24 Feb

Tightened Regulations Weighing on Home Sales

General

Posted by: Eileen Crosbie

New Mortgage Regulations Weigh On Home Sales

New Mortgage Regulations Weigh On Home Sales
This morning, the Canadian Real Estate Association (CREA) released its January national real estate statistics showing home sales declined 1.3% month-over-month in the first month of this year. This down draft put resales at their second lowest monthly level since the fall of 2015 and only  a bit above levels recorded last November when new tighter mortgage regulations were first put in place.

Activity was down in about 50% of all local markets, led by the three largest urban markets–The Greater Toronto Area (GTA), Greater Vancouver and Montreal.

For the year as a whole, the number of homes changing hands was up 1.9%. Sales slowed in the second half of 2016 and the newly released data show that the slowdown continues. Notably, year-over-year sales were down significantly in the Lower Mainland of British Columbia (BC). This slowdown was exacerbated by the August introduction of the 15% land transfer tax on foreign nonresident purchasers. The October tightening of mortgage regulations dampened activity further.

Housing activity will not provide the boost to overall economic growth in 2017 that it did in 2015 and the first half of 2016. as first-time homebuyers will find it more difficult to qualify for a mortgage and credit availability is diminished by the disproportionate impact of the new regulations on nonbank lenders.

Sales activity was down from the previous month in about half of all local markets, led by three of Canada’s largest urban centres: the Greater Toronto Area (GTA), Greater Vancouver and Montreal.

Supply shortages are a major issue depressing sales activity and raising prices, especially in and around Toronto and parts of BC. Price pressures will continue in these markets unless demand declines significantly.

New Listings Continue To Decline

The number of newly listed homes fell 6.7% in January, the second consecutive monthly decline. New listings were down in about two-thirds of all local markets, led by the GTA and environs across Vancouver Island.

The monthly decline in new listings dwarfed the decline in sales so the national sales-to-new listings ratio jumped to 67.7% last month compared to 64.0% in December and 60.2% in November. The ratio in the range of 40%-to-60% is considered generally consistent with balanced housing market conditions. Above 60% is considered a sellers’ market and below 40%, a buyers’ market. 

The sales-to-new-listings ratio was above 60% in half of all local housing markets again last month–the vast majority of which continued to be in British Columbia, in and around the Greater Toronto Area and across Southwestern Ontario. There were sellers markets already in these regions.

Number of Months of Inventory

The number of months of inventory is another important measure of the balance between housing supply and demand. It represents the number of months it would take to completely liquidate current inventories at the current rate of sales activity.

There were 4.6 months of inventory on a national basis at the end of January–unchanged from December and a six-year low for this measure. Clearly government efforts to increase supply is warranted.

The imbalance between limited housing supply and relatively strong demand in Ontario’s Greater Golden Horseshoe region is without precedent (the region includes the GTA, Hamilton-Burlington, Oakville-Milton, Guelph, Kitchener-Waterloo, Cambridge, Brantford, the Niagara Region, Barrie and nearby cottage country). The number of months of inventory in January is now at or below one month of sales in the GTA, Hamilton-Burlington, Oakville-Milton, Kitchener-Waterloo, Cambridge, Brantford and Guelph.

Prices Continue to Rise

The Aggregate Composite MLS House Price Index (HPI) rose 15.0% y-o-y last month. This was up a bit from December’s gain, reflecting an acceleration in condo and townhouse unit price increases.

This price index, unlike those provided by local real estate boards and other data sources, provides the best gauge of price trends because it corrects for changes in the mix of sales activity (between types and sizes of housing) from one month to the next.

Prices for two-storey single family homes posted the strongest year-over-year gains (+16.8%), followed closely by townhouse/row units (+15.8%), one-storey single family homes (+14.4%) and apartment units (+13.3%). In many of these regions, the supply of new single-family homes is so limited, you practically need to knock down a house to build a new one.

