Given the uncertainty in the Canadian housing market, inflated home prices, elevated levels of household debt, and mortgage stress tests, it seems more and more buyers are opting for the sidelines, choosing to rent instead. It appears real estate investors and developers are taking note, funnelling money into purpose built rental units. A good chart from Ben Rabidoux of North Cove Advisors highlights a record number of rental apartment units currently under construction across Canada. While these units should provide relief to a national housing market ailing with low vacancy rates, I am hearing anecdotally of more property builders in Vancouver switching to rentals given the obvious weakness in the resale market where sales have tumbled to near two decade lows throughout the year. The data appears to back those rumblings. Per CMHC, there were 4226 rental units under construction in Greater Vancouver for the month of June, just off a record high set in May. Further, housing starts for new rental units remains elevated. The 12 month monthly average for new housing starts remains close to record highs. I suspect rental housing starts will continue to trend higher, given the weakness at pre-sale centres across Greater Vancouver. The pre-sale

The global economic slowdown which has prompted the worlds central bankers to take a dovish pivot has no doubt been plagued by the cyclical slump in global property markets. This slump has been exacerbated by the slowdown in the Chinese home buying spree as capital controls remain tight as economic output slows. China recently reported second quarter GDP growth of 6.2% year-over-year according to the National Bureau of Statistics, the slowest pace of output expansion on record dating back to 1992. Of course, the slowdown in China’s self-reported growth rate comes as the Trump trade war shows no signs of cooling off. This has impacted foreign purchases of American homes. According to the National Association of Realtors, the dollar volume of homes purchased by foreign buyers from April 2018 through March 2019 dropped 36% from the previous year. Foreigners bought 183,100 properties (the lowest count in 10 years), with a total value of about $77.9 billion, down $121 billion a year ago. The dollar volume of foreign purchases declined amongst the top five most active countries, with the steepest drop in Chinese purchases, which fell to $13.4 billion, a 56% decline from the prior level. Despite the steep decline in

The Canadian housing market recorded somewhat of a stabilization in June. The news comes just days after being featured on the number one spot for Bloombergs “housing bubble dashboard” which featured Canada and New Zealand as the most vulnerable to a correction in home prices. Per the Canadian Real Estate Association, national home sales inched higher in June, up 0.3% year-over-year. The slight increase in sales was largely in part due to an uptick in Eastern Canada, where lenders have shifted mortgage originations to more stable markets. “There’s a growing divergence in Canadian housing market trends between eastern and western Canada,” noted Gregory Klump, CREA’s Chief Economist. Sales increased 16.2% in Quebec city and 9.6% in Toronto, while falling 15% in Greater Vancouver and 4.6% in Calgary. The overall year to date trend in home sales remains weak, especially considering mortgage rates have plummeted nearly 90 basis points since the start of the year. The sluggish activity in the housing market appears be weighing on the auto market. The Canadian auto industry posted its sixteenth consecutive deceleration in sales for June, contracting another 7.2% year-over-year. “We’ve been expecting single digit declines all year and that’s exactly what we’ve been getting.

One of the signs you look for when an economy, and in particular a housing market is in distress is the number of foreclosures hitting the market. Foreclosures are a lagging indicator as typically households try to hold on as long as possible while lenders will typically offer borrowers a grace periods to try and catch up on outstanding payments. However, once foreclosures begin to increase they create somewhat of a self fulfilling feedback loop. When houses are forced to sell they create a clearance price which ultimately impacts the values of homes in the surrounding areas. In their book ‘House of Debt’ economists Atif Mian and Amir Sufi argue the impact of the housing bust in 2008 was ultimately magnified through the sharp increase in foreclosures. They believe the damage could have been mitigated had banks partaken in some of the risk sharing, by forcing lenders to share in the downside of property values they would have been more prudent in their lending standards. But alas, this was not the case, and as we can see in the chart below, US foreclosure starts (listings) and completions (sales) began ratcheting higher in 2005 as home values peaked. Foreclosure sales ultimately

As we have seen throughout this year, the condo market continues to outperform the detached housing market. However, outperform might be a little too generous. Condo sales across Greater Vancouver fell 23.9% from last year, this marked the fewest condo sales for the month of June since 2002. This is particularly concerning given this doesn’t account for the increase in population growth and new condo stock during that time period. Similar to the detached market, the majority of the weakness in the condo market is at the higher end of the spectrum. In other words, the more expensive the condo the more challenging it is to sell. This should not be mistaken for assuming entry level condos have not been impacted. One bedroom and studio units have witnessed sales fall and prices drop as well. One bedroom and studio condo sales were down 27% year-over-year with the average price per square foot sinking by 6.9% (8.7% decline for 2 bedroom condos).  Inventory jumped by 46.5% year-over-year to the highest levels since June of 2015. This allowed the overall months of inventory to inch higher to 6.2 months. This is indicative of a buyers market but certainly not cause for panic. 

As we had been calling for the past few months, Greater Vancouver home sales had likely bottomed and we would soon begin to see year-over-year increases. This was indeed the case in July, where home sales bounced, jumping 23% year-overyear. While the large increase in sales is certainly significant, it is also important to contextualize the increase. Last year ( July 2018) was the slowest month of July in eighteen years. Therefor, it was highly unlikely we would see sales weaken further. Instead, we saw sales increase, although still below the 10 year average for the month, while prices continued to inch lower. It appears lower prices, along with falling mortgage rates have certainly encouraged some buyers back into the market. Further, the labour market remains relatively strong, allowing willing buyers to obtain a mortgage and or leverage up in the housing market. However, overall market conditions remain very volatile with some segments exuding significant weakness, while other more affordable segments of the market remain much more resilient. Let’s unpack the month of July further.

