Friday, August 15, 2008

Down 3.6% in July

"The question is no longer will Canadian house prices drop but whether they will sink to levels seen in the United States where some markets have watched home prices crumble by as much as 30% in the last year."
Financial Post, Gary Marr, August 15, 2008. "Alberta leads national drop in home prices"

Well said...Only problem is just a few months ago, we were hearing tales of a slowdown to 5% growth in 2008 (from 11% in 2007). This is the first time that the FP or G&M (to my recollection) has stated unequivocally that Canadian housing prices will fall. The mainstream media just keeps repeating the doggie do-do that the CREA/real estate people and the banks keep spouting.

July 2008: The average sales price declined 3.6% YoY. As bearish as I am on housing, even I didn't expect that bad a number!

CREA is trying to spin away:

In June, it was only 4 of 25 markets going negative (Calgary and Edmonton included) going negative. The number was skewed....

In July, now you can add Vancouver to the list. Toronto is quite close now at 1.5%. Windsor is now negative.

Listen to CREA spin furiously :
" Even though average prices continue to post year-over-year gains in most major markets...the decline was the result of fewer sales compared to a year ago in the four most expensive major markets in Canada – Vancouver, Victoria, Calgary and Toronto."

Hmm, the four most expensive major markets in Canada had fewer sales. Yes, mathematically that would skew the average price downward as you lose more higher prices sales in your mix.

BUT...Is it not concerning to see the #1 and #3 cities (Tor/Van) have fewer sales and go negative in inflation adjusted (real) terms. The other 3 rich cities in Canada (Calgary, Edmonton, Victoria) go negative and/or fewer sales.

How many major cities are there in Canada not affected by this housing crash developing.

Let's start from West to East with all cities over 1 million:

1) Vancouver: From BMO "However, the drop in July spread to a few more cities, including the previously untouchable Vancouver market."
Vancouver is the Michael Jordan of housing markets. Sales down 44%!!
2) Calgary: Negative (big time)
3) Edmonton: Negative (big time)
4) Toronto: slowly sales/barely up (1.5%)
5) Ottawa: holding up so far
6) Montreal:
holding up so far (new high in average price)

I don't know about Ottawa, but I live in Montreal. Everything happens with a lag here. We've been spared some of the worst recently with some provincial income tax cuts and a strong aerospace sector. Plus, culturally we are a little insulated from what goes on in the ROC, but it gets here eventually.

I would expect to see all 6 major Canadian cities negative YoY by year end. I would expect to see Calgary, Edmonton, Vancouver and Toronto all negative by October latest.

What are the hot areas in terms of price increases?

Saskatchewan and Newfoundland/Labrador (ie commodity bubble land). With the upcoming commodity implosion and housing bubbles in those areas, look for them to follow Calgary and Edmonton's lead. Saskatchewan is already having huge drops in sales volume and anecdotal reports report that much of the increase was due to investment buying, much of it from Alberta. Potash stock price is a good proxy for Saskatchewan's economy. I don't have a position in Potash currently but I have shorted it recently and I think it is reminiscent of JDSU back in 2000.

One last spin by CREA's economists:
"Based on what happened in the first half of the year, CREA’s market analysis shows a record national average residential MLS® price by the end of 2008, but with a much more modest increase than was recorded in 2007."

Translation: instead of 5% growth for 2008 (down from 11% in 2007), we are now projecting to go to get back to postive (ie +0.1%) by December.

My take:

  • Expect to see negative numbers the rest of the year
  • Expect Toronto to go negative soon. When the mainstream media (based primarily in Toronto) gets this, expect to see a flood of housing doom articles. While the doom will be correct, it will be about years late.
  • Expect Ottawa and Montreal to participate in the housing crash by year end
  • Expect to see negative numbers worsen with an occasional upward blip (similar to a bear market rally in the stock market- ie nothing goes down in a straight line)
  • Expect to see bottom calling on these inevitable blips
  • Expect to see a negative 6-9% by year end


Rick said...

Soon, the legal profession will be upped a notch and the Realty vocation will become the #1 bottom feeders, manipulators and masters of self serving behaviour.

Rachelle said...

Hi Adil, enjoying your blog. Folks in Ottawa often say we're protected because of all the stable government jobs here. What do you think? I think I've noticed some changes in my trendy downtown neighbourhood in the past year or so. Houses take longer to sell, and high-end houses are dropping by a lot, especially newly constructed ones. The bottom end in this neighbourhood is about $400K for a single family home and I haven't seen that fall yet.

Adil Burney said...

thank you for the nice comments.

I don't know very much about the Ottawa housing market except that it traditionally very pricey (especially relative to your friends here in Montreal). Perhaps the "stable government jobs" help, although the massive government job cuts in the mid 90s hurt Ottawa home prices a lot.

Houses are too pricey almost everywhere in Canada (and most of the world) and they will come down, IMHO, pretty much everwhere, Ottawa included.

The credit bubble was worldwide in its scope and Canada went along for the ride. Government jobs may lessen the fall a bit, but price and overprime are the main culprits.