Construction starts last month rebounded by 13.1 per cent — more than expected, CMHC reports

Eric Beauchesne
Sun

OTTAWA — Despite a lot of huffing and puffing, Canada‘s housing market seemingly refuses to be blown down by the slumping domestic economy.

Housing construction starts last month rebounded by a steep, and more than expected, 13.1 per cent, to an annual seasonally adjusted pace of 211,000 almost completely offsetting a similarly large plunge the month before, the federal housing agency reported.

The report Tuesday from Canada Mortgage and Housing Corp. followed news a day earlier that home-building intentions the month before were also much stronger than anticipated.

Analysts, however, continued to warn that the housing market cannot continue to defy the gravity of a slowing domestic economy, and the good news failed to prevent another triple-digit loss on Bay Street and further slump in the currency, reflecting concerns about the global slowdown.

“On balance, this does not necessarily mean that housing activity remains healthy,” said TD Securities analyst Charmaine Buskas, projecting a slowdown that will dampen overall economic growth as well. “It should be taken for what it is — a snapback from a previously large decline.”

“Despite August’s gain, the trend for housing starts is still clearly to the downside,” agreed Desjardins Group economist Benoit Durocher.

In fact, the pace of housing construction this quarter is already running well below the average of the second quarter, he noted.

“We can therefore expect residential investment to pull back for a third straight quarter,” he said. “This should once again slow domestic demand, which means that the outlook for economic growth remains very small.”

That weakness will also translate into interest-rate cuts by the Bank of Canada, he added, projecting the first of the cuts will come in December.

And earlier this week, a University of British Columbia study concluded that houses in most Canadian cities are sharply over-priced by as much as 25 per cent and which warned of a potential price correction, a view later echoed even by some realtors.

But the August housing construction report seems to fly in the face of such warnings, with both a modest two per cent increase in starts on single-family homes and a 25 per cent surge in apartment and condo unit construction starts.

Reinforcing expectations of a housing market slump, and in turn overall economic weakness Tuesday, were deepening stock market losses.

© The Vancouver Sun 2008

Harvey Enchin
Sun

‘Real estate is always good, as far as I’m concerned,” Donald Trump once said.

“It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.”

The Donald may be unfamiliar with the architectural atrocity that is the “Vancouver special” or its hometown, which Forbes last year ranked as the sixth most overpriced real estate market in the world.

But the man more famous for the phrase “You’re fired” than his roller-coaster ride in real estate was recently worth $3 billion US, and you can’t argue with success.

For a lucky few, of course, Vancouver real estate has been a gold mine. Those who purchased a home after the last major downturn in 1990 and hung on through the frequent bumps and dips until today — or rather until February this year — hit the motherlode.

Depending on who’s doing the math, the value of their investment has more than tripled. And house flippers who snapped up a teardown last year and cashed out near the peak have also made a killing.

The rest of us, lemmings who bought during the frenzy and bid up the price of dumpy asbestos-filled bungalows that are worth less than they were six months ago, rue the day we placed a call to a real estate agent.

A dwindling number of realtors cling to the fiction that we are in a “balanced” real estate market where, since no one has an advantage, everybody presumably gets a fair deal. But remove the rose-coloured glasses and one could easily get the impression that real estate is threatening to become a horror show for sellers — and it’s one we’ve seen before.

In fact, there have been several episodes of market mayhem, from a terrifying drop in 1981 to more modest declines in 1990 and 1996. But these are early days in Metro Vancouver’s latest real estate slump, with prices for a typical detached home down 4.3 per cent in August from May, so it’s difficult to gauge whether it will be a mild correction or a catastrophic crash.

It’s little comfort that prices of resale homes as of August were up six per cent year over year (new home prices were up eight per cent) because history has a way of repeating itself. And the past isn’t pretty.

A worst-case scenario would be a replay of 1980-82 when house prices spiked and sank so fast fortunes were won and lost in a matter of days. The run-up began in 1979 with average prices soaring from the $240,000 range to more than $540,000 in 1981 and almost back again by mid-1982 — a 125-per-cent gain in real (inflation-adjusted 2008) dollars that largely evaporated within a year. Unfortunates who bought at the peak didn’t see a recovery to that price level again until 1995. In nominal dollars, the trough was shorter, just eight years, but no less painful.