This an excerpt from The Saretsky Report. You can subscribe to the monthly report for free Here. The June edition is set to be released later this week. Detached sales across Greater Vancouver dipped just 1.7% from last June, despite the small decline it still helped push detached sales towards their lowest count on record. This marked the fewest transactions dating back to 1991.  Again, this reaffirms our belief that detached sales are nearing a bottoming process where the comparative base effects are easing and will likely trend positive within the next 6-8 months. In other words, detached sales are already so low that we should expect to see year-over-year increases very soon. This is not to be confused with year-over-year price increases.  Although inventory actually fell 5% year-over-year it remains elevated. As of today, there is 8.8 months of inventory for sale, suggesting further downwards pressure on prices. However, new listings fell 17.7% from last year which has certainly helped support prices from falling further. We will continue to watch inventory numbers closely.  Buyers remain very cautious, and low-ball offers have become commonplace. Similar to our message last month, entry level houses, particularly with mortgage helpers are not seeing

Famed US fund manager Bill Gross is well known for many reasons, one of them was his creation of ‘The Plankton Theory‘, or as best described by Gross as, “In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can’t pull it off – either through an inability to come up with a down payment, or to service the monthly mortgage – then the ‘plankton’ would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he’ll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton.” While I will stop short of saying “this time is different”, it appears the

It appears the pre-sale space is beginning to garner more media attention. CBC just penned an article titled, “Pre-sale condo buyers back out of contracts as market slows in Lower Mainland.”  I have been beating this dead horse for awhile now as the risks mounting were simply too large to ignore. During the peak of the mania people were piling into pre-sale condos at a frantic pace. It was just a few years ago that buyers were camping out in tents and paying record sums to get their hands on one. It sounds rather hysterical now but at the time people found a way to rationalize the behaviour. Anyways, as per the article, Vancouver Real Estate lawyer Kenneth Padzer notes an uptick in clients trying to renege on their pre-sale contract. “We’ve had clients approach us and say, can you go through all the paperwork and see if there’s some some way that we can legally not close, and it’s unlikely.” Of course this happened just a decade ago, but during a mania we tend to have short memories. In February 2009 CBC wrote an article titled, “More lawsuits filed as pre-sale condo buyers seek to renegotiate.” An excerpt from

As expected, the federal Government unveiled the details of their first time home buyer scheme which was initially promised a few months ago. Basically the Government will become an equity partner in your home and share both the upside or the downside of your home purchase, backed by the Canadian taxpayer. At first glance it feels like an awkward big brother type of deal. Of course the Government is always backwards looking and seems to have brought in this policy at the worst possible time. After a multi-decade long run-up in home prices the Government has decided now is the best time to leverage taxpayer dollars into homes for first time buyers. This will likely be a losing proposition, at least in the near term as the National Home Price Index drifts into negative territory. Although, on a more positive note, CMHC is limiting the scheme to people whose mortgage and incentive are less than or equal to four times their total gross income. In other words, their ability to leverage will actually decline under this program. As a result, Rate Spy calls this first time buyer program a “bridge to nowhere” as it will likely receive little use. Although

New data released from the Canadian Housing Statistics Program suggests there are quite a few homeowners who have accumulated more than one property. In BC and Ontario about 15% of homeowners have more than one property. And the vast majority of them are residents. Canadians have certainly played a large role in accumulating real estate. They’ve also incurred a lot of debt in the process. First quarter data for 2019 shows the household debt servicing ratio printed a new record high. For context, our US neighbours to the south are currently enjoying the lowest debt servicing ratio on record after taking the medicine in 2008. No wonder CMHC’s Evan Siddall continues to lament for the continuation of the B-20 Mortgage stress test. Siddall re-iterated his views in a recent piece in the Globe & Mail, “The real estate lobby is on the wrong side of this issue, they’re being intensely self-interested, and somebody had to call them on it frankly because they were getting traction.” Adding,  “If we ease the stress test or extend mortgage amortizations, for sure it is increasing debt and it’s going to bump prices higher.” Safe to say there’s no change coming on that front anytime

There are a lot of predictions right now that a recession is just around the corner. At least the bond market thinks so. The entire Canadian yield curve is below the overnight rate, which has been historically speaking- a strong indicator. The spread between 10 year and 3 month yields is the most inverted since 2007. Of course people have been calling for a recession for awhile now. Particularly in Canada where household debt levels are off the charts. Housing bulls have found a way to justify the debt levels, usually citing the correlating asset prices which are directly dependent on underlying debt levels continuing to grow. It’s a pretty flawed argument but so far it hasn’t mattered since household balance sheets have failed to blow up after more than a decade of warnings. However, with the recent yield curve inversion and now residential investment falling, those warnings are ratcheting up again. Friends over at Better Dwelling noted Residential investment marked its fifth consecutive quarterly decline. Residential investment fell to 6.50% of GDP in the first quarter of 2019, down from 6.94% the same period last year. The predicative nature of residential investment as a recession indicator has been well