC, Scotiabank Economics.
000s
Canadian Housing Starts
History
forecast
BaseCase
Risk
Weakest Household Debt Growth Since The 1990s…
0
2
4
6
8
10
12
14
16
18
20
90 92 94 96 98 00 02 04 06 08 10 12
Residential Mortgage Growth
Source: Bank of Canada, Scotiabank Economics.
%, 3-month moving average
y/y % change
m/m % change, seasonally adjusted
0
2
4
6
8
10
12
14
16
18
90 92 94 96 98 00 02 04 06 08 10 12
Household Credit Growth
Source: Bank of Canada, Scotiabank Economics.
%, 3-month moving average
y/y % change
m/m % change, seasonally adjusted
…Especially For Consumer Loans
-5
0
5
10
15
20
90 92 94 96 98 00 02 04 06 08 10 12
Consumer Loan Growth
Source: Bank of Canada, Scotiabank Economics.
%, 3-month moving average
y/y % change
m/m % change, seasonally adjusted
2. Canadian Housing
b. Mitigating Factors
After Ottawa Eased The Most Since 1954 NHA and 1967 Bank Act…
• 1999: Introduction of 5% down payment insured mortgage
• 2003: Price ceiling on insured mortgages lifted
• 2005: Introduction of insured mortgage with 30-year amortization period
• 2006: Introduction of insured mortgage with 35-year & 40-year amortization periods
• 2006: Introduction of 0% down payment insured mortgage
…CDN Macroprudential Rules Clamped Down
• After sharply easing mortgage lending standards in 2006-07, the federal government has since reversed its position
• October 2008: Max 35 year amortization for insured mortgages; minimum 5% down for insured mortgages; consistent minimum credit score; new loan doc standards for property value and incomes
• February 2010: Qualify at 5 yr posted rate instead of 3 yr; lower refi ceiling to 90% from 95%; min 20% down required to get mortgage insurance on non-owner occupied properties
• January 2011: Max 30 year amortization for insured mortgages; refi ceiling for primary occupancy homes dropped to 85% from 90%; withdraw gov’t insurance on HELOCs
• November 2011: Accounting changes to hold more on balance sheet
• June 2012: Max 25 year amortization for insured mortgages; insurance dropped for mortgages on homes valued over $1 million (ie: now minimum 25% down); refinancing ceiling dropped to 80% from 85%; mortgage payments and total debt payments capped at 39% and 44% of income respectively.
• 2012-13 Federal Budget: OSFI oversight of CMHC
• Spring 2012: Insurance lifted from covered bonds, portfolio caps at the CMHC, new OSFI lending guidelines to banks
• January 2014: Basel III
A key difficulty lies in evaluating the opaque forms of non-rules-based tightening being applied through moral suasion by regulators to lenders and GSEs.
Assessing Mortgage Rule Tightening
$362
$166
$0
$50
$100
$150
$200
$250
$300
$350
$400
40 down to 25 30 down to 25
Source: Scotia Economics.
Evaluating AmortizationCompression
Increase in Monthly Mortgage
Payments, $
10
20
30
40
50
60
70
00 02 04 06 08 10
Housing Starts
Single-detached
Good Reasons For Rising High-Rise Housing Demand?
% share of total
Source: CMHC, Scotia Economics.
Apartment
• Better affordability
• Favourable demographics
• Lifestyle choices
• More selection
• Urban renewal / intensification
• Tight rental vacancy rates
• Investor purchases
Canadians Have More Home Equity & More Real Estate in their Portfolio
Includes households, non-profits and unincorporated business.Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics.
Canadians Have More Home Equity…
30
40
50
60
70
80
1990 1995 2000 2005 2010
Canada
US
Real estate equity as % of real estate assets
15
20
25
30
35
40
45
1990 1995 2000 2005 2010
Canada
US
… and More Real Estate Assets
Real estate as % of total household assets
2. Canadian Housing -
c. Why It’s (Somewhat) Different From The U.S.
