Canadian Business Declares Beginning Of Canadian “Housing Crash” – “What’s surprising about the weakness in Vancouver is the absence of any change in economic fundamentals to explain it. The market was cooling even before the latest round of mortgage tightening by Ottawa.”

A sombre picture

“In just one year, Vancouver house prices have dropped by 12%, and unit sales are plummeting…”

“The Real Estate Board of Greater Vancouver chalked it up to a “summer lull,” but the numbers suggest a trend that can’t be dismissed as simply seasonal. Last month, unit sales were the lowest for any August in the past dozen years, and nearly 40% below the 10-year August norm. Even more worrying, the average home price in Vancouver is now down more than 12% from a year ago—a worrying sign for the country’s priciest city.”

“David Madani, an economist with Capital Economics, concludes: “The Vancouver market has cracked.”

“It’s clear that trouble is ahead. The weakness… marks the start of a reversal in the long boom for Canadian real estate. The doubling in home prices that happened over the past 10 years is not likely to repeat itself. Royal LePage even conceded in a July report that the Canadian housing market has reached a “tipping point.” Forecasts from private economists vary widely. Some are calling for relatively flat prices, while Madani at Capital Economics predicts a 25% decline in Canada’s major cities over the next few years. No markets will feel the slowdown more than Vancouver and Toronto.”

“What’s surprising about the weakness on the West Coast is the absence of any change in economic fundamentals, such as a spike in unemployment, to explain it. The Vancouver market was cooling even before the latest round of mortgage tightening by Ottawa, which took effect in July.”

“A change in buyer psychology may also be occurring, says Madani. “I don’t think there are enough people now who believe we can continue these outsized price gains we’ve seen over the past decade,” he says. “As those expectations change, potential buyers step back.” With Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney constantly warning about Vancouver real estate, it’s not surprising their pleas for restraint are being heeded.”
“If this change in mindset truly takes hold, the entire Vancouver market will be affected, not just the multimillion-dollar homes. The city’s real estate has always been mind-boggling to outsiders, but reached a particularly confounding peak this year in terms of affordability. The median house price in Vancouver is 10.6 times greater than the median income, according to urban policy consulting firm Demographia. That makes it the second-most-unaffordable major city on the planet after Hong Kong. The only way to account for the market becoming so detached from fundamentals, in Madani’s view, is a pervasive belief among buyers that prices will keep rising. “Vancouver is far, far beyond what anyone would expect, based on trends in immigration, income or interest rates,” he says. “That’s just not sustainable.”

“If home prices rise substantially above income growth, the only way you’re bridging that gap usually is through mortgage debt,” says Ben Rabidoux, an analyst with boutique research firm M Hanson Advisors.

“It seems like Vancouver is past the tipping point,” says Sonya Gulati, a senior economist with Toronto-Dominion Bank. Gulati estimates the market is overvalued by 15% to 20%, and says prices could fall by an equivalent amount over the next two to three years. Rabidoux foresees an even greater decline, perhaps a 30% to 40% fall in average price.

“Typically, investors are concerned about “cash flow,” the money earned through rental income. But prices for new units in Toronto are so high that it’s tough for investors to use rental income to cover the mortgage and maintenance fees and still have something left over for themselves. They’re essentially banking on one thing: price appreciation, which is more akin to speculation. “They’d be better off going to a craps table at Casino Rama,” says Charles Hanes, a Toronto real estate agent for more than three decades.” …
Don Campbell, founder of the Real Estate Investment Network, a membership-based education and research outfit for individual investors, says those in his network who have purchased new condos tell him they’re financially sound enough to deal with monthly losses until prices rise and they can make an exit. Campbell himself is dubious. “They’re going to be disappointed because the market is not going to perform as well as it has over the last four years,” he says. “The incredible number of units that are going to be coming on the market over the next little while will really start to put a damper on the average sale price of the new condos.”

What’s happening in Toronto and Vancouver today marks the start of a much broader slowdown in housing. Affordability is becoming an issue in other cities, especially Montreal, Kelowna and Abbotsford, B.C., according to Demographia. Nationwide, the average home price is 5.6 times the average income, says Madani, whereas the norm stretching back to 1975 is 3.5. He admits the price-to-income ratio is not a perfect measure, but says it’s one clear warning sign the market is overheated. Prices ultimately have to fall in line with income.

After past housing booms in Canada, the subsequent hangovers lasted many years. The average price in Vancouver fell by more than 20% in real terms between 1995 and 2001 after a steady run-up.

– from ‘Canada’s housing crash begins’, Joe Castaldo, Canadian Business, 14 Sep 2012 [hat-tip Renters Revenge]

As we’ve been saying…
Bubbles don’t need anything to precipitate their demise, at some point they turn and collapse under their own weight.
– vreaa

40 responses to “Canadian Business Declares Beginning Of Canadian “Housing Crash” – “What’s surprising about the weakness in Vancouver is the absence of any change in economic fundamentals to explain it. The market was cooling even before the latest round of mortgage tightening by Ottawa.”