Price trends continued to vary widely by location. In the Fraser Valley and Greater Vancouver, prices continued to recede from their peaks reached in August 2016 but remained above year-ago levels (+24.9% y-o-y and +15.6% y-o-y respectively). Meanwhile, benchmark prices climbed to new heights in Victoria and elsewhere on Vancouver Island as well as in the Oakville-Milton, Guelph, and the GTA. Year-over-year price gains in these five markets ranged from about 18% to 26% in January. By comparison, home prices were down 2.9% y-o-y in Calgary and edged lower by 1.0% y-o-y in Saskatoon, continuing their retreat from peaks reached in 2015. Prices in these two markets are down 5.9% in Calgary and 4.3% in Saskatoon relative to their 2015 peak levels.

Home prices were up modestly from year-ago levels in Regina (+3.8%), Ottawa (+3.7%), Greater Montreal (+3.1%). In Greater Moncton, prices held steady. Monthly trends suggest that prices have continued to stabilize in these markets.

The actual (not seasonally adjusted) national average price for homes sold in January 2017 was $470,253 about in line with where it stood one year earlier. This marks the smallest y-o-y increase in nearly two years.

The national average price continues to be pulled upward by sales activity in Greater Vancouver and the GTA, which remain two of Canada’s tightest, most active and expensive housing markets. That said, Greater Vancouver’s share of national sales activity has diminished considerably over the last year, giving it less upward influence on the national average price. The average price is reduced by almost $120,000 to $351,998 if Greater Vancouver and GTA sales are excluded from calculations.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

24 Feb

China’s Crackdown On Capital Outflows Sending Shudders Through Global Property Markets

General

Posted by: Eileen Crosbie

China’s Global Homebuyers Could

Be Suddenly Cash Poor

China
Property prices around the world have benefited from the demand of foreign buyers, a.k.a. China’s capital outflows. China has issued unexpected rules on exchanging yuan for international currency. This could impact real estate around the world. Some argue it already has.

China’s Clamp Down on Outflows

As capital flight intensified, China’s reserves have plunged, causing the country to sell US treasury bonds. In response, China has introduced new rules, which now require disclosure of the intended use of the yuan being converted. In addition, they must pledge the money won’t be used for the purchase of property, securities, or insurance products. Borrowing or lending on behalf of others is now prohibited, and requires a legal declaration saying you have not done so. Anyone caught breaking the rules will be denied the conversion and lose exchange rights for two years. They can also be subject to an anti-money laundering investigation.

China’s currency is not freely convertible on the open market. In order for yuan to be used internationally, the People’s Bank of China purchases foreign currency and provides liquidity for yuan holders. The government restrictions already exist–each Chinese citizen can trade up to US$50,000 per year, and only that much can leave the country. This rule has not forestalled huge outflows.

Despite the rule, one measure of capital outflow from the State Administration of Foreign Exchange (SAFE) shows approximately US$1 trillion dollars worth of yuan were removed from the foreign exchange reserves from the 2014 peak to November 2016. To put that in perspective, this outflow is larger than the entire gross national product of Canada in 2016.

Much of this money found its way into global real estate markets causing prices to boom. Property prices surged in some parts of Canada, the US, the UK, New Zealand and Australia, all countries that had relatively low barriers to importing large volumes of capital and liquid currencies.

Some analysts believe that the party might be over. However, China has a massive underground banking market that operates in the shadows. In August 2016, the Chinese government shut down one operation in Shenzhen, but no one knows just how many more such shadow banks there are.

Also, some Chinese people purchased homes via a process called smurfing–where large amounts of money are broken down into small undetectable amounts. Homes are an easy way to reassemble the money into a single house-shaped bank account. However, you need to sell the home to retrieve the money.

Many  people that do this are just looking for a way to hedge against any devaluation their hard-earned money might experience as a result of a major currency change. It does present a problem for domestic investors though. If a large number of people smurfing require their money soon, they’ll have to sell. This will provide downward pressure on house prices.

There is anecdotal evidence that tighter restrictions on capital outflows from China is having an impact. According to Bloomberg News, “China’s escalating crackdown on capital outflows is sending shudders through property markets around the world. … In Silicon Valley, Keller Williams Realty says inquiries from China have slumped since the start of the year. And in Sydney, developers are facing “big problems” as Chinese buyers pull back, according to consultancy firm Basis Point.”

