This from Ben Radioux, at ‘The Economic Analyst’, 20 Feb 2012.
An account of ‘Where We Stand’. Thanks to Ben.
“Keep in mind that this type of data is backwards looking. It tells us what has already happened. Inventory and sales levels can give indication of short-term price pressures, but in a credit-driven market, the real story of future price movements is found in changes in mortgage demand/availability, which I cover in a separate report. The bottom line on that front is that the recent incremental changes in mortgage requirements may prove to be more significant than any month-to-month sales trends. These recent changes include tightening stated-income and business for self mortgages, tightening of CMHC bulk portfolio insurance for big banks, some lenders capping max mortgage amounts at $1 mil, and reports of general internal tightening via lenders and CMHC. The problem is that with 15% of all mortgages originated through the broker channel being originated through explicitly subprime lenders (the highest on record), it strongly suggest that the marginal buyer is the main support of this current market. Prime buyers, by and large, are already in the pool. So these types on incremental changes, which affect marginal buyers the most, can sometimes have far greater consequences than anticipated.”
“Vancouver: Y/Y prices are now negative for the second month leading to a decline in the 12-month moving average for the first time since early 2009. January sales were the second weakest in the past decade (second only to January 2009), while new listings were the highest of any January in the past decade. Consequently, the sales/new listings ratio was extremely weak (0.27) while months of inventory ballooned to 8 in January. Sales will pick up in subsequent months, but rising inventory and weak sales will likely persist, meaning downward price pressure will remain intact. The last time we saw sales this weak, the BoC was in the process of cranking rates down to zero. The ‘shock and awe’ from low rates are now long gone. I’m not sure what will reinvigorate sales in the short term. While it may be too early to call a definitive peak in Vancouver, things aren’t looking good.”
We agree with the flavour of Ben’s framing of the stats. Yes, one can’t be sure that last summer was a top, but, if it were, this is one way the decline would start to play out.
The emphasis on incremental change in lending standards (and other factors) on the marginal buyer (and, ‘marginal holders’) is crucial, and a concept that most market participants do not fully understand. As prices remain stagnant or drop, thresholds will be crossed which result in non-linear changes (a ‘wall’ will be hit, or at least a very steep part of a curve; and demand/supply will deteriorate more rapidly than most imagine).
Also: less space, appetite, and will for bail-out, this time around.