Echo

Canada's new home market is weakening

Monday, May 11, 2009

The weak conditions in the labor market - dragging demand for new homes and input prices for building - and commodity prices (inputs) is driving down the value of new homes in Canada. From The Daily:

Contractors selling prices decreased 0.5% in March compared with a 0.7% decline in February. This resulted in a New Housing Price Index of 154.6 (1997=100).

Between February and March, prices declined by 1.2% in Calgary and Edmonton, followed by Vancouver (-1.1%) and Victoria (-0.9%). In Calgary and Edmonton, declines were attributed to lower material and labour costs and lower lot prices from developers. In Vancouver and Victoria, builders reported lower prices due to competition and slow market conditions.
The chart illustrates new home prices in Canada and the US (average), both indexed to 1997. Although the market in Canada is turning weak, it is unlikely that it will fall as hard as the market in the US. The fundamentals are strikingly different.

The Canadian market is reacting to weak economic fundamentals, rather than an outright crash in the housing market stemming from overly-indebted households.

Rebecca Wilder

4 comments:

Anonymous May 11, 2009 at 2:27 PM  

Canada doesn't have a mortgage interest deduction for tax purposes - so their house prices are usually much lower than in the States so as to compensate, which makes these findings more jarring.

stephen saines May 12, 2009 at 6:55 PM  

Anonymous: Indeed, since the US is virtually alone in the World in having that deduction, it has had the effect of further 'renting of money'.

Cdns typically pay down their mortgages before agreed amortization has occured. There is an incentive to do so.

This has been commented on many times in comparisons.

Susan M Wachter has an excellent treatise on the matter (plus many other aspects at:

....well I'll be damned!

The Neo-Cons have pulled both it and the site!

I happen to have the entire copy here, since I forwarded it to the Globe and Mail some months back on a story they were doing.

I'll consult Rebecca as to whether to post the entire thing after seeing if it is available anywhere else on the web.

I have the document in entirety, but the mail client won't allow me to select the exact paragraph.

Here's a parallel document in Google Cache that contains same I believe. I'll figure out the glitches and post more later:

http://74.125.95.132/search?q=cache:YfuqCX2b0JgJ:www.fin.gc.ca/consultresp/06Rev_32e.html+Susan+M.+Wachter+Submission+in+Response+to+Finance+Canada%27s+2006+Review+of+Financial+Sector+Legislation:+Mandatory+Mortgage+Insurance+in+Canada:+The+Public+Policy+Consequences+Susan+M.+Wachter+finance+canada&cd=1&hl=en&ct=clnk&gl=ca&client=firefox-a

stephen saines May 12, 2009 at 7:04 PM  

Anonymous: I realize what has been fooling my mail client into glitching. I get this problem a lot in this version of Unix, albeit it could be the mouse software or the video card: It is the 'return link' at the end of the paragraph.

So I have had to scroll down manually to copy this:
[12. Even with mandatory insurance requirement lender may try to find
ways to self insure. In the recent historic low rate environment US
lenders have been able to offer mortgage packages to top quality
borrowers who would otherwise require mortgage insurance. The borrower
makes a 10% down payment, takes a first mortgage for 80%, and takes a
second mortgage of 10% of the value of the loan. The tax deductibility
of mortgage interest payments makes this mortgages package to appear to
be a better deal than a conventional mortgage with a 20% down payment, a
first mortgage of 80% of the loan value and mortgage insurance. On
closer examination we see that the risks the homeowner is taking is
significantly different. The second mortgage is typically an
interest-only loan. If rates rise the borrower could face substantially
greater interest expense. The borrower is also more highly levered. The
impact for mortgage insurers is that they are adversely selected.

This adverse selection is also present in the funding side of the US
market. The narrow charter for the FHA has allowed the two largest GSEs
to expand the scope of their lending activity and take away a key
borrower segment from the FHA. Consequently, the overall risk of the FHA
portfolio has risen. [Return]]

Oh dear, I sense format problems, and haven't the time to correct right now.

The paper is an excellent one, she saw sub-prime coming a long time before it hit.

Check her background at the Wharton School. This lady warned Congress, along with others, as to what was impending.

[Biographical Information

Dr. Susan Wachter is Richard B. Worley Professor of Financial Management
and Professor of Real Estate and Finance at The Wharton School at the
University of Pennsylvania. Dr. Wachter served as Assistant Secretary
for Policy Development and Research at HUD, a President appointed and
Senate confirmed position, from 1998 to 2001, and was senior advisor
responsible for national housing and urban policy. The Chairperson of
the Wharton Real Estate Department from 1996 to 1998, Dr. Wachter is the
author of over 100 publications. Dr. Wachter served as President of the
American Real Estate and Urban Economics Association and coeditor of
Real Estate Economics, the leading academic real estate journal. Dr.
Wachter currently serves on multiple editorial boards, and is the
Founder and Director of the Wharton Geospatial Initiative and the
Founder and Co-Director of the Penn Institute for Urban Research.

In 2005, Dr. Wachter received the George Bloom Award for Lifetime
Achievement from the American Real Estate and Urban Economics
Association. Also in 2005, Dr. Wachter was appointed as the Inaugural
Holder of Visiting Chair, The Celia Moh Professorial Chair, at Singapore
Management University. Current research focus is on mortgage systems and
housing markets. Recent published research includes:

"Does the Current System for Resolving Failed Banks Offer a Model for
the Resolution of Failed GSEs?" Journal of Financial Stability, 2005.

"Subprime Lending: Neighborhood Patterns over Time." co-authors Jonathan
Hershaff and Karl Russo. Promises & Pitfalls - Federal Reserve System's
Fourth Communitv Affairs Research Conference. 2005.

"Neighborhood Patterns of Subprime Lending: Evidence from Disparate
Cities," co-authors Paul Calem and Jonathan E. Hershaff, Housing Policy
Debate. Volume 15 Issue 3, 2005.

"Bank Lending and Real Estate in Asia: Market Optimism and Asset
Bubbles," co-authors Winston Koh et al., Journal of Asian Economics,
Vol. 15 Issue 6, November-December, 2004.

In 2004 and 2005, Dr. Wachter presented invited testimony to the Senate
Banking Committee of the US Congress on US mortgage markets. This and
related work was also featured in keynote addresses at both
international and national conferences, including programs convened by
the US Federal Reserve System in Washington, DC, New York, Atlanta, and
Chicago. Dr. Wachter is frequently cited in media worldwide.]

I will post more later, not in the mood to argue with the computer right now. A dog I'm caring for thinks I'm mad at her! Damn computers...hide the hammer....

stephen saines May 12, 2009 at 7:22 PM  

OK, I managed to find the 'missing' document in Google cache:
http://74.125.95.132/search?q=cache:J_v9oIM8K08J:www.fin.gc.ca/consultresp/06rev_40-eng.asp+Susan+M.+Wachter+Submission+in+Response+to+Finance+Canada%27s+2006+Review+of+Financial+Sector+Legislation:+Mandatory+Mortgage+Insurance+in+Canada:+The+Public+Policy+Consequences+Susan+M.+Wachter&cd=2&hl=en&ct=clnk&gl=ca&client=firefox-a

To those thinking I fall victim to conspiracy theories too easily, here is what Finance Canada's site now shows, after the Neo_Cons were caught trying to "liberalize" (US term, the term is the sign of Satan to the Neo-Cons here, for obvious reasons) Cdn requirements for mortgages:
[ Response to Finance Canada's 2006 Review of Financial Sector Legislation
Institutional links
The document you are trying to access is not yet available.
Date Modified: 2008-10-06]

I must run this poor dog. It's one thing for me to fight with computereez, it's quite another when innocent second-parties inherit the wrath!

I will pursue this later with the Press as to what the Harpoons (Harper's Happy Gang) are up to now. They have a lot to account for! They idolized Bush's devious methods, and almost got us into the same mess.

This document itemized it, without directly pointing the finger.

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