Canada's Housing Bubble

Aug 17, 2011 Ben Rabidoux theeconomicanalyst.com

More signs of economic weakness:

Stats Canada today released the most recent manufacturing sales data.

Manufacturing sales fell 1.5% (-$713 million) in June to $45.3 billion, the lowest level since November 2010. Sales have declined for three consecutive months after growing steadily since May 2009.

The decline was fairly widespread with Ontario shedding 2% month-over-month, Quebec down 1.6%, Alberta down 0.9%, and BC managing to eke out a 0.6% gain.

Manufacturing sales tend to lead employment.  The connection is quite evident when manufacturing sales as a percentage of GDP is inverted and plotted against the unemployment rate:

These two data series are only up to April of this year.  With softness now evident in manufacturing sales, it is quite likely a warning sign that the consistent drop in unemployment we've experienced since the end of the recession may stabilize or reverse course.

The data further confirms that there is a significant chance that we will see negative quarterly economic growth, though that possibility was firmly dismissed by almost all economists who last year were predicting 3-4% growth.  The Wall Street Journal was quick to state the obvious:

The Canadian economy, a stalwart of growth among the Group of Seven in the post-recession recovery, is at risk of shrinking in the second quarter, data released Tuesday indicated.

If so, Canada would join Japan among G7 economies that post an outright decline in economic activity for the April-to-June period. This would mark a significant U-turn for an economy that recorded annualized growth of nearly 4% in the first quarter, was among the first in the developed world to move from the recovery to expansion phase, and has recouped the jobs lost during the 2008-09 recession.

With weak economic data coming from Canada's largest trading partners, and with consumer credit demand running at lows not seen since the early 90s, I'm afraid weakness is the name of the game in the short term.  Of course, all of this is compounded by the remaining risk of a housing market correction, which would choke off consumer spending as HELOC growth would die and wealth effect spending shift into reverse.  If this materializes, look out!

CREA releases July resales data:

The Canadian Real Estate Association (CREA) has released the final July resale stats.  Sales and prices are showing signs of moderating, though still look reasonably solid compared to a terrible July last year.

Resale activity decreased by 0.1% in July relative to the June, while new listings rose 0.9% (both in seasonally-adjusted terms).  Sales are now off 4.2% in seasonally adjusted terms since February, a clear sign that the resale market is cooling.

The actual (not seasonally adjusted) national average price for homes sold in July 2011 stood at $361,181, which is the lowest level since January.  There is typically a 2-3 quarter lag between sales and prices in a stable supply environment.  Given this, we should expect house prices to moderate moving forward, though the year-over-year price appreciation may still show strong gains.

As I continue to explain, two major factors exert price pressure on real house prices:  Supply/demand imbalances and credit demand/availability.  I'll continue to monitor the supply/demand aspect in the monthly real estate board round-ups, while the credit demand and availability is a topic of frequent discussion here.  With supply slowly increasing amid a marginal decline in demand, price pressure should be virtually nonexistent over the next few months.  This is confirmed by the fact that the year-over-year change in mortgage debt as a percentage of GDP has now fallen to levels not seen since 2000.  The issue now is one of consumer confidence, which affects both credit demand and housing sales.  With negative economic news around every corner, consumer confidence is eroding.  How it affects the real estate market is now the million dollar question.

Cheers,

Ben