The Housing Bubble

A pair of reports from Reuters on Canada. “The troubles at Home Capital Group Inc are about liquidity rather than mortgage quality - it is not a U.S.-style subprime mortgage crisis - but the shift in sentiment just a week after Ontario unveiled more measures to cool housing has investors in the mood to sell. A housing slowdown is just what many have been hoping for, with concern about a real estate bubble at a fever pitch. Toronto mortgage broker Calum Ross, who does not do subprime lending himself, has advised clients who are real estate investors to sell their Toronto real estate holdings because the combination of price gains and rent control make it a poor investment.”

“‘I sincerely hope the market is going to cool, because anyone who doesn’t think that double digit rate of appreciation in real estate is problematic clearly doesn’t understand real estate economics,’ Ross said.”

“Canada’s No. 2 listed alternative lender Equitable Group said it has taken steps to reinforce its liquidity position on Monday after it experienced a quickened pace of withdrawals late last week. The troubles at Home Capital, which provides subprime mortgage loans and has seen a 73-percent decline in HISA deposits since March 30, has raised fears it may be the first sign of a crack in Canada’s red-hot housing market, which some have called a bubble.”

“The Ontario’s Public Service Employees union said it opposed using pension funds to finance Home Capital and wants stricter guidelines governing pension funds’ investments. ‘It’s workers’ money going to finance a finance company that sells mortgages to people who maybe can’t afford the mortgages,’ said Warren Thomas, president of the union. ‘I think it’s a risky, inappropriate investment … I just don’t think we should be in the business of financing banks.’”

The Globe and Mail. “The safety, soundness, prudent business practices and governance of Home Capital’s operating subsidiaries, Home Trust and Home Bank, are supervised by the Office of the Superintendent of Financial Institutions and Canada Deposit Insurance Corp. These financial businesses operated with an unstable business model, providing subprime mortgages and consumer loans financed by short-term, high-interest deposits and investment certificates.”

“Has Ottawa not learned the severe consequences that can erupt from this funding mismatch after earlier experiences? Presumably, Home Trust and Home Bank were high on Ottawa’s watchlist, but shareholders and depositors, whose money was exposed, were not aware. So where were the regulators?”

From Bloomberg. “Toronto home price gains slowed in April and new listings soared the most in seven years, signaling the red-hot market may be cooling after the Ontario government imposed new measures to curb runaway gains in Canada’s biggest city. In further signs of a slowdown, sales fell 3.2 percent to 11,630 units, the first year over year decline since 2014. The number of new homes on the market jumped 34 percent to 21,630, the biggest increases since 2010, the figures released Wednesday show.”

From Urban Toronto. “The first quarter of 2017 saw 9,932 new condo units sold in the GTA, a massive 73% year-over-year increase that represents a new quarterly high. The quantity of new condo units launched for pre-construction sales in Q1 2017 more than doubled, with 6,293 new units compared to 3,061 units launched during Q1 2016. At the current pace of sales, less than three months of housing inventory is available, and a substantial number of new launches will be needed to balance the growing supply-demand disparity.”

“This is evidenced in the record number of units pre-sold during the quarter, rising to 94% from an 86% share in 2016’s first quarter, and an 84% share the year before. The number of projects to sell out in Q1 2017 more than tripled from last year’s figures, with 80 sold-out projects versus the 25 recorded in Q1 2016. Urbanation’s report diverges from the TREB narrative in regards to condominium flipping practices, noting an increase in resale activity within newly-built condo developments. The 1,059 re-sales recorded in Q1 2017 represent a 69% jump over the 625 units resold in Q1 2016, while 249 re-sale units were sold for the second time within the past year, a 53% growth from Q1 2016.”

“‘The shortening of holding periods for some condo buyers is an outcome of the rapidly accelerating market,’ said Shaun Hildebrand, Urbanation’s Senior Vice President. ‘Although the share of short-term condo market participants still appears relatively low, it will be important to monitor the situation closely going forward as market conditions evolve.’”

From CTV News. “New reports are painting a bleak picture for Saskatchewan’s housing market. More homeowners in the province are falling behind on their mortgages, while home sales in Saskatoon continue to decline. A report from the Canadian Bankers Association shows the percentage of people in Saskatchewan behind three months or more on residential mortgages has reached 0.7 per cent — the highest level in 24 years and more than twice the national average of 0.28 per cent.”

“Saskatoon is ‘firmly in a buyer’s market,’ according to the realtors association. Jason Yochim, the CEO of the Saskatoon Region Association of Realtors, says the market conditions do not favour speculative selling. ‘Today’s consumers are very well informed and, with many homes to choose from, are not afraid to move on if the seller is unwilling to respond to an offer at market value,’ Yochim said.”

The Calgary Sun. “A developer behind suburban communities in Calgary and Edmonton has landed in severe financial turmoil that it blames on two recessions, including the latest rout in Alberta. Walton International Group Inc. and 32 of its affiliates have obtained protection from their creditors and will attempt to restructure under the Companies’ Creditors Arrangement Act.”

“The Calgary-based developer, which has $245 million in assets and $253 million in liabilities, is the Canadian arm of the Walton group of companies that’s involved in real estate projects spanning 105,000 acres in North America. William Doherty, chief executive of Walton International, said in an affidavit that the Walton group has been hit by lingering effects of the 2008 recession, a general decline in the U.S. real estate market and the latest recession in Alberta.”

“Doherty said the 2008 downturn, widely linked to a housing bubble that helped trigger a global financial crisis, changed the behaviour of builders and developers south of the border. Their less aggressive approach, combined with a slower than expected recovery in the U.S. economy and real estate market, extended the timelines for Walton projects.”

“‘These economic conditions have in turn created a tight credit market for real estate developers, making it relatively difficult to obtain financing extensions and new project financing,’ Doherty said, adding it’s also been difficult raising funds from investors.”

From Vice Money. “The slow oil sector and declining employment have cooled the property market. City assessors report the median value of a Calgary home is now $460,000, down from $480,000 last year. According to the CMHC, the vacancy rate of Calgary rentals was seven percent in 2016, the highest in 25 years. Rent prices went down by 7.5 percent last year.”

“‘Let’s talk about the fact that life might be easier for artists for a while,’ says poet Nikki Reimer, who works in communications at the University of Calgary. I used to be intimated by Nikki, not because she is anything but kind, but because I knew her first through her ruthless poetry. Here she ironically adopts the ‘common sense’ of a couple talking themselves into buying a condo:

Anyways we’re just paying somebody else’s

Mortgage think how good we’ll feel to be in our

Own place those prices will always go up & the

Figures don’t matter once we’re in the market

“The poem’s skepticism seems justified. In Calgary prices have not gone up, and a recent study shows that 81 percent of Canadian millennials regret buying their homes because it has made them cash poor.”