• Explicit GSE guarantees – unlike the US GSEs
• Strongly capitalized banks & captive dealers, far less shadow banking
• Totally different funding model: deposit funding & large held-on-book component,
versus reliance upon revolving door financing
• Financial institutions less reliant upon short-term lines
• No strategic defaults, outside of Alberta & Saskatchewan (and limited there)
• Tougher bankruptcy rules
• Less outsourcing of sales force in Canada
• Generally more conservative products, but not entirely
• No option ARMs in Canada, but entire book resets within 5 years
• No mortgage interest deductibility (with exceptions)
• Stricter underwriting criteria including independent appraisals & hair-cuts
• Canada has already taken steps to tighten mortgage rules…
• …and is pursuing further financial reforms (Basel III, OSFI oversight etc)
What Makes Canada’s Mortgage Market Different?
Canadians Usually Don’t Default When House Prices Correct
Canada has witnessed some big price corrections since the late 1980s that corresponded with big shifts in the macro environment, notably in Toronto and
Vancouver, and yet each time mortgage arrears barely budged.
Implication? Revenues are at greater risk than charge-offs.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Toronto 1989-95
Vancouver1990-91
Vancouver1995-96
Vancouver2008
Toronto 2008-09
peak to trough change in provincial mortgages in arrears, bps
Mortgage Arrears During House Price Corrections
Source: Canadian Bankers Association, Scotia Economics.
-30
-25
-20
-15
-10
-5
0
Toronto 1989-95
Vancouver1990-91
Vancouver1995-96
Vancouver2008
Toronto 2008-09
% change
Large House Price Corrections
Source: CREA MLS, Scotia Economics.
trough to peak in provincial mortgages in arrears, bps
2. Canadian Housing –
d. Pockets Of Greater Concern
Canadian Households More Heavily Leveraged Than Most
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12
Under Construction
Existing Condo Stock
Toronto Condo Construction:97k Units on the Way
Source: Urbanation, Scotiabank Economics
Toronto Condo Investors Under Water
Assumptions:• 20% mortgage down payment;
• 25 year amorization in 2004-05, 30-year am. from 2006-Q2 2012, 25-year am. from Q3 2012 onwards;
• Mortgage is fixed rate @ 3.5% from from 2009 onwards, 5% beforehand;
• Property taxes = 1% of condo purchase costs; maintenance & condo fees = $250/month;
• The 'shrinking new condo' starts at 650 Sq. Ft. in Q4 2004 and 'shrinks' 10 sq. ft. per year to reflect falling condo sizes;
• The shrinking codo's cost = its size * Urbanation's average $PSF condo cost estimate.
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Q42004
Q42005
Q42006
Q42007
Q42008
Q42009
Q42010
Q42011
Q12012
Q22012
Q32012
Q42012
700 Sq. Foot Condo (Resale) Carrying Cost
Central Toronto 1-Bdrm Condo Rent
700 Sq. Foot Condo (New) Carrying Cost
Toronto Condos: Monthly Rent vs. Monthly Carrying Cost
Sources: MLS, TREB, Urbanation
Toronto’s Luxury Condos Adding To The Overhang
Trump International
Hotel & Tower
Shangri-La Toronto
Four Seasons Private Residences
(East & West Towers)
Residences at the Ritz-Carlton
Opening Date: January 2012 August 2012 Summer 2012 April 2011
• 65 storeys
• 118 residential units
• 261 hotel rooms
• 66 storeys
• 202 hotel rooms
• 287 residential units
• 55 storeys
• 253 hotel rooms
• 103 residences
• 25 storeys
• 101 residences
• 53 storeys
• 267 hotel suites
• 159 condo units
Source: Andrew Barr/National Post, THERESIDENCESTORONTO.COM, TRUMPTORONTO.CA, SHANGRI-LATORONTO.COM, YORKVILLERESIDENCES.COM.
Contacts
Economics
Derek Holt, Vice-President, Scotia Economics
Dov Zigler, Financial Markets Economist
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