Brace yourselves: January 2011 sales underwhelming

Just Jack gave us this run down of January sales volumes since 1999 in the last post. It needs to be highlighted, for more than just its comic relief!

1999 - 260 - the market is idling at the start line
2000 - 254 - market is still idling
2001 - 289 - starts creeping forward
2002 - 461 - the tires are smoking up
2003 - 437 - this ain't your dad's Buick, hold on Alice

2004 - 428 - its a friggin' Bugatti Veyron
2005 - 432 - with Nitrox Oxide
2006 - 431 - and no brakes
2007 - 387 - switching tanks
2008 - 406 - to the moon Alice
2009 - 255 - hit the brakes Alice, I think there's a brick wall ahead
2010 - 361 - nope it was a mirage
2011 - January estimate of volume of sales is... 273 - "for Christ's sakes Alice, we're outta road, jump!"

Change of tune?

You know it's really getting sad when the media equates a reduced rate of credit growth in Canada to "people getting the message" on changing their spending habits. Instead of pointing out many Canadians just can't get any more credit, they try to make Canadians think they've heard the message and they're voluntarily slowing down their free-money spending binge. OK, sure, whatever.

Key points:

• Mortgages outstanding are still rising at almost 7 per cent, year over year, but a monthly trend indicates the rate seen during the recession.
• Mortgage arrears appear to have peaked, though they're stabilizing at twice the pace in the recession. That's still below the rates of past slumps.
• Lines of credit are growing at 0.3 per cent a month, the slowest since 2007.
• Debt is still rising at a pace that eclipses income, but not assets.
• Debt interest payments now represent 7.2 per cent of disposable income, the lowest since mid-2006. (Think this might be because interest rates are the lowest since mid-2006? Rocket meet scientist)
• Consumer bankruptcies are "in a clear downward trend."
• There's a similar trend in delinquencies on consumer loans.
  

Emphasis mine. There's a reason why spending and borrowing are still growing, but at a slower rate than a year ago: the taps are slowly being turned off, interest rates are very slightly higher than they were one year ago and the pool of spenders are at or near the maximum in terms of their available credit. The situation isn't "getting better" because tapped-out consumers are "heeding the warnings."

In the interest of balance, it is true that asset growth is outpacing debt accumulation. You can thank a very robust stock market and a rebound in housing prices for this--both markets grew abnormally fast over the past 12 months, so this little indicator should be taken for what it is, not used to justify current debt accumulation trends.

The last few puffs into a balloon always seem to feel slower than the first don't they?

Back to the data: Monday market update

MLS numbers courtesy of the VREB via Marko Juras.

Month-to-date January 2011
Net Unconditional Sales: 233
New Listings: 879
Active Listings: 3,120
Months of Inventory: 13.4
Sales to new listings ratio: 27%

January 2010 totals
Net Unconditional Sales: 418
New Listings: 1,211
Active Listings: 2,793

Sales are off to a slow start in 2011. They may well end up being even slower than December 2010. While REALTORS® manufacture bidding wars on tear-downs over on the mainland with a little help from asleep-at-the-wheel journalism (H/T Mr.4AM), Victorian's aren't going goo goo for the ga ga of available properties quite yet. With looming mortgage changes in the near term, the question remains: will they?

Originally I'd thought they might. Now, I'm not so sure. I'm beginning to think there might not be an early heated "spring market" before the implemented CMHC changes. There's been a big shift in the market over the early weeks of 2011, and it's demand driven, or I should say lack-of-demand driven. For as long as I can remember, single family homes priced below $500K were in high demand. Now? Not so much. The sheer lack of sales in this category this month has me scratching my head. Where did those buyers go? More importantly, are they just taking a breather or are they finally exhausted?

UPDATE: Demographia's most recent survey released today shows Victoria as Severely Unaffordable with the median house price requiring 7.1 times annual median household salary to purchase. We're more unaffordable than San Jose, San Diego, Los Angeles and Santa Barbara, California, heck, we're even more unaffordable than New York City! New York City? Yep, even that town that gave the world thin and runny salsa is more affordable than us. Congratulations Victoria, you've earned it!

The buying consensus

Look, if you absolutely must buy for the first time, right now, for whatever reason, you should be pricing in 2011 changes today. If you can't get a deal like that, you should be really, really, strongly inclined to walk away until you can.

With the mortgage rule changes, even focusing entirely on the periphery, pundits are saying that price declines across the market of 7% (that's seven percent) are completely reasonable.

If you're buying an average condo, your final price should therefore be: $301K x 0.93 = $280K

If you're buying the average town home, your agreed-on price should be around: $434K x 0.93 = $403K

And if you can still get qualified for one of them old-fashioned 5% down, 35 year amortization, 7% cash back mortgages, you might be able to successfully bid on an average single family home in Victoria for: $647K x 0.93 = $601K.

My advice is worth what you paid for it (in case you're scratching your head, you paid nothing, so it shouldn't influence you in any meaningful way).

CAAMP gets it

And they're trying to push that when prices start falling it's a result of the government making it too difficult for a small subset (the fringe) of potential home buyers.

CAAMP said 79% of mortgages in Canada have fixed rates and most of them are locked in for terms longer than five years, meaning only 21% of people with mortgages are vulnerable to a spike in rates.