“Everything changed’’ as it became more difficult to send money offshore,” said Coco Tan, a broker associate at Keller Williams in Cupertino, California. Bloomberg further reports that “In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments.”

We have seen a slowdown in high-end purchases in Vancouver since the August imposition of a 15% land transfer tax on nonresident foreigners. While home sales were slowing even before the tax, it might just be that some of that slowdown was the result of China’s efforts to stem the outflow of capital.

“While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.”

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

24 Feb

January Jobs Report Continues Strong

General

Posted by: Eileen Crosbie

Canadian Job Surge in January

Canadian Job Surge in January
January’s payroll gain was a huge 48,300 Statistics Canada said on Friday in Ottawa, well above economists’ forecast of a loss of 10,000 jobs. This follows a gain of a whopping 46,100 in December. The unemployment rate fell by 0.1 percentage points to 6.8%.

Employment growth has been strong since August. Canada posted the best quarterly hiring gain since 2010 in the final quarter of last year. Full-time employment held steady following a substantial increase in December. This may signal the country’s economy is finally turning the corner after two years of pain induced by the collapse in oil prices.
Most of the job gains were for men aged 25 to 54, with the increase of about 30,000, the largest in more than two years.

Gains in the average hourly wages of permanent employees slowed to 1% in January from a year earlier, the smallest gain since 2003, from the 1.5% pace in the last two months.

Hours worked also fell 0.8% from a year earlier.

Thus, the report continued to show signs of an uneven job market, something that has led Bank of Canada Governor Stephen Poloz to stress there’s much more labour slack than in the US, meaning there could be further divergence in monetary policy as the Fed continues to gradually hike rates and the Bank of Canada remains on the sidelines this year.

Demand for financial and business services led the way in January.  Employment in finance, insurance, real estate, rental and leasing increased by 21,000, bringing gains from 12 months earlier to 59,000 (+5.3%), with most of this increase concentrated in the last six months.
There were 16,000 more people working in business, building and other support services last month. On a year-over-year basis, employment in this industry was little changed.

Compared with December, employment rose in Ontario, British Columbia, Nova Scotia and Newfoundland and Labrador. In contrast, there were fewer people working in New Brunswick. Employment was little changed in the remaining provinces.

Canadian labour markets have improved relative to the US, as labour force participation rates remain above unusually weak levels in the US. Adjusted to the measurement concepts in the US, the unemployment rate in Canada was 5.7% in January, compared with 4.8% in the US. Over the past year, the jobless rate fell 0.5 percentage points in Canada, while it was little changed in the US as it nears full-employment.

In January, the labour force participation rate was 65.8% in Canada (adjusted to US concepts) and 62.9% in the US. On a year-over-year basis, the participation rate was unchanged in Canada, while it increased slightly in the US as some discouraged workers resumed their job search.

In a separate report, Canada posted a second consecutive monthly trade surplus. Exports increased 0.8% on the strength of higher energy product prices. Imports increased 1.0%, mainly reflecting stronger imports of aircraft and industrial machinery.

Canada’s merchandise trade surplus with the United States narrowed from $4.7 billion in November to $4.4 billion in December. This will no doubt be a topic of discussion on Monday in Washington when PM Trudeau meets with President Trump. Those discussions will likely be cordial, although the renegotiation of NAFTA and Trump’s threat of a border tax has jeopardized the stability of one of the largest two-way trading partnerships in the world.

Provincial Unemployment Rates in January In Descending Order (percent)
(Previous months in brackets)

   — Newfoundland and Labrador        13.8 (15.1)
— Prince Edward Island                     9.8 (10.5)
— New Brunswick                               8.9   (9.3)
— Alberta                                             8.8   (8.5)
— Nova Scotia                                     7.7   (8.3)
   — Saskatchewan                                 6.4   (6.6)
— Ontario                                             6.4   (6.4)
— Quebec                                            6.2   (6.5)
— Manitoba                                          6.1   (6.3)
— British Columbia                             5.6   (5.8)
 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres