RBC Research – Meetings Discussing the Canadian Housing and Mortgage Market

Thanks to Zerodown for forwarding ‘Canadian Housing & Mortgage Industry, Highlights from Meetings Discussing the Canadian Housing and Mortgage Market’, a research document from RBC Capital Markets, authored by Geoffrey Kwan and Sean Adamick [RBC, 29 Jun 2012]. Excerpts:

“We had meetings this week with senior management teams from across the Canadian housing and mortgage market, including banks (Scotiabank), non-bank lenders (Home Capital Group, First National Financial, Equitable Group), mortgage insurers (Genworth Canada, Canada Guaranty), condo developers (Tridel), real estate investment firms (Tricon Capital), real estate consultants (RealNet) and housing economists (RBC Economics).”

“Key meeting highlights include:
• Canadian government changes to mortgage insurance rules and OSFI final mortgage underwriting guidelines announced last week were generally viewed as prudent, but unlikely to cause a housing downturn.
• Housing is already slowing in Canada with certain markets moderating earlier than others (e.g., Vancouver has been moderating for many months whereas Toronto more recently is showing signs of cooling) with general expectations that housing going forward is likely to continue moderating but that a housing downturn scenario appears unlikely for now.
• Key risks to the housing market include: (1) declining consumer confidence; (2) rising unemployment; (3) within the condo market, a surge of supply into the market; (4) deteriorating global macro developments; and to a lesser extent in the near term (5) rising interest rates.
• Toronto and Vancouver housing markets are overvalued with some suggesting the degree of overvaluation to be about 10%–15%.
• Lenders have tightened mortgage loan underwriting (beyond what was required due to mortgage insurance rule changes) likely reflecting the more uncertain macro environment and OSFI’s new mortgage underwriting guidelines.”

Some (excerpted) entity specifics of possible interest:

1. Scotiabank
– Condo exposure in Canada is $13 billion.
– A stressed housing scenario is unlikely to be a significant credit issue for Scotiabank’s mortgage loan book, but potentially could be meaningful for other parts of the bank’s loan book. Small business owners tend to be relatively more resilient, but credit card loans are where there would likely be relatively higher losses.
– Loan loss provisions are low at 0.01% of loans.

2. RBC Economics
– See strong immigration going forward to help housing demand.

3. Genworth MI Canada
– MIC estimates that the high LTV market is about 35% to 40% of the market, having peaked closer to 45% during the current housing cycle and might have bottomed at 30% during the recent downturn in late 2008/early 2009.

4. Tricon Capital (North American real estate investor and asset manager [primarily multi-unit/condos in Canada])
– Tricon is cautious on the Toronto and Vancouver condo markets (only 3 deals done in Toronto since 2007/2008).
– The company sees much better investment opportunities in U.S. housing vs. Canada on a risk-adjusted basis.

18 responses to “RBC Research – Meetings Discussing the Canadian Housing and Mortgage Market

  1. Situationroom

    Overvalued by 10-15%? Hahhahhahahah. Blows me away of how much of a low ball estimate that is.

    • I’m pretty sure all the “experts” were saying the same thing last year, and they were right. So they’re probably right this time too. And when they say it a year from now….and a year after that…and a year after that…

      • No they are not right, Bob. They (economists, accountants and analysts) all use a similar playbook to draw conclusions about future activity but these formulas almost invariably do not account for policy changes or impacts from outside our own markets. Nor can they account for public sentiment which is emotionally driven and very difficult to quantify.

        The economic modeling I am referring to is looking at a wide variety of past statistical data and monthly summary numbers which are used to make educated guesses as to what may transpire in the coming 30 days or the next quarter.

        The events of the past are therefore the inputs for the future.

        But It is utterly impossible to accurately measure public sentiment changes nor to quantify that data in a meaningful way without risking looking foolish. As a result, most economists will offer conservative estimates of changes based upon the past and for the most part these suffice to provide forward looking guidance.

        They are however very often useless at real inflection points and cannot meaningfully penetrate the really significant market moves that real people need to be wary about.