  1. Looking at the charts, it’s my impression that the Vancouver market started deflating in 2008 BEFORE the GFC hit the fan and sales dried up everywhere else, so Vancouver was ahead of the curve with no triggering event at that time, too.

    • “the Vancouver market started deflating in 2008 BEFORE the GFC hit the fan”

      Credit was being “crunched” well before the LEH moment. In my view that can explain a good part of the weakness. Most of the rest seemed a mixture of nervousness (“sentiment”) and higher interest rates.

  2. “The average price in Vancouver fell by more than 20% in real terms between 1995 and 2001 after a steady run-up.”

    A 20% correction from here over six years would still leave the market 50% overvalued by any conventional metrics. Face facts, Vancouver has been sold to the highest bidders and there’s no turning back now. Dim sum anyone?

    • Sold to the highest bidders, and nothing happens after that except selling fancy coffee to each other?

    • Run-up 2001-2012 is much larger, resulting in an equally large drop.

      • Agreed. The 20% drop between 1995 to 2001 isn’t a set drop in values that *must* happen after a speculative run-up in prices. Makes more sense that a drop is specific to each bubble. Bigger bubble, bigger melt.

    • The highest bidders, unfortunately, are locals.

      • Yes, locals have been far and away the majority of local buyers.
        The decrease-in-offshore-investors story may now be giving local buyers ‘paws’ (hahaha; turning them into bears). [pun hat-tip to jesse]
        Regardless, we are now in a market where inventory is robust, sales are down, MOI is high, and prices, if anything, are slightly down from choppy peak 2011-2012 (10%? 12%?). This is precisely the kind of milieu we’d expect late in the topping process. Next step will be anecdotal news of sales that represent significant price drops… these could start coming through this fall.

      • Reports of significant price drops have been showing up for months over at the “Vancouver Price Drop” blog. The most interesting ones are the ones listed well below assessed value and still not selling.

        It’s not a very comforting outlook for anybody who bought during the last three years or so.

      • KC -> We find vancouverpricedrops invaluable. Remember that those price ‘drops’ are actually drops in asking price; they are significant, but less so than time1 time2 sales price drops for single properties (the real ‘gold standard’ of price changes).

        4Slices -> hahaha. Yeah, we can expect that argument, eh? When it comes, it’ll make a nice ‘erroneous theory for crash’ post.

      • “The highest bidders, unfortunately, are locals”

        I wonder if we’ll ever know for sure. Almost certainly the vast majority of the winning bids are locals.

        In my view the major determinants of weak sales this year are:
        – curtailment of some of the more egregious loans
        – lower population growth
        – speculators already in the market running out of steam and finding out they’re “short”

      • 4SlicesofCheese

        “Remember that those price ‘drops’ are actually drops in asking price”

        A few weeks ago I popped into an open house for a townhome just off south granville. Had to leave my email to the realtor for “safety reasons” of which he used to email me to solicit his services.

        He attached some similar type properties on a mls link, 2 out of the 15 sold, both of the sold properties had reductions in asking already. And the sold price ended up being a good amount off the latest asking price.

        Sold 1
        Previous Price: $373,800
        List Price: $359,900
        Sold Price:$292,500

        Sold 2
        Previous Price: $528,000
        List Price: $499,000
        Sold Price: $475,000

  3. Along the same lines…”The National”, CBC, is supposed to be running an extended story on Vancouver RE this week, I think Thursday evening.

  4. “Based on a true story.”

    [NoteToEd: Yes, actually. Coming soon to a ‘market’… near us.]

    • nem, hey did i hear one of the elders say she this town could use a few walmarts? anyway, somehow this number came to mind and i was thinking too much for apres open house … or even apres ‘open house’ … so i’m going to crank it to the sunset over the pacific and raise a glass to congratulate uncle ben … the overlords have declared they’re ready to rip the world apart … cheers …

      • I worked an investigative on the “W” money in the Civic2005, OldChub… Spiked. Too controversial.

        On the bright side… My ‘legend’ is still intact.

        On the NotSoBrightSide I may have to burn the candle at both ends tonight on EastChinaSea deployments…

      • yes, definitely all too coordinated for my paranoia … thinking back, i like to believe most remained hopeful enola gay would return loaded, but … it didn’t

  5. Pingback: Canadian Business Declares Beginning Of Canadian “Housing Crash” « larrymatthews

  6. The link no longer works and the story appears to have been pulled from the Canadian Business website. I wonder what advertiser or industry lobby group was involved in this decision. Good to see that we have freedom of the press in Canada.

  7. Newborn Loses Faith In Humanity After Record 6 Days …

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