Canada’s housing market: a victim of demographics

ROB CARRICK  The Globe and Mail

Demographic trends built up our housing market, and now they’re going to start pulling it apart.

Prepare yourselves, buyers and sellers. The years ahead for housing will look nothing like the last decade.

A report issued by Pacifica Partners Capital Management in B.C., describes the housing market as we know it today as a product of a wave of buying by baby boomers in their peak earning years. Now, as they start entering retirement, boomers aren’t buying houses any more and the younger generation isn’t large enough to pick up the slack.

Anyone still think the housing market’s going to snap back from the weakening trend that has taken hold in the past couple of months? It’s not, so act accordingly. Adjusting our expectations about housing won’t be easy because we’ve seen prices rise dramatically. Canadian Real Estate Association numbers show an average annual price gain of 7.7 per cent over the past 10 years on a national basis.

Aman Bhangu, Pacifica’s vice-president of research, said real estate has performed a lot like stocks did before the twin stock market crashes of the past decade. “At the end of the 1980s and 1990s, you had that mantra of ‘buy and hold, stock markets always go up, just get in there.’ It’s likewise with real estate – ‘real estate always goes up.’”

Mr. Bhangu said that taking a fresh look at the fundamentals supporting the real estate sector suggests prices are overvalued today by one-third, while other estimates call for a price decline of 10 to 25 per cent from current levels. Forecasts like these are educated guesses, whereas the demographic impact on housing is rooted in basic numbers.

Pacifica’s report says people aged 45 to 64 used to account for just below 20 per cent of the population. In the 1990s and 2000s, however, this cohort claimed an additional 10 per cent of the population. In round numbers, there are 4.3 million more 45- to 64-year-olds now than there were in 1990. Most housing bubbles in the industrialized world have occurred after sharp growth in the number of 45- to 64-year-olds, Pacific said in paraphrasing research issued last fall by the French bank Société Générale.

In previous generations, the supply of young people in Canada was big enough to replenish the gaps created as older workers moved into retirement. Now, with baby boomers such a disproportionate part of the population, there’s a shortfall.

Young adults buy starter homes from people moving up to the more expensive houses where boomers live. Gen Y, you’ve just been handed the perfect comeback the next time a boomer dismisses your complaints about high tuition costs and a tough job market. Just say: “Good luck selling your house, old timer.”

Mr. Bhangu said immigration could help support the housing market as boomers age, but he’s unsure how much of the impact of shifting demographics can be overcome. A key question is whether the job market in Canada can sustain the level of immigration needed to maintain equilibrium in the housing market.

Here’s what Mr. Bhangu suggests if you’re a boomer who has ideas about selling the family home any time soon. Consider all your financial assets and savings, and determine how much you’re depending on the value locked in your home to meet your financial goals. If your home is a dominant part of your net worth, think about selling it now so you can diversify your holdings.

Mr. Bhangu said young people shouldn’t dismiss renting for the near term, in part because it gives them mobility in finding a job. Those who want to buy a house need not feel as if they have to rush into the market now, before house prices climb out of reach. “At this time, there’s more risk going in than there is in holding out.”

That’s the investing point of view on home ownership. Before the rapid increase in house prices of the past decade, people generally bought houses for lifestyle reasons. If that’s your view on owning a home and you figure on staying for 10 years or more, then ignore demographics and focus on affordability.

Here, there’s good news. Housing prices are under pressure as sales decline, and a five-year fixed-rate mortgage can be had with minimal hassle for roughly 3 per cent. Only buy a house you love, though. It’ll carry you through the days ahead when people talk about what a terrible investment housing is.

Borrowers reminded of flexibility amid fixed-rate fever_{By            Nestor Arellano            |            12/12/2012 4:35:00 PM            |                 0                comments}

Outgoing Bank of Canada Governor Mark Carney may be delighted that consumers are heeding his warnings and have been flocking to fixed-rate mortgages in record number, but one broker is advising borrowers to pick shorter term mortgages because they offer greater flexibility.

“Right now people are looking for security, that’s why they are going for fixed-rate mortgages,” said Omer Quenneville, a mortgage broker with Centum in Toronto. “However, I would recommend that borrowers go for three-year mortgages just so they can quickly switch once discounts for variable-rate mortgages go down.”

In a speech before members of the Chartered Financial Analysts Society in Toronto on Tuesday Caney said he has seen some “encouraging” signs in the housing market that his persistent warnings about future interest rate.

The BOC chief said Canadians, who have one of the highest debt-to-income ratios in the world, appear to be taking the looming possibility rate hikes seriously as seen with the increase take up in fixed-rate mortgages.

“The share of new fixed-rate mortgages has almost doubled to 90 per cent this year, reflecting the combination of attractively priced fixed-rate mortgages and the tightening bias of the Bank of Canada,” said Carney. “I wouldn’t say mission accomplished…but a more sustainable housing situation in Canada is within sight.”

Since September 2010, the central bank has kept its one-per cent policy rate but last year warned it will likely move towards higher rates. When this happens, Quenneville said, variable-rate mortgages are likely to become attractive again.

“As a broker, I will be telling my clients to go for shorter fixed-rate mortgages,” he said. “When the prime rate goes up, they’ll have more flexibility to switch mortgages.”

