Air coming out of Canadian house prices

Last month, the Teranet-National Bank National Composite House Price Index showed that Canadian house price gains while moderating across the board are still robust. Combined with recent evidence of a precipitous drop in transaction volume, however, it is clear that air is coming out of the Canadian house price bubble.

Canadian policy makers have been trying to get the housing market in Canada under control for some time, tightening mortgage financing rules last month to help reduce record Canadian household debt levels. Home prices have increased over 85% in Canada over the last decade as record low interest rates, a lack of inventory and a relatively benign economic outlook in the face of crises elsewhere have buoyed the market. House prices in Canada now go for 12 times personal disposable income on average. This is well above historical norms and one reason people believe Canada’s housing market is a bubble. In April, Bank of Canada Governor Mark Carney went on the record saying that he has become wary of the household debt problem as it sits at 151% of Canadians’ disposable income. He regards household debt levels as the number one domestic risk to the Canadian economy.

House price gains are now moderating. But prices are still reaching new records and the breadth of gains is still tremendous. National Bank of Canada wrote last month:

Monthly changes in the Teranet-National Bank National Composite House Price Index™ tend to be greater in May and June each year. The index for May 2012 bears out this tendency, showing Canadian home prices up 1.1% from the previous month and reaching a new historical high for a second month in a row. For the first time in 11 months, none of the 11 metropolitan markets surveyed showed a monthly price decline in May. Prices were up 2.0% in Calgary and 1.4% in Edmonton and Toronto. For the two Alberta markets it was the second consecutive strong monthly gain after seven months of decline. For Toronto it was the fifth consecutive monthly gain. Prices were up 1.1% in Vancouver, 1.0% in Hamilton and Winnipeg, 0.6% in Ottawa-Gatineau and Montreal and 0.4% in Quebec City and Halifax. For Halifax it was the seventh consecutive monthly gain, currently the longest run of monthly rises among the markets covered. Prices in Victoria were flat.

The composite index in May was up 5.8% from a year earlier. It was the sixth month in a row of deceleration in 12-month inflation. Since prices rose 1.2% or more in each month from last May through last July, further deceleration is possible over the next two months. The only market in which 12-month inflation has followed the national composite in decelerating for six straight months is Vancouver (emphasis added).

My takeaway: Vancouver prices had been increasing so much recently that they were driving the national composite index. Now that price gains there are moderating, the national index’s gains are too. More importantly, however, sales volume is dropping precipitously in Vancouver, a sign of extreme levels of market weakness and usually a harbinger of price declines.

National Post reported yesterday:

Sales in Canada’s most expensive housing market continue to plummet with the Greater Vancouver area hitting a 10-year low in June for activity.

The Real Estate Board of Greater Vancouver said there were 2,362 property sales in June, a 27.6% drop from a year earlier and a 17.2% decline from just May.

Overall, there are 18,493 properties for sale in the area through the MLS, a 22% increase from a year ago and a 3.7% jump from May.

[…]

Detached home sales have been the hardest hit. Sales in that segment of the market dropped 37.4% in June from a year ago.

The benchmark price for detached properties increased 3.3% from June, 2011 to $961,600.

Sales of apartment properties dropped 19% in June from a year ago. The benchmark price of an apartment property increased 0.3% from June, 2011 to $376,200.

There may be a connection between what is happening in Vancouver and what is occurring in China as Chinese buyers have been a major factor in buoying the property market in Vancouver. With sales volume dropping, we should consider the possibility that this is driven by a lack of foreign buyers.

Below is a breakout of NBC’s House Price Index by metro area