Canada’s Strained Housing Markets
March 7, 2013
Derek Holt
Vice-President, Scotiabank Economics
Outline
1. Macro backdrop & the Bank of Canada
2. Canadian Housing:
a) Strains
b) Mitigating Factors
c) Why It’s (Somewhat) Different From the United States
d) Pockets Of Concern
The Macro Backdrop –
BoC On Hold Throughout 2013-14
Spare Capacity Will Prevent The BoC From Hiking Through 2013-14
Will Canadian Spare Capacity Narrow Or Widen?
3
2
1
%
Scotia's Output Gap
BoC's output gap
post-GDP revision
0
-1
-2
-3
-4
Source: Bank of Canada, Statistics Canada, Scotia Economics.
Even The BoC’s Output Gap Doesn’t Go Into Excess Demand By 2014
Canada’s Current CPI Softness Could Be Returning Us To The Past
CDN CPI: Back To The 1990s?
8
CPI, y/y % change
7
6
US
5
Canada
4
3
2
1
0
-1
90
91
92
93
94
95
96
97
98
Source: Statistics Canada, BLS, Scotiabank Economics.
99
Among The World’s Best Corporate Balance Sheets
Source: Statistics Canada, Quarterly Survey of Financial Statements, Scotia Economics
2. Canadian Housing
a. The Strains
Canada Is At A Cycle Top In Housing
Home Ownership Rate
72
%
70
Australia
68
U.S.
U.K.
66
Canada
64
62
60
1991
1996
2001
2006
2011e
Source: Statistics Canada, Census of Population, U.S. Census Bureau, Housing Vacancy Survey, U.K. Office for
National Statistics, Census of Population, Australian Bureau of Statistics, Census of Population and Housing.
Canada Is At An Exhausted Point In The Consumer Cycle
115
Real consumer spending indexed to 2007Q1 = 100
110
Canada
US
105
Euro zone
100
Japan
U.K.
95
07
08
09
10
11
Source: OECD, Eurostat, UK National Statistics, Scotiabank Economics.
12
Canadian Renovation Spending At A Record High
Canadian Renovation Spending
14
1.4
C$ bns, nsa, 4-quarter moving
average
% of personal disposable
income, nsa, 4-quarter
moving average
12
1.2
10
1.0
8
0.8
6
0.6
4
0.4
2
0.2
0
1971
0.0
1971
1979
1987
1995
2003
2011
Source: MLS, Statistics Canada, Scotiabank Economics.
1979
1987
1995
2003
2011
Sharply Cooling Canadian Housing Resale Markets
Canadian Resale Transactions
Edmonton
Windsor
St. Catharines
% share of mkt,
Jan 2013
volume of
transactions,
y/y % change,
January 2013
4.6
1.5
0.6
Winnipeg
2.4
Saint John
0.3
Kitchener-Waterloo
1.5
Calgary*
6.7
St. John’s
0.9
Saskatoon
1.2
London
1.9
25 Major Markets
67.9
Canada
100.0
Hamilton
3.0
Quebec City
1.9
Sudbury
0.5
Ottawa
2.6
Durham Region
2.1
Halifax
1.3
Montreal
8.9
Thunder Bay
0.4
Toronto*
18.6
Victoria*
1.2
Regina
0.8
Vancouver*
5.8
-40
-30
-20
-10
0
10
20
Source: CREA, QFREB, Scotiabank Economics. *February data.
Canadian House Prices In Early Decline Phase
Canadian Home Prices
Canadian Home Prices
Thunder Bay
Regina
Halifax
St. John’s
Quebec City
Saskatoon
Calgary*
Winnipeg
Regina
Calgary*
Durham Region
Edmonton
Hamilton
St. John’s
Vancouver*
Saskatoon
Halifax
London
25 Major Markets
Montreal
Sudbury
Sudbury
Ottawa
25 Major Markets
Hamilton
Toronto*
Toronto*
Canada
Canada
Edmonton
Kitchener-Waterloo
St. Catharines
Victoria*
Windsor
Saint John
Winnipeg
Durham Region
Victoria*
London
Kitchener-Waterloo
St. Catharines
Ottawa
Vancouver*
Saint John
Thunder Bay
y/y % change,
January 2013
-10
-5
0
5
10
15
20
Source: CREA, QFREB, Scotiabank Economics. *February data.
25
Windsor
30
cumulative % change
from December 1999
0
50
100
150
Source: CREA, Scotiabank Economics. *February data.
200
250
Home Price Indices – Repeat Sales Metric
240
Canada – Teranet National
Bank House Price Index
index:Jan 2000=100
220
200
180
160
140
US – Case-Shiller
Home Price Index
120
100
00
03
06
09
12
Source: Teranet National Bank House Price Index, S&P/Case-Shiller Home Price Index, Scotiabank Economics.
Canadians Have Higher Debt… But Stronger Balance Sheets
Canadians’ Debt-To-Income Now Higher…
… But Less Debt Used To Buy Assets
30
household credit liabilities as
% of disposable income
household debt as % of assets
160
US
145
US
26
130
22
115
Canada*
100
Canada*
18
85
70
1990
1995
2000
2005
2010
14
1990
1995
* Includes households, non-profits and unincorporated business.
Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics.
2000
2005
2010
Canada’s Debt Service Burden Is At An All-Time High
Distorted by accounting change
30
25
Canada's Household Debt Service Burden
interest payments on all debt +
mortgage principal payments
(% share of after-tax PDI)
Total
20
Principal
15
10
Interest
5
0
1982Q1 1986Q1 1990Q1 1994Q1 1998Q1 2002Q1 2006Q1 2010Q1
Source: Bank of Canada, Statistics Canada, Scotiabank Economics.
Source: Bank of Canada, Statistics Canada, Scotia Economics.
No Leverage Apart From Household Debt? Think Again
• Condos have driven all of the rise in housing starts for years…
• …estimated 45-60% of Toronto of new condo sales over recent
years have gone to investors not for primary occupancy….
• …5-15% down payments at sales office openings imply +/- 10
times gearing…
• …then flip when the project goes live
• Leveraged equity has been behind this
Will Canadian Housing Starts Follow Sales Like They Did In The US?
Housing Starts & Resales Declined Simultaneously in the U.S.
2.5
unit millions
unit millions
8
7
2.0
6
Resales (RHS)
1.5
5
4
1.0
3
Housing Starts (LHS)
2
0.5
1
0.0
0
04
06
08
10
Source: U.S. Census Bureau, NAR, Scotiabank Economics.
12
Scenarios For Housing Starts
Canadian Housing Starts
260
000s
240
forecast
220
History
200
Base
Case
180
160
140
Risk
120
100
05
06
07
08
Source: CMHC, Scotiabank Economics.
09
10
11
12
13
Weakest Household Debt Growth Since The 1990s…
Residential Mortgage Growth
Household Credit Growth
18
20
%, 3-month moving average
18
16
14
%, 3-month moving average
16
y/y % change
12
14
y/y % change
12
10
10
8
8
6
6
4
2
m/m % change,
seasonally adjusted
0
4
2
m/m % change,
seasonally adjusted
0
90 92 94 96 98 00 02 04 06 08 10 12
Source: Bank of Canada, Scotiabank Economics.
90 92 94 96 98 00 02 04 06 08 10 12
Source: Bank of Canada, Scotiabank Economics.
…Especially For Consumer Loans
Consumer Loan Growth
20
15
%, 3-month moving average
y/y % change
10
5
0
m/m % change,
seasonally adjusted
-5
90 92 94 96 98 00 02 04 06 08 10 12
Source: Bank of Canada, Scotiabank Economics.
2. Canadian Housing
b. Mitigating Factors
After Ottawa Eased The Most Since 1954 NHA and 1967 Bank Act…
• 1999: Introduction of 5% down payment insured mortgage
• 2003: Price ceiling on insured mortgages lifted
• 2005: Introduction of insured mortgage with 30-year amortization period
• 2006: Introduction of insured mortgage with 35-year & 40-year amortization
periods
• 2006: Introduction of 0% down payment insured mortgage
…CDN Macroprudential Rules Clamped Down
• After sharply easing mortgage lending standards in 2006-07, the federal government has since
reversed its position
• October 2008: Max 35 year amortization for insured mortgages; minimum 5% down for
insured mortgages; consistent minimum credit score; new loan doc standards for property value
and incomes
• February 2010: Qualify at 5 yr posted rate instead of 3 yr; lower refi ceiling to 90% from 95%;
min 20% down required to get mortgage insurance on non-owner occupied properties
• January 2011: Max 30 year amortization for insured mortgages; refi ceiling for primary
occupancy homes dropped to 85% from 90%; withdraw gov’t insurance on HELOCs
• November 2011: Accounting changes to hold more on balance sheet
• June 2012: Max 25 year amortization for insured mortgages; insurance dropped for mortgages
on homes valued over $1 million (ie: now minimum 25% down); refinancing ceiling dropped to
80% from 85%; mortgage payments and total debt payments capped at 39% and 44% of income
respectively.
• 2012-13 Federal Budget: OSFI oversight of CMHC
• Spring 2012: Insurance lifted from covered bonds, portfolio caps at the CMHC, new OSFI
lending guidelines to banks
• January 2014: Basel III
A key difficulty lies in evaluating the opaque forms of non-rules-based tightening being applied
through moral suasion by regulators to lenders and GSEs.
Assessing Mortgage Rule Tightening
Evaluating Amortization
Compression
$400
$362
Increase
in Monthly
Mortgage
Payments, $
$350
$300
$250
$200
$166
$150
$100
$50
$0
40 down to 25
Source: Scotia Economics.
30 down to 25
Good Reasons For Rising High-Rise Housing Demand?
Housing Starts
70
% share of total
• Better affordability
• Favourable demographics
Single-detached
60
• Lifestyle choices
50
• More selection
• Urban renewal / intensification
40
• Tight rental vacancy rates
• Investor purchases
30
Apartment
20
10
00
02
04
06
Source: CMHC, Scotia Economics.
08
10
Canadians Have More Home Equity & More Real Estate in their Portfolio
Canadians Have More Home Equity…
80
… and More Real Estate Assets
45
Real estate equity as % of
real estate assets
Real estate as % of
total household assets
Canada
Canada
40
70
35
60
30
50
US
US
25
40
20
30
1990
15
1995
2000
2005
2010
1990
1995
Includes households, non-profits and unincorporated business.
Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics.
2000
2005
2010
2. Canadian Housing -
c. Why It’s (Somewhat) Different From The U.S.
What Makes Canada’s Mortgage Market Different?
• Explicit GSE guarantees – unlike the US GSEs
• Strongly capitalized banks & captive dealers, far less shadow banking
• Totally different funding model: deposit funding & large held-on-book component,
versus reliance upon revolving door financing
• Financial institutions less reliant upon short-term lines
• No strategic defaults, outside of Alberta & Saskatchewan (and limited there)
• Tougher bankruptcy rules
• Less outsourcing of sales force in Canada
• Generally more conservative products, but not entirely
• No option ARMs in Canada, but entire book resets within 5 years
• No mortgage interest deductibility (with exceptions)
• Stricter underwriting criteria including independent appraisals & hair-cuts
• Canada has already taken steps to tighten mortgage rules…
• …and is pursuing further financial reforms (Basel III, OSFI oversight etc)
Canadians Usually Don’t Default When House Prices Correct
Large House Price Corrections
Toronto 198995
Vancouver
1990-91
Vancouver
1995-96
0
Vancouver
2008
Mortgage Arrears During House Price Corrections
Toronto 200809
0.7
peak
to trough
change
in provincial
mortgages
in arrears,
bps
trough
to peak
in provincial
mortgages
in arrears,
bps
0.6
0.5
-5
0.4
-10
0.3
-15
0.2
-20
0.1
-25
0.0
-30
% change
Source: CREA MLS, Scotia Economics.
Toronto 1989- Vancouver
Vancouver
Vancouver
95
1990-91
1995-96
2008
Source: Canadian Bankers Association, Scotia Economics.
Toronto 200809
Canada has witnessed some big price corrections since the late 1980s that
corresponded with big shifts in the macro environment, notably in Toronto and
Vancouver, and yet each time mortgage arrears barely budged.
Implication? Revenues are at greater risk than charge-offs.
2. Canadian Housing –
d. Pockets Of Greater Concern
Canadian Households More Heavily Leveraged Than Most
Toronto Condo Construction:
97k Units on the Way
350,000
300,000
Under Construction
Existing Condo Stock
250,000
200,000
150,000
100,000
50,000
0
Q1-05
Q1-06
Q1-07
Q1-08
Q1-09
Source: Urbanation, Scotiabank Economics
Q1-10
Q1-11
Q1-12
Toronto Condo Investors Under Water
Toronto Condos: Monthly Rent vs. Monthly Carrying Cost
$2,000
Assumptions:
• 20% mortgage down payment;
•
25 year amorization in 2004-05,
30-year am. from 2006-Q2 2012,
25-year am. from Q3 2012
onwards;
•
Mortgage is fixed rate @ 3.5%
from from 2009 onwards, 5%
beforehand;
•
Property taxes = 1% of condo
purchase costs; maintenance &
condo fees = $250/month;
•
The 'shrinking new condo' starts
at 650 Sq. Ft. in Q4 2004 and
'shrinks' 10 sq. ft. per year to
reflect falling condo sizes;
•
The shrinking codo's cost = its
size * Urbanation's average $PSF
condo cost estimate.
$1,800
$1,600
$1,400
$1,200
$1,000
Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q1 Q2 Q3 Q4
2004 2005 2006 2007 2008 2009 2010 2011 2012 2012 2012 2012
700 Sq. Foot Condo (Resale) Carrying Cost
Central Toronto 1-Bdrm Condo Rent
700 Sq. Foot Condo (New) Carrying Cost
Sources: MLS, TREB, Urbanation
Toronto’s Luxury Condos Adding To The Overhang
Opening Date:
January 2012
August 2012
Summer 2012
April 2011
• 25 storeys
• 101 residences
Trump
International
Hotel & Tower
Shangri-La
Toronto
Four Seasons Private
Residences
(East & West Towers)
Residences at
the Ritz-Carlton
• 65 storeys
• 66 storeys
• 55 storeys
• 53 storeys
• 118 residential units
• 202 hotel rooms
• 253 hotel rooms
• 267 hotel suites
• 261 hotel rooms
• 287 residential units
• 103 residences
• 159 condo units
Source: Andrew Barr/National Post, THERESIDENCESTORONTO.COM, TRUMPTORONTO.CA, SHANGRI-LATORONTO.COM, YORKVILLERESIDENCES.COM.
Contacts
Economics
Derek Holt, Vice-President, Scotia Economics
derek.holt@scotiabank.com
Dov Zigler, Financial Markets Economist
dov.zigler@scotiabank.com
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