_{By            Nestor Arellano}       

“In the current context, a specific concern is that the total number of housing units under construction has been increasing and is now well above its historical average relative to the population,” according to the bank’s Financial Systems Review – December 2012 report. “If the upcoming supply units are not absorbed by demand as they are completed over the next 18 to 36 months, the supply-demand imbalance will become more pronounced, increasing the risk of a sudden correction in prices.”

Some brokers and realtors, at least in Toronto, believe the condo market has peaked. In August, there was a 10 per cent slip in Condo sales which forced an overall decline of 1.5 per cent in Canada’s hottest market. Condo sales fell to 1,753 for July with the overall sale of 7,570 home that month, compared to 7683 that sold a year earlier, according to the Toronto Real Estate Board.

But according to the BOC, the over building is mainly occurring in the multi-unit dwelling market especially in major metropolitan areas. In the scenario it painted, the bank warned, price corrections in this particular segment may pull down house prices in general creating a domino effect that would also cause jobs to tumble and household spending to slacken.

“This would likely lead to a decline in housing activity, adversely affect household incomes and employment, as well as confidence and household net worth, which would in turn reduce household spending,” the report said.

Three developments in the sector need monitoring according to the Bank of Canada:

• Since June 2011 the number of unsold high-rise units in the pre-construction stage has risen from 7,000 to 14,000. Unsold units under construction have increased from 5,000 in the beginning of 2012 to almost 7,000
• Over the past year prices of condos have flattened and many builders have started phasing projects to address overbuilding
• The average square-footage of sold units has been shrinking since 2010

News Release: December 4, 2012 HOME SALES DECREASE IN THE FRASER VALLEY; THOSE BUYING LOOKING FOR AFFORDABILITY (Surrey, BC) – Property sales through the Fraser Valley Real Estate Board’s Multiple Listing Service® (MLS®) decreased by 19 per cent in November compared to the same month last year, moving from 1,120 to 905. Sales also decreased 14 per cent month-over-month compared to October 2012. Scott Olson, president of the Board says, “Buyers can’t borrow as much as what they could prior to the mortgage rule changes, so we’re seeing our pool of prospective buyers shrink and we’re seeing a change in the price range they’re looking for. “For three months in a row, we’ve seen a decrease in sales of detached homes $700,000 and up and greater demand for those $400,000 to half a million. Tighter credit conditions are having an impact on the market.” In addition to the drop in sales in November, the number of new listings posted on the MLS® decreased by 11 per cent compared to last year and by 32 per cent compared to October. Olson observes, “This was a significant drop with last month ranking alongside November 2003 as the slowest for new listings in the last decade. “It means that sellers are adjusting to conditions that favour buyers; great selection, houses are on the market longer and prices are lowering. If sellers don’t have to sell, they’re taking their home off the market.” In the last six months, prices for all three residential property types combined have decreased by 1.4 per cent while year over year they’ve increased by 1.3 per cent. For single family detached homes, the benchmark price increased by 2 per cent in one year, going from $533,800 in November 2011 to $544,700 last month. For townhouses, the benchmark price in November was $298,900, a decrease of 1.5 per cent compared to $303,600 during the same month last year. The benchmark price of apartments in Fraser Valley in November was $202,800, an increase of 2.6 per cent compared to $197,700 in November 2011. The Board received 1,723 new listings in November compared to 1,926 during the same month last year, taking the number of active listings to 9,478, on par with November 2011. For a detached home in the Fraser Valley, the average number of days to sell in November was 59, up five days from the same month last year. For townhomes, it was 70 days and apartments 74 compared to 52 and 72 in November 2011. —30 — The Fraser Valley Real Estate Board is an association of 2,855 real estate professionals who live and work in the BC communities of North Delta, Surrey, White Rock, Langley, Abbotsford, and Mission. The FVREB marked its 90-year anniversary in 2011. Full package: http://www.fvreb.bc.ca/statistics/Package%20201211.pdf

Flaherty ‘happy’ about slowing market_{By            Vernon Clement Jones            |            04/12/2012 6:00:00 PM            |                 2                comments}

Jim Flaherty’s reaction to a cooling real estate market may be the polar opposite of most brokers, with the finance head suggesting he’s “happy” about the slowdown.

“Less demand, lower prices, modestly, in the housing market are much better for Canadians than a boom followed by a bust,” he said early this week. “The housing market has softened somewhat in part because of steps that I’ve taken and I’m happy about that.”

The reaction is to news of a 3.5 per cent annualized drop in the housing sector. Activity across many of the country’s major markets has also seen dramatic year-over-year declines – what Flaherty sees as the kind of controlled slowing needed to overt a more-pronounced and severe correction.

Brokers have been much less enthused about the falloff and the promise of a slower winter season relative to last year’s boom.

The decline in their business is also reflected in the broader economy, with StatsCan reporting growth in the third quarter rose 0.6 per cent – well off of projections and representing the third quarterly decline for 2012.

The mortgage rules revamp in July is largely to blame for that housing retraction, say brokers. They point to the effects a new, lower amortization ceiling for insured mortgages has had on first-time buyers.

Far from blaming those tighter rules, Flaherty is “crediting” them for reining in a sector helping drive Canadian household debt to historic highs.

“I’m all for a soft landing,” he said.