CMHC: slowdown foreseen

A couple of articles in the Sun to discuss. First is the one from today.

CMHC's Carol Frketich reports that they expect sales and starts to go down in Vancouver this year and in 2007. Prices, however, will keep rising - 9% in 2006 and 4% in 2007.

Interestingly, Cameron Muir seems to be hinting that the boom can't go on forever:

CMHC analyst Cameron Muir said it appears that Greater Vancouver is "closer to the end of the current cycle than [it is] to the beginning of the current cycle."

"Really what we're seeing out there is that by the time we get to 2007, affordability in Vancouver is going to reach the point that it impinges on sales as well as price gains in the marketplace," Muir said.

Good. We're getting closer to being on the same page. Now that we all agree that the market will come down at some point, we can simply agree to disagree on timing. In fact, I don't have a terribly strong stance on timing. I would be surprised if the bull market survived another 4 years, and I would also be surprised if it crashed tomorrow. Not a terribly precise forecast window, I know, but so be it.

The other article is from yesterday. We have Carol Frketich with CMHC's views, but we also have two others: Dave Barclay from the BC Real Estate Association and Patricia Croft from PHN.

From Mr. Barclay, there is no need to do anything except extrapolate from 2005:

Dave Barclay, president of the B.C. Real Estate Association, said housing demand in 2005 was up all over the province, and "we see this trend continuing."

"The economy is strong, and as long as the economy remains strong, then we see the real estate market remaining strong as well," Barclay said.

From Ms. Croft, however, some worries:

For one, Croft considers Greater Vancouver real estate prices "the most overvalued in all of Canada," and affordability is "the worst in Vancouver of any major city in Canada."

"That's something to keep an eye on," she said, because if first-time buyers are priced out of the market, "the ripple effect can be pretty powerful."

I agree with her on both fronts. Of course, Ms. Croft represents an investment firm, and we all know that real estate and other investments are like apples and oranges. How could she possibly know more about real estate than the realtors? Ha!

Selling T-dot in Rain City

I got a glossy condo mailout in the mail today. Interesting twist - it's for a condo development in Toronto. The place is called "Montage" and it's in the CityPlace development that Concord Pacific is putting up to the West of the Skydome where that little golf course thingy was until they started building Cityplace.

I see this as similar to the Californians that buy in Boise Idaho and other outback towns simply because houses look cheaper there than they do in California. Not that Toronto is the outback, but it's just cheaper than Vancouver.

I think the Vancouver investors are supposed to think: "Wow! A 1186sf unit for just $389K!! That's so cheap compared to Vancouver!!" and then proceed to buy 3 condos, sight unseen.

Actually, what's interesting is that rents in Toronto are higher, according to CMHC anyway, so it might in fact be the better investment.

Anyone from Toronto reading? Care to tell us what the 411 is in the 416 for the condo market? Is CityPlace selling well?

Greenspan's last move

is up. Another 25bps, bringing the Fed rate to 4.5%. Where will it go next? Here's the text:

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Note the word 'may.' It appears that further moves will depend on the data.

According to Macroblog's handy fed fund forecaster, as of yesterday the probability of an upward move in the March meeting is about 77%, but only 28% for the May meeting. So, the market appears to expect one more move.

That's not going to help the US housing market.

January numbers are coming

In a couple of days, we will see January's numbers. I must admit that I really don't know which way they will go.

In December, we saw some price drops. This really confused me, since we didn't have any real prior sign of trouble in the market - no big inventory runups for example. This makes me lean to the idea that the December numbers were a blip.

On the other hand, the neighbourhoods and places I've been monitoring haven't shown much increase in the past few months. Maybe the 'pause' (or worse) is actually here.

What will we see in the numbers this week. Will Vancouver soon be following California? Or is it just a quick stop for a breath before the market begins another year of big gains?

Hyping TV Towers

Article in the Sun today hyping the new TV Towers project on Robson. Lot's of juicy stuff.

Conord Pacific's David Negrin tells us that it is cheaper than renting:

"We are very competitive pricing. That's what appeals to younger buyers. With 25 per cent down you could be paying $1,800 a month. That's cheaper than renting."

