Housing affordability improves
RBC released their quarterly housing affordability publication today. The data was from Q3 of this year, representing the July to September period. Not surprisingly given the drop in bond yields and fixed mortgage rates and a slight decline in year-over-year home prices, the housing affordability measure actually improved for the first time since Q2 2009.
Not much to get too excited about yet. Affordability is still well below levels that dominated the past 15 years, and that is with record low interest rates to boot.
Speaking of those record low interest rates, it may be worth noting that it will be difficult to repeat this reading of increasing affordability unless home prices are moving downwards. The July to September period of this year was marked by a declining 5 year bond yield. The big banks responded by cutting their benchmark fixed interest rates, upon which the affordability calculations are made. That trend is now reversing as you can see in the recent movement in the 5 year bond yields:
And as expected, banks are once again hiking their fixed rates. With interest rates rising of late, it will mean that either incomes must rise or house prices must fall to get a second straight improvement in housing affordability.
Also of note, the national average affordability continues to mask some ridiculous affordability readings:
It doesn’t bode well for the future direction of real estate in a city when people spend 50 to 60% of their income just to carry the cost of a home. The real issue is being masked by extremely low interest rates. We’ll see how things change when interest rates rise (inflation) or when incomes fall and unemployment rises (deflation and austerity). Either way…..it’s not good.
Banks still not touching residential real estate
Today Stats Canada released their updated residential mortgage credit figures.
Two particularly noteworthy trends are the decrease in residential mortgages held by the banks (they know when to drop a bad investment) and the massive 45% increase in mortgage backed securities between 2008 and 2009. MBSs now account for nearly 30% of the entire outstanding mortgage market and virtually 100% of the new growth in mortgages.
It’s not a hard sell to investors: Make a slight premium over Government of Canada bonds, yet still enjoy the full backing of the Government on any potential default. It’s a deal made in heaven…..unless you’re the taxpayer on the hook.
Trade deficit nears record
Canada’s current account deficit widened even more than expected in Q3 to a record shortfall of $17.5 billion (or $70.1 bln annualized) from a revised $13 billion ($51.9 bln a.r.) gap in the prior quarter.
As noted by RBC:
“The overall current account gap represents about 4.3% of GDP….That’s up from 3.2% in Q2, and 2009’s result of 2.8%. Putting that in perspective, the U.S. current account deficit for all of last year was 2.7% of GDP, but likely widened to around 3.5% of GDP in Q3…In other words, one of Canada’s twin deficits is now actually worse than its U.S. counterpart and, at over 4% of GDP, is in the problem zone identified by U.S. Treasury. It’s also close to the record gap of 5.2% of GDP in 1975Q1.”
“Canada suddenly finds its broadest trade deficit in the company of countries that have typically been cited as extravagant over‐spenders/under‐savers.While this may prove to be a passing phase, it is an early warning that the country may be living beyond its means.”