        As a result there is a failure in the estimation process when it is almost entirely based on historical numbers and is backward looking. We all understand this here on an intuitive level. Bloggers are in fact doing some of the best work in forecasting future outcomes even when it sometimes sounds crazy to most other readers. That is not to suggest what they are saying is not valid though.

        Sometimes a lack of training in a defined field permits outsiders to draw the obvious and correct conclusions about events that are impending while the data used by the professionals restricts their views and limits their gut level (non-scientific) reaction to formulas that do not apply at the moment of truth.

        And that is why I often appreciate the genius of people who post on this site. They get it when so many others are blind to the obvious. As an historical analogy, how many professional investors predicted the crash of 1929 in time to avoid it?

        We all get that point loud and clear. So 15% declines is just baby talk.

  2. RBC Economics says, “strong immigration going forward to help housing demand.”

    Funny, that’s exactly what they’re saying where I live now, in New Zealand. And in Australia. And in the U.S. And pretty much everywhere else with a deflating property bubble (i.e., the industrialized world). So how exactly is one country going to attract these miracle immigrants who will come in and buy up over-priced real estate?

    Oh, yes, your country is the best and everyone wants to live there! Of course. Except that’s also what every country is saying at the same time.

    Ultimately, these immigration solutions are a total wash. Australia’s gain, is Canada’s loss. New Zealand’s loss is the United States’ gain. Etc., etc. Unless they’re talkinga bout the millions of Chinese and South East Asians who would love to immigrate to any of these countries, given the chance. If only these people had any money (make no mistake, MOST Chinese are not gazillionaires–it is still a crushingly improverished country for the most part).

    So these immigrants will NOT be able to pay for the houses either. Every country says, “it’s different here” and “immigration will save us”. The truth is, you cannot all have increased immigration at the same time–not when the very rare rich have the choice of anywhere they want to go.

    And the truth is, immigration numbers are dropping! We’re heading into a global recession (of which deflating real estate is just a part of it) and most immigration numbers drop preciputously during recessions. Because hey, it actually costs a lot of money to move.

    • Ralph Cramdown

      Maybe the RBC guy didn’t get the memo about the government killing the investor immigrant program?

    • Good points Skip. And that is even without touching on the issue of how an open immigration policy can function during a time of high unemployment. If native born citizens cannot find jobs it becomes increasingly difficult to justify allowing newcomers to come into the country and compete for a shrinking share of the economy.

      • you’re a racist!

      • How so, Rusty?

      • Farmer -> Don’t be offended, it’s meant to be a complex joke.
        ‘rusty’ is, for comic effect, playing the role of someone who calls ‘racist’ any discussant who vaguely suggests that immigration criteria may need to be addressed.

        ‘rusty’ -> In future, one of those (irritating but useful) smiley face things would clear things up for the uninitiated.

      • No problem, I really had no idea. Rusty is from the past and I have not seen his comments too often until now.

  3. Sorry to blither on so much tonight but there are some important developments taking place South of the border this month that we need to take into consideration.

    Rental rates are on the rise.

    That’s right. Rents are rising sharply as an outcome of the number of home foreclosures and lack of buyer interest in the existing market. A lack of new construction and a dearth of quality space has created a new environment where demand for units outstrips supply.

    This is happening despite the efforts by the government to support the housing market and stimulate fresh buying so we might conclude that market forces have acheived what government intervention has failed to do. First timers are shunning ownership instead of embracing it and therefore bargains abound on the sales side.

    But people don’t trust current home prices even when they have fallen below the cost of renting and so rental demand is especially strong thus pushing prices up even further. The gap is therefore widening and the seeds of a recovery in housing are coming into sharper focus.

    Supply and demand is at play. Time to pay attention again.

    In virtually every single market in the US that is tracked it is now cheaper to buy than to rent. But renters are lagging the reality and so we are seeing pressure on the market for leased space. This is a signal to Americans to look seriously at the opportunities available where purchases are concerned.