That one is just laughable. Anyone want to take a cut at it?

And you know what? We're running out of condos!

Negrin adds land is [scarce] in downtown Vancouver and with the city's moratorium on converting office space into residential developers are having to look elsewhere for projects.

Yup, huge shortage.

More interesting is some research that they quote:

Research from Price Waterhouse Coopers recently indicated developers would be wise to build more of these smaller units.

The September Condo Market Review found "there was more demand for smaller units than what was being offered," says vice-president Craig Hennigar.

I don't have any reason to question their findings. I wonder though, do they mean that there is more demand from investors or from actual owner-occupiers? Also, I've read elsewhere that in down markets that have a lot of inventory, the small units are very hard to sell. Anyone out there know if there is anything to that? I don't think I'll be rushing out to get my 400sf unit, anyway.

The future of Yaletown

Some interesting discussion on this post about what Yaletown might look like in 30 years. I've wondered this myself. The worry is that a bunch of buildings all built in the very same style will

a) all go out of style at the same time.
b) all deterioriate at the same time.

One interesting case study is the case of St. Jamestown in Toronto. Now, there are obvious differences I should throw out there first. The most obvious is that in Yaletown we have mostly condos rather than rental buildings. Although, if Cam Muir's 47% investor number is right, then maybe this distinction isn't a big deal. Also, we should be careful in taking one bad example too seriously.

However, as an exercise in thinking about one possible outcome, I think it is interesting.

In the 1950s in Toronto they tore down a whole neighbourhood of old Victorians and put up these huge cement towers - meant for young singles and professionals. It wasn't very long until it became more or less a low income area. It is currently heavily populated with recent immigrants. I'm glad that the new Canadians have a place to live and I'm glad they're here, but my point is simply that the neighbourhood turned out very differently than was originally planned.

I don't suggest that Yaletown *will* go in that direction. I simply suggest that it is not impossible that it might not always be as hip, young, single, and professional as it currently is.

Some links on St. Jamestown are below.

Wikipedia:

St. James Town began to grow in the nineteenth century when it became a semi-suburban area home to the city's middle class. The area was rezoned in the 1950s as the nineteenth century homes were levelled, and apartment towers, inspired by Le Corbusier's "Towers in the Park" concept were erected, each accommodating thousands of residents surrounded by greenspace but with few amenities. Each of the buildings is named after a major Canadian city.

St. James Town was originally designed to house young "swinging single" middle class residents but the apartments lacked appeal and the area quickly became much poorer. Several building owners being bought by the city and turned into public housing. Today, the towers are mostly home to newly arrived families of immigrants, and the area has great ethnic variety.

Toronto Neighbourhoods:

The St. James Town apartments were originally planned and designed as a neighbourhood for upwardly mobile singles and professionals. However, almost from the start St. James Town has been populated by low to moderate income families.

US Prices Falling

Awareness is starting to spead in the US that prices are falling. See two articles discussed at Ben Jones's place on California, DC, Florida, Marin County, New Jersey, Sacramento, and Boston. Much of this discussion comes from the latest report from the National Association of Realtors, discussed by bubblemeter and Calculated Risk.

What happened in the US? Inventory started to rise in the summer and early fall (See Phoenix for example). Prices apparently started to drop in November/December. Now, things are happening on different paces in different cities, but that's the overall summary.

What's the lesson for Vancouver?

Well, as Annette has pointed out in the comments, we still have overnight lineups to pre-buy condos in Vancouver. As Rob Chipman has pointed out, there is no sign of inventory run-ups at this point. Given these facts, I would be surprised if Vancouver has topped out yet.

However, I think the US is in the middle of providing us with an example that it is a large mistake to assume that real estate markets will *never* top out; that they always go up. Once you accept this premise, the question becomes 'when'. I don't have the answer, but I really wonder if those who may sit out all night in the hopes of buying a $360K 1Br condo have really thought through the full consequences of what they are doing.

Many people in San Diego, Boston, DC, and Florida all thought that their local markets were 'different' and would always go up. They are now learning otherwise.

Many of these cities have all of the things that are supposed to keep our market booming forever - good weather, construction booms, government jobs, land/sea/mountain barriers, wealthy immigrants. They also have much higher incomes. Yet they fall.

So, I think the following lessons should be taken:

1. Real estate has cycles, even in Vancouver.
2. A real estate crash in the US will not leave Vancouver untouched. (Why? Psychology, demand for our exports, credit markets, etc.)

If you are looking to buy for an investment or as a home, this doesn't mean that you shouldn't buy right now if it's right for you. It does mean, however, that you should make sure you do your homework and 'pencil out' some more pessimistic 'what if' scenarios to make sure you're comfortable with *all* the relevant possible outcomes.

Desperate sellers

Piggington has an interesting account of desperate sellers. We talked about similar issues in October in this post on Housing Market Chicken.

Reactions to the BoC

Some reactions from yesterday's rate hike:

In the bond market, nothing moved.

Mortgage rates? Well, the 5-yr posted rates didn't move at all - still at 6.30 for the big players. I haven't been tracking the short rates, but obviously they are more likely to have increased a bit.

What did analysts say? Rob Chipman suggests that continued big federal spending will be inflationary, meaning that long rates could go higher.

In the Sun, we have some quotes from some of our favourite quotables.

Tsur Somerville from UBC:

"It's one of these things where the individual changes don't matter that much but now in the aggregate we are starting to get to a change that would have an effect," said Tsur Somerville, director of the UBC Centre for Urban Economics and Real Estate.

Benjamin Tal from CIBC:

Even if the bank raises rates another 50 basis points, that's still well below the previous peaks of six per cent in 2000 and eight per cent in 1995, Tal said.

"In every cycle in the past 30 years the peak is much lower than the previous peak," Tal said. "The peak now is almost the bottom in the previous cycle."

But while consumers will not "suffer considerably" Tal believes the interest rate increase will cause a slowdown in consumer spending and consumer credit and a moderate increase in bankruptcies..

But rates would have to increase another 150 basis points "to shock the consumer."

Yeah Ben, but 'affordability' is not good right now even with the record low rates. So, we don't need to see 8% mortgages for there to be a lot of pain out there.

Finally, last on the list but first in our hearts is Cameron Muir from CMHC:

But the rise in interest rates, and the resulting increase in mortgage payments, won't necessarily translate into lower house prices in British Columbia, said Cameron Muir, a senior market analyst with Canada Mortgage and Housing Corp.

The rise in rates may even increase demand for houses in the short run as people rush to take advantage of pre-approved mortgages rather than risk higher rates in the future, Muir said. But in the longer term, there should be little noticeable effect.

"A quarter-point increase is not going to be enough to reduce demand for housing given the fact that our economic fundamentals are doing so well," Muir said.

I agree with Cam and Tsur that one 25bps increase on its own won't do much. However, we have now stacked up 4 of these increases, with some more yet to come. It is this bigger picture that I look at. So, I disagree with Cam that 'in the longer term there should be little noticeable effect.'

These interest rate increases, taken together, will matter in 2006. How much they matter we can discuss, but they will matter.

Bank of Canada: another 25

The Bank of Canada moved today - up another 25 bps to 3.5%. Things are looking pretty 'balanced' for 2006, according to the Bank:

The outlook for growth and inflation in Canada is similar to that in the October MPR. The Bank continues to judge that the Canadian economy is operating at its production capacity and will grow roughly in line with production potential through 2007. CPI and core inflation should return to the 2 per cent target by the first half of 2007. Risks to the Bank's projection remain balanced for 2006 and tilted to the downside through 2007 and beyond.

However, they still think rates should go a little higher. Note the word 'modest'.

In line with the Bank's base-case projection and current assessment of risks, some modest further increase in the policy interest rate would be required to keep aggregate supply and demand in balance and inflation on target over the medium term.

I interpret this to mean that another 25bps is pretty certain, but more than that will depend on future economic conditions. Next decision is March 7, 2006 in 6 weeks.

Impact on the housing market? If new buyers are at the affordability limit with VRM's, then this move will move their affordability point. However, if new buyers are using the 5-yr mortgage rate, then the impact of this move will be slight; the 5-yr bond market hasn't moved very much at all in the last 3 months and this 25bps move on the short end shouldn't affect it much either.