A return to those ugly days seems unlikely. Inflation in 1981 was running at an annualized rate of 12.5 per cent and the average five-year mortgage rate reached 18.5 per cent. At the nadir of that recession — the worst in half a century — the unemployment rate approached 13 per cent and the economy (GDP) contracted 6.7 per cent in 18 months.

Today, Canada‘s inflation rate is 3.4 per cent, unemployment is six per cent and a five-year mortgage can be had for under six per cent (if you shop around.) The economy is still growing, although just barely. These conditions do not suggest a housing market collapse like that of 1981-82 is imminent.

Still, a drop of 20 to 25 per cent, which was the range of decline in the 1990 and 1995 slumps, is not unthinkable.

The problem of looking at real estate prices this way is that it fails to capture the complete cycle. Just as investment promoters use timing to inflate claims of stock performance, real estate agents can raise — or dash — expectations by emphasizing only the upswing or downside of a cycle.

However, seen from peak to peak or trough to trough, the irrational exuberance of real estate dissipates. Vancouver‘s annual house appreciation from 1979 until 2008 was 7.6 per cent, from 1981 4.4 per cent, from 1992 5.3 per cent and from 2001 10.6 per cent. These represent fair returns but not a lottery win.

Rather than dwell on historical prices, perhaps we need to think about real estate — and the notion of balance as equilibrium between buyers and sellers — in a different way.

A number of analysts, including Tsur Somerville, a real estate finance professor at the University of British Columbia‘s Sauder School of Business, are doing just that. For them, a balanced market is one in which the ratio of house rents to prices equals the cost of capital for owning a house (the mortgage rate and out-of-pocket costs) minus the expected rate of house price appreciation.

In other words, the dividend payment, being the rent for a house, equals the price of the asset, being the house price multiplied by the cost of holding the asset ( the cost of borrowed funds, maintenance, property taxes, insurance and depreciation) minus the change in the market price of housing.

Applying this formula, Somerville calculates that the equilibrium rent-price ratio for Vancouver is 4.1 per cent, while the current ratio stands at 3.6 per cent. On this basis, Vancouver house prices are about 11 per cent overvalued. Taking the average house price of $754,500 in the second quarter of 2008, prices must fall by about $85,000 to bring the rent-price ratio into equilibrium.

How bad is that? Maybe the real estate storm will blow over without causing too much damage. If a measly loss of $85,000 is all it takes to return to normal market conditions, perhaps we can all breathe a sigh of relief. However, in the event of macroeconomic shocks, like a global recession, or environmental Armageddon, all bets are off.

© The Vancouver Sun 2008

 

Metro starts to pass 18,000 for fifth straight year

Paul Luke
Province

Greater Vancouver housing starts dipped last month, but pockets of strength in Delta, Surrey and Vancouver sustained a brisk pace of construction for the year to date.

Despite a slow August, starts so far this year are seven-per-cent higher than the same period last year, Canada Mortgage and Housing Corp. said yesterday.

“Metro Vancouver will see housing starts exceed 18,000 units for the fifth consecutive year in 2008,” CMHC senior market analyst Robyn Adamache said.

“Demand for new homes remains healthy. However, the inventory of unsold new homes is edging up.”

August starts fell 15.9 per cent to 1,560 from the same month a year ago. Delta’s year-to-date starts roared ahead by 99 per cent, Vancouver‘s jumped 74 per cent and Surrey‘s climbed 66 per cent.

Among the larger year-to-date drops, Langley lost 55 per cent, Burnaby and New Westminster slumped 38 per cent and Maple Ridge fell 21 per cent.

Peter Simpson of the Greater Vancouver Home Builders’ Association said multi-family units are still leading the charge across the region.

Multi-family starts in Metro Vancouver rose 11 per cent in the first eight months of the year, while single-family detached fell by six per cent.

The region’s home-building market will remain strong even if the pace of construction eases off during the last four months of this year, he said.

“Workers are happy,” Simpson said. “Starts are jobs.”

Across urban B.C., year-over-year starts fell 11.8 per cent in August.

Nationally, starts rose a better-than-expected 13 per cent in August.