First off, I doubt it if this quote is accurate. The most popular mortgage product in Canada is a a five year term, so I don't see how "most of them" are "for terms longer than five years." I can't find it anywhere in CAAMP's actual report.

Nor can I find these two statements that appeared in CAAMP's fall consumer report; statements which can't be taken back empirically, and statements which shouldn't be ignored in light of CAAMP's renewed vigour against policy changes that make it harder for their members to make a buck:

1. 16% of Canadians with a mortgage could not manage an extra $300 increase in mortgage payments.  
2. In addition, 11% of households would run into financial trouble if mortgage rates rose only 1.5%.

That's a sizable issue for Canadian financial policy makers. And CAAMP just "forgot" to mention these folks in their latest report.

Remember, these rule changes don't prevent lenders from offering flexible mortgage terms to the 79% of prudent Canadian borrowers (as per CAAMP). These rule changes just mean the fringe won't benefit from subsidized interest rates through CMHC insurance anymore unless they can meet marginally more difficult terms, today.

CMHC insured mortgage changes

Full details here.

Here's the coles notes:

• Mortgages with amortization periods longer than 30 years will no longer qualify for government-backed mortgage insurance, which is required for buyers with less than a 20% down payment on a home. The previous limit was 35 years.
• Maximum amount Canadians can borrow against the value of their homes, lowered to 85% from 90% on a refinancing.
• Federal government backing for home equity lines of credit, or so-called HELOCs, is removed.
• Adjustments on amortization and refinancing limits coming into force on March 18.
• Government backing on HELOCs will be removed as of April18.

Interesting that the Department of Finance is spinning this as a "savings" move for consumers.

 

From the DoF directly:

The new measures:

• Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. This will significantly reduce the total interest payments Canadian families make on their mortgages, allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire.
• Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes. This will promote saving through home ownership and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.
• Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. This will ensure that risks associated with consumer debt products used to borrow funds unrelated to house purchases are managed by the financial institutions and not borne by taxpayers.

These changes are actually more drastic than I'd expected. Especially on the HELOC side of things. IMO removing insurance on HELOCs is a direct hit on homeowner as second property speculator. Others will call that an abhorrent change that prevents people who can't manage their consumer credit from rolling their high interest debt into their homes. Because that's what a home is there for and all that...

I still expect a short term but subdued buying rush in the market. That may include a listings frenzy too as sellers try to sell before the rule changes in March. By mid-February I suspect there won't be a big bank in Canada still doing CMHC insured 35 year amortizations.

UPDATE: The effects of the mortgage rule changes will be felt in the sales stats. MLS numbers courtesy of the VREB via Marko Juras.

Month to date January 2011
Net Unconditional Sales: 144 
New Listings: 560
Active Listings: 3,007

Sales to new listings ratio: 26%
Sales to active listings ratio: 5%

January 2010
Net Unconditional Sales: 418
New Listings: 1,211
Active Listings: 2,793

Possible mortgage changes

You'll note the government has reigned in the CMHC twice since 2008 after opening the floodgates for loose lending in 2006:

• 0% down, 40 year amortization CMHC insured mortgages were eliminated in October of 2008
• 5% down, 35 year amortization CMHC insured mortgages were "pegged" to the 5-year fixed rate on offer moving forward from April 2010. 

It's possible, though how likely is a wide open debate at this time, the government reigns in the CMHC again in 2011. We've heard speculation from changing the impact condo fees have on the qualification criteria all the way to upping the down-payment requirement and reducing the amortization period from 35 years to 30, perhaps even 25.

We've been having a discussion as to the effects this will have on people's ability to purchase a home in Victoria. Here it is all laid out for you. I used TD's mortgage calculator to generate these graphics. I used $400K as the mortgage amount and the "special offer" 5-year fixed rate to base the calculations on. The only thing I changed was the amortization period.

The total monthly payment changes $130 with a 5-year reduction in amortization and then $330 with a ten year reduction in amortization.

For a little perspective on the impact this may have, let me consult the most recent CAAMP survey on the state of mortgage financing in Canada:

• 16% of Canadians with a mortgage could not manage an extra $300 increase in mortgage payments.
• In addition, 11% of households would run into financial trouble if mortgage rates rose only 1.5%.

In other words, 16% of current Canadian homeowners wouldn't be able to afford a $400K mortgage if amortizations dropped from 35 years to 25 years. Victorians don't have above average household incomes compared to their peers across Canada so we can safely say this kind of mortgage qualification change would be felt here in the first time buyer single family home market.

I think the likeliest change to come will be a reduction in amortization periods from 35 to 30 years. It's a small pill for Canadians to swallow at this time. I also think there's a fair probability that fixed interest rates climb over the calendar year, perhaps even by 1%. If that occurs, it has the combined effect equal to dropping the amortization to 25 years:

Minor tweaks, yet they may impact about 16% of the market. I know I'm reaching a bit with this analysis. But a bit of "what if" context is necessary to broaden the discussion, no?

UPDATE: While not official, it's about as close as it gets until tomorrow. 30 year amortizations and HELOC clamp-down coming. (H/T Reid). I expect a similar time line to last year's changes: no earlier than mid-April for implementation is my guess. Expect a short-term "busy" period in the market between now and then as people scramble to buy now before the rules change. I'd be expecting banks to almost-immediately implement the new rules, although current pre-approval terms will likely be honoured.