    It is also a warning to those in Canada who think renting as a lifestyle is a permanent feature of our own bubbly markets. As we suddenly face our own declines head-on, this is now the opportune time to be saving for the eventual opportunity to buy back in cheap when the obvious moment arrives.


    It may have arrived in America already as rent costs outstrip ownership costs and the shoe is again fitting better on the other foot………But we all knew that already did we not? Bull markets dominate bears by a margin that is too dangerous to ignore.

    • Ralph Cramdown

      Owning in the US is cheaper than renting, yes, but credit is tight, and appraisals are being done conservatively and by the book.

      The type of person who came through the bust with capital and credit rating relatively unscathed likely doesn’t need to be told that now’s a good time to buy, but the rest — the majority — are still scared of housing, can’t get financed, or both.

      • Ralph, I agree that credit is tight in the US as an outcome of the housing bubble burst. I also agree that is what is holding back many Americans from investing in decades low housing prices.

        What we need to appreciate though is that we, as Canadians, have an opportunity to gather insights about how the market functions under such circumstances and to learn the lessons before we are confronted with them first hand.

        The reality is that while the housing bust down South had initially led to falling rental prices, that in the longer term, (over 5 years) this in fact drove rental costs up above the price paid for ownership. Supply was not sufficient to meet demand where household formation was concerned.

        So this is where rubber meets the road and we can again find market balance. And no matter what anyone tells you……. if it is cheaper to rent than buy over an extended period of time and across most market segments then the housing crisis is coming to an end.

        So sell Canada and buy America.

    • Joe_blown_away_by_high_housing_costs

      I am worried that rents may rise due to the real estate mkt correction. It will mean more demand for rental housing as those who would otherwise own are forced to rent. I raised that issue before on this blog and most said rents would stay the same or go down slightly, as has been the experience is the US. This is because of increased supply as RE speculators cannot sell and therefore rent out their RE holdings. Already some condo developments in Vancouver have turned to renting out units (river port flats in Richmond was supposed to be ownership but developer has to rent out units).

      I am a renter with a cat and can tell you it is hard to get by in Vancouver. The last thing we need is higher rents due to RE crash.

      • Ralph Cramdown

        What these people are missing is that you’ve got demand (household formation) and supply (number of units of housing + new construction). New construction takes a while to react to changes. Current units of available housing doesn’t change unless we get an event like the US, which has a few million units stuck in the foreclosure/REO queue, many of them unoccupied. Household formation is, if anything, reduced by tighter credit conditions.

        The landlord says to himself “dammit, renting for lest than my costs doesn’t make sense unless prices are going up. I can’t raise rents, so I’ll sell.” Now who does he sell to, and at what price? A household with less borrowing power than last week? Or another landlord who won’t buy unless the numbers make sense at current rents.

  4. bo.xilai@gmail.com

    Can’t comment on Vancouver right now, but we went to go see houses in Kelowna over the weekend. We saw eight homes – two with “accepted” offers… one our agent showed us, the other was an open house we just happened to walk by… Anyway, we got a call from our agent – both with “accepted” offers had just collapsed due to “financing” issues.

  5. “Loan loss provisions are low at 0.01% of loans.”

    I would say “low” is an understatement in that case.

  6. Farmer, I would be a bit cautious about reading increases in U.S. rent as any sign that the housing bottom is in. Many have long predicted an intervening period of rent increases before house prices fall yet again. Unless the country experiences some true wage and job growth, rent increases will ultimately be capped by what the populace can pay. And there’s a negative feedback cycle built in here: the higher the cost of basic living (rents), the slower the economy becomes, which means people can afford even less. I hate to use the over-used word…but prepare for a wee “bubble” in rents for a few years. I would not be at all surprised to see rents fall too, without some miracle economic recovery. The more worrisome trend is that once rents start falling (along with house prices) these rents will be even MORE unaffordable, as the population’s purchasing power (i.e., wages and investments) decline. Not saying this is a certain sequence of events…but until I see true economic recovery, I’m not using rising rents as any sort of sign that I should be rushing in to buy just yet.

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