© The Vancouver Province 2008

 

Bruce Constantineau
Sun

The value of B.C. building permits fell 19 per cent in July to about $861 million — with residential permits dropping 7.1 per cent and non-residential permits plunging by more than 37 per cent from June levels.

Analysts say the declining permit values reflect a slowing economy and builders’ increasing caution about future development plans.

Statistics Canada reports the total value of B.C. building permits during the first seven months of this year declined 9.7 per cent to $6.837 billion. Residential permits fell 8.8 per cent to $4.654 billion while non-residential permits dropped 11.4 per cent to $2.183 billion.

Central 1 Credit Union chief economist Helmut Pastrick expects house building activity throughout B.C. will slow down considerably, following recent sharp declines in home sales.

Greater Vancouver Multiple Listing Service sales fell nearly 54 per cent in August to 1,568 units.

“I expect we’ll see considerably weaker residential permit values in the future — with a decline of about 20 per cent by the end of this year and another decline in 2009,” Pastrick said in an interview on Monday.

He predicts B.C. housing starts will fall from 39,200 last year to 37,100 this year and 31,700 in 2009.

Pastrick believes there is more potential for growth in B.C. non-residential construction because market conditions on the commercial side remain strong — with low office vacancy rates, low industrial vacancy rates and rising hotel occupancy levels.

“It’s just that we’re seeing some constraints in development plans now because of the credit squeeze, with financing being a little tighter than normal,” he said. “It can also be a lot harder to find commercial development sites, which delays the permit process.”

Pastrick noted the value of non-residential permits does not include engineering construction projects like new roads, bridges and transit lines, which have all generated tremendous activity in B.C.

Residential construction activity might slow down, but there’s no collapse in sight, according to Greater Vancouver Home Builders’ Association chief executive officer Peter Simpson.

“There may be a few clouds out there and the ceiling has dropped a little, but the sky is not falling,” he said.

Simpson said developers of major projects are taking a close look at market conditions now and doing their best to avoid unnecessary risks.

He noted the market has grown steadily since 2000, but it may be time for builders to exercise caution.

Some builders have started offering buyers incentives like attractive mortgage packages or free appliances, but Simpson denied there’s any “desperation” in those tactics.

Vancouver Regional Construction Association president Keith Sashaw said while building permit values dropped in July, the industry remains “very busy.”

© The Vancouver Sun 2008

 

Vancouver houses overvalued by 11 per cent, according to a UBC study of real estate

Derrick Penner
Sun

With Metro Vancouver past the peak of its current real-estate market cycle, more discussion is emerging about what the cycle’s downside will look like.

The latest discussion points lean towards a price correction in the double digits, with one study showing current Vancouver house prices overvalued by 11 per cent on a particular measure and an economist observing that prices are falling at a rate of 10 per cent or more this year.

University of B.C. real-estate economist Tsur Somerville was lead author of a study that evaluated the cost to rent a detached, mid-market home in nine Canadian cities, versus the cost to own, to find a balanced price.

The study’s conclusion was that in the second quarter of this year, Metro Vancouver’s average house price, $754,500, was 11 per cent higher than the balance point.

However, Regina, Winnipeg, Ottawa and Montreal are 25 per cent out of equilibrium, considering prices and rents in those markets. Halifax house prices are 20 per cent out of balance.

Titled Are Canadian Housing Markets Overpriced? the study observes that housing affordability is a severe problem in some Canadian cities, limiting the ability of markets to continue to rise.

Calgary prices showed as being seven-per-cent higher than balance.

Only Toronto showed prices in balance with rents, and Edmonton, which has already seen price declines, would need to see prices climb again by eight per cent to be in balance.

“I was surprised the Vancouver number is as low as it was,” Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at UBC, said in an interview.

He added that the rent-versus-own measure is a narrow observation that treats homes like a financial asset and does not take other measures of affordability or valuation into account.

And what eventually happens in the Vancouver market, Somerville said, will depend on a host of variables ranging from changes in mortgage rates to changes in the long-term average appreciation of housing prices and economic conditions.

“What you can identify is where the pressures are,” Somerville added. “How the market plays out is very different.”

Prices do not have to fall for the market to correct, Somerville said. Prices can simply stagnate over a period of time, like Vancouver experienced through the mid-1990s until 2001.

However, Somerville added that Vancouver has built new homes at a much higher rate than household formation in the city during the up-cycle, and the inventory of unsold homes in the market has ballooned rapidly, which make Vancouver more susceptible to price declines.

“Those are two big warning signs,” he said.

Somerville said another unknown in the declining market is what the buyers of pre-sale condominiums that are now under construction will do once the units are complete.

If a significant number of investor-buyers of those condominiums decide to sell them right away, that would put more downward pressure on prices.

However, at this point there is little evidence of “calamity in the housing market,” said Helmut Pastrick, chief economist for Central 1 Credit Union, formerly known as Credit Union Central B.C.

Pastrick said the reversal in the housing market was caused because of affordability. Too many first-time buyers were squeezed out of the market for prices to rise higher.

However, “it would take nastier economic conditions,” such as a recession or sudden spike in mortgage rates to cause a more serious decline in Vancouver‘s markets, he said.

Pastrick said Vancouver’s housing price index has declined four per cent since its peak in February, and in his latest weekly economic briefing, he noted that prices are on pace to drop 10 to 15 per cent this year.

“I think [the decline] will be closer to 10 per cent by the end of the year,” Pastrick added in an interview. “And the [decline] will be at least 10 per cent from top to bottom [of the cycle].”

The inventory of unsold homes, which had grown dramatically over the summer, dropped a bit in August and Pastrick expected that trend to continue over the next several months. At some point in 2009, he believes, the real estate market will find a new balance “and we could see housing prices tread water.”

“I’m not suggesting [prices will be] flat,” he said. “There’s going to be some movement, but it could be a period of time where prices don’t make large moves up or down — perhaps plus or minus five per cent a year.”

© The Vancouver Sun 2008

 

City house price shock

Paul Luke
Province

Brace yourself, Vancouver homeowner — the city’s out-of-whack real estate market has overpriced your house by about 11 per cent.

Homeowners in the city are living in an overvalued market where prices for detached homes must take a big hit to come into balance with rents, researchers at University of B.C.‘s Sauder School of Business say.

An 11-per-cent correction translates into an estimated drop of $85,000 on a house valued at $754,500 in the second quarter, says the study released yesterday by UBC professor Tsur Somerville and research assistant Kitson Swann.

“We find that the housing stock in many major Canadian cities is substantially overpriced,” the study said.

“Declining sales and weakening prices are signs that the decade-long boom in Canadian markets is over.”

The study defines equilibrium, or balanced housing prices, as the relationship between prices and house rents.

“We say a housing market is in equilibrium when the ratio of house rents to prices equals the cost of capital for owning a house — which is the sum of the mortgage rate and out-of-pocket costs, then minus the expected rate of long-run house price appreciation.”

Among nine Canadian cities, only Toronto‘s house prices are in balance, the study said.

Prices in Regina, Winnipeg, Ottawa, Montreal and Halifax would have to fall by 20 to 25 per cent from their second-quarter level to reach equilibrium, it said. Calgary‘s would have to come down by seven per cent.

“House prices can correct through sharp, rapid declines, through longer and slower declines, or by staying essentially flat for a long period,” the researchers said.

Edmonton‘s recent, pronounced declines mean its prices should rise by eight per cent to come into equilibrium with rents.

Vancouver‘s market is less unbalanced than those in Regina, Winnipeg, Ottawa, Montreal and Halifax, the study said.

But the report has particular concerns about Vancouver.

It warns that the potential for quick declines is greatest in cities where there is a mismatch between the number of units and the number of households ready to occupy them, and where there is a growing inventory of unabsorbed units.

“Recent data suggests that Vancouver is the most at risk in this regard,” the study said.

In a separate report yesterday, Statistics Canada reported that the value of building permits in B.C. and Alberta fell in July.

The value of B.C.’s permits dropped 19 per cent in July, pulled lower by a 37.6-per-cent plunge in non-residential permits.

In the Vancouver area, permit value fell 32.3 per cent to $407.5 million in July, StatsCan said.

Nationally, the value of permits rose by an unexpected 1.8 per cent in July, fuelled by growth in the value of multi-family units, StatsCan said.

Many economists had predicted a drop of one to two per cent.

© The Vancouver Province 2008