Historically Bad Housing Numbers

Home sales plunge in April, CREA reported

Mortgage Report – Weekend Edition

  • Prices Tumble in April: The national average home price in Canada has plunged almost 10% in one month (April). That’s never happened before in CREA data going back to 1980. The next closest month-over-month drop was -7.6% in April 1989. The data was skewed partly by the GTA’s 11.8% nose-dive.
  • Home Inventories Skyrocket: The total number of real estate listings, relative to sales, exploded 111% last month. Canada is now at 9.16 months of inventory (seasonally adjusted), says CREA. In other words, it would take over nine months to clear all listings at the current pace of sales. This is the highest level of inventory since the 2009 recession when it peaked at 9.71 months. Inventory is the most telling of CREA’s housing indicators. Sudden spikes are often followed by further price weakness in ensuing months.
  • Some Perspective: During past recessions, like in the early 1990s, real estate “listings were piling up,” CREA Senior Economist Shaun Cathcart tells us. “Right now, they’re falling fast.” He adds that sales “disappeared instantly” after the lockdown, yet most listings “hung around,” even though many sellers didn’t (couldn’t) actively market their properties. “I expect [months of inventory] to fall back next month,” Cathcart projects.
  • BMO’s Insured-Rate Gap: Banks are being more aggressive with their advertised default-insured mortgage rates. As BMO’s move below shows, it’s “rewarding” insured borrowers with 30-bps lower rates. That 3/10th of a point savings means an insured BMO borrower pays $1,400 less interest per $100,000 of mortgage over five years. But they have to pay up to a 4%+ insurance premium to get this lower rate, depending on their equity.
    • Side note: If you’re wed to your bank for some reason—and you have a 65% loan-to-value or less—it may be worth asking what rate the bank would give you if you paid the $600 per $100,000 CMHC fee. If the insured rate is more than 15 bps lower than the bank’s best uninsured rate, you may be ahead. Of course, you’ll usually find a lower rate at another lender with no insurance premium required.
    • These are BMO’s latest fixed-rate reductions:
      • 3yr “Special”: 2.89% to 2.74%
      • 5yr Smart Fixed (insured): 2.79% to 2.69%
      • 5yr Smart Fixed (uninsured): 3.09% to 2.99%
  • CIBC Trims Fixed Rates: Canada’s fifth biggest bank lowered the following advertised rate “specials” today:
    • 5yr: 3.09% to 2.97%
    • 7yr: 3.29% to 3.17%
  • National Bank Cut: …the following special fixed rates:
    • 4yr: 3.04% to 2.94%
    • 5yr: 3.09% to 2.99%
Canada's big banks cutting mortgage rates
  • Down Payment Primer: Here’s a quick overview on how to prove your down payment to lenders.
  • Credit Taps Tighten for Investors: When loan losses mount, credit policies get conservative. Here’s a story on how one bank has started prohibiting HELOCs as a source of rental property down payments. “There have been thousands of real estate investors buying negative cash flow properties, specifically condo investments where their monthly costs far exceed their monthly income on those properties and that is a very real source of concern,” says Broker Calum Ross.
  • China vs. USA II: Four months after signing a much-ballyhooed trade deal, U.S./China relations are in the toilet. Trump threatened to “cut off the whole relationship” over suspicions about the “plague from China,” as he put it. Now China’s making its own threats. That, along with horrid economic numbers (e.g., retail data), could hurt market sentiment and push down bond yields. For how long is anyone’s guess, but the last Ameri-China trade spat lasted a year and a half. Analysts don’t expect this altercation to last that long. Rate impact: Bearish
  • Grim Harbinger: 1 in 4 Canadian restaurants will never re-open, according to Ipsos estimates. That is consistent with U.S. surveys. The mortgage relevance here is the sheer fact that businesses of all sorts are simply going to disappear post-COVID. All this talk of a V-shaped recovery is distracting many from this truth. We’re likely looking at suppressed economic growth for years, not months (not including the immediate post-COVID bounceback — which is unlikely to get us back to where we were pre-COVID). Rate Impact: Bearish
1 in 4 Canadian restaurants will never re-open
  • Capital Economics on Negative Rates: “The key issue is not that the policy rate is still too high, but that credit spreads are still elevated.” In other words, investors continue to force banks to pay more for funding, and that’s keeping loan rates higher than normal relative to bond yields. While negative rates in Canada may be inevitable someday, the BoC would likely buy more assets (e.g., buy bonds to push down longer-term rates, including mortgage rates) before it went negative on its overnight rate.
  • Loss Provisions Soaring: Lenders are setting aside far more capital for expected losses than Bay Street anticipated. Equitable Bank was one canary in the coal mine this week. Its provisions for uninsured mortgage losses were 48 bps vs. its 9-bps long-term average. Home Capital, too, surprised observers by increasing its provisions to 70 bps in Q1, up from 9 bps in the previous quarter. Capital isn’t free. These loan-loss buffers will probably result in higher-than-normal mortgage rates (relative to bond yields) for multiple quarters.
  • Steer Clear for Now: “Banks stocks [are] unlikely to outperform until signs of credit losses are peaking,” says National Bank Financial. And it’s “still too early to make that call.”
  • FTHBI Bust: The “2,950 [First-Time Home Buyer Incentive] approvals are a far cry from the target of 20,000 that CMHC had set for the program’s first six months of operation.”—MP Tom Kmiec via MBN
  • Fun Fact: Or, not so fun if you’re anti-oligopoly. “The largest five banks hold 89% of the market share [in Canada], compared to 35% in the US,” notes Capital Economics.

To all ye mortgage shoppers, happy 3-day weekend!



10 Comments

  • AntiSpinDr says:

    I just saw a TD report that said “average prices will likely be distorted, and not fully represent broader market conditions.”

    What a load of bull. Prices are set in the market so how can they not represent market conditions. The real estate establishment will keep spinning the data like they always do. Smart buyers will stand back and not try to catch a falling knife.

    • The Spy says:

      AntiSpinDr, So many commentators are shrugging off the current weakness. We won’t attempt to outguess the market at this point, other than to say that massive job losses, scared sellers (you don’t need a lot of them), less foreign buyer interest, credit tightening and suspended immigration are patently negative for housing. No doubt, most of the unemployed will get their jobs back but many won’t. For those who do and want to buy a home, many will wait to see how things shake out, and many will take time to get their finances in order following weeks without income. Notwithstanding the inevitable bounce or two, it’s hard to argue there’s not greater than a 50% chance that prices in most markets keep falling, for some number of months — assuming recession history is a guide. That’s about as precise as anyone can get for a housing forecast.

  • mm_99 says:

    The Tangerine Tornado is going to push yields negative with his half baked foreign policy. Go Trump.

  • PD says:

    Trudeau’s lockdown may be saving a few thousand lives but it’s killing millions of livelihoods. It’s time to lift the lockdown for anyone under 65 and save this country from the Liberal’s free for all spending spree that will never be repaid

  • Appraiser says:

    CREA’s April data is the exception that proves the outlier rule. Just like the rest of the economic data of late.

    “I think there is too much pessimism about the future path of the labour market and economy.

    Yes, the labour market took a terrible hit in March and April. We will not get *all* of that back soon. But we will get *some* of it back–and soon.”
    ~Kevin Milligan UBC School of Economics

    https://twitter.com/kevinmilligan?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor

  • Save Your Kool Aid says:

    “Prices holding steady for now”

    https://www.cbc.ca/news/business/crea-home-sales-1.5571143

    The only thing preventing absolute panic in the housing market is ridiculous headlines like that. People read that misleading nonsense and realtors feed it to buyers. CBC should be ashamed of itself.

    Comparing prices to 2019 doesn’t even begin to tell the story. When was the last time you saw monthly prices down 10% in April? April is always one of the strongest months of the year!

    There is nothing “distorted” about prices whatsoever. It is simply supply and lack of demand. It makes no difference if most demand is only temporarily absent. Prices will not wait for buyers to make their grand re-entrance.

    Federal aid like CEWS and CERB will do NOTHING to keep people from selling if they don’t get their jobs back. If it wasn’t for credit, over a million people wouldn’t be able to feed their damn families for crise sake!!! Who the hell thinks they’re going to hold on to their houses?

    David Rosenberg projects 13% unemployment in 2021. Even 10% unemployment would put housing in a bear market.

    https://www.marketwatch.com/story/the-great-repression-is-here-and-it-will-make-past-downturns-look-tame-economist-says-2020-04-27

    Economists and media need the wake up because we have a real estate crisis in the making. If you depend on home equity you may want to sell while you still have some. You can always buy back later.

  • mm_99 says:

    For anyone interested, Toronto Storeys has a good summary of housing projections here.

    https://torontostoreys.com/real-estate-forecasts-covid/

  • mm_99 says:

    Oh and does anyone know how many jobs are expected to be lost permanently in Canada because of corona virus? I found a US forecast but nothing domestic.

  • david says:

    that figure for big 5 share is sooo fake – our mortgage market is incredibly competitive. hey big 5 bank bashers. the US has a regional bank market, and many of the regional markets are quite concentrated. so lets pretend that instead of having these large CDN banks turning on a dime and providing months of deferrals with a simple please, you have a bunch of smaller private firms with no appetite whatsoever to defer anyone’s mortgage and immediately start legal proceedings. this web site is soooooo have your cake and eat it too….

    • The Spy says:

      David,

      The federal government pressed banks to offer deferrals and it clearly made economic sense to do so. While the Big 6 deserve appreciation for cutting borrowers some slack, few will throw the industry a ticker tape parade for doing what’s in its best interests anyhow.

      As for Capital Economics, it’s pretty good about getting the facts straight, but we’ll let it defend its own numbers. Just note that Capital Economics’ stats do parallel data from C.D. Howe, which reports: “Since 2007, the share of all banking assets controlled by the largest six banks grew from 90 percent to 93 percent.” Source: https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/e-brief_248.pdf

      You neglected to cite any counter-sources. Do share your data, so we can peruse them over a nice piece of cake.

Leave a Reply

Your email address will not be published. Required fields are marked *