Canada's Housing Bubble

Nov 19, 2010 Jonathan Tonge americacanada.blogspot.com

In May I published a post titled “Listings – The 2.1 Tipping Point?” in which I predicted an imminent collapse in real estate sales.

I noted that when the ratio of new listings-to-sales exceeded 2.1, history shows that it generally marks a peak in the market. After peaking, it is not until the ratio goes below 1.5 before you can be confident that the market has bottomed.

In the following month real estate sales collapsed in a manner that can only be compared to 1990. Hot markets such as Vancouver, Toronto and Calgary saw year-over-year sales plunge by roughly 40%.

Two charts are provided below. The first was originally published in that very article and displays sales and listing activity until April 2010. The second captures activity up until the end of August. Note that both of these charts are produced by CREA and that the pink annotations were made by me.

April 2010

August 2010

The ratio has proved to be an excellent leading indicator. It will be one component that I will use to help call a market bottom and give a buy signal.

Note that in the second chart, that at point f there has been a collapse in both sales and new listings.

Home owners and real estate agents may not have forgotten the mantra from late 2008: “Don’t list now, wait until spring”. While this attempt to monopolize the supply of real estate in Canada may have proved successful and worth repeating, it was the unprecedented drop in interest rates in fall of 2008 that led to the surge of real estate sales in spring of 2009. It takes approximately 6 months before the changes in the overnight rate have an impact on consumer behaviour. That rule proved to be very accurate.

Nevertheless owners are less likely to list when sale volumes are depressed. Selling your home in a down market is not easy and is especially hard on families. Those desiring to upgrade may sit and wait for prices to adjust.

Recently we’ve been told by the boards and MSM that prices are going to maintain their lofty levels despite the drop in sales thanks to sellers not listing their homes. Well the fact of the matter is that the new listing-to-sales ratio has maintained itself well above the 2 mark. It is still in very dangerous territory and giving a very strong ‘sell’ signal. We could easily see home sales take another dive in the following months as we head into winter. Alternatively we could see new listings rise.

The MSM has also been erroneously reporting that prices have held firm. Asking prices have dropped 5-10% in many long overbought markets across Canada. Properties are being delisted after 4 or 5 months with little activity.

There has been an assumption that since (based on the initial false MSM’s story) prices have held firm to this point that they won’t decline at all. After the volatility in the market in 2008-10, I can see that people have lost any resemblance of patience. US real estate prices declined only subtlety in 2006. It wasn’t until the majority accepted that real estate had moved into a secular bear market that price reductions became more realistic. We are not there yet.

It is also important to note that CREA performed a well-timed (but perhaps valid) reconciliation of their MLS database in June. Total listings moved from roughly 230,000 in March to nearly 260,000 in June. Within the space of a day, total listings moved back to 240,000. Just for anyone following that number – it is not a good indicator of where we are at.

We have just seen very depressed sales figures through the ‘hot’ spring and summer months. No new interest rate cuts will be available to shock the market with. Current rates are still very stimulative but buyers feel safe that those rates will be available tomorrow and as a result, they no longer have a significant impact on over-indebted consumers. Costly home-buying tax breaks or incentives may have lost their shine after watching their spectacular failure south of the border. This could be a very difficult market to turn around. Especially as the broader economy suffers from household credit whose growth is now slowing. Falling home prices combined with stagnant credit growth will compound one another.

Jonathan Tonge
www.americacanada.blogspot.com