Housing starts flatline; Remax discusses past real estate performance; CREA updates 2011 housing forecast; China raises interest rates

Housing starts flatline

CMHC released their January 2011 housing starts data today.  Seasonally adjusted housing starts were virtually unchanged from December 2010 numbers, but down significantly from both the 12 month average and last January’s numbers.

From BMO:

It’s worth remembering that net household formation is running at 175K and has been stable for much of the past decade.  At the same time, housing starts have averaged over 200K.  The excess inventory has been absorbed by a steady rise in home ownership rate, itself encouraged by loosening lending standards and a new societal norms and stigmas surrounding renting and owning.

With ownership rates now above 70%, an all-time high, and with lending standards set to reduce the buyer pool, it’s very difficult to see how housing starts will be sustained anywhere near the 200K average of the past decade….let alone even the 175K supported by demographics.  Though most economists are predicting starts to average 180K this year, I’d be more inclined to predict housing starts in the 160-170K range, but with lots of volatility.  The implications on the construction sector, which employs 1.3 million, should be clear.

“Past performance is not predictive of future performance” evidently lost on RE/MAX

It’s interesting that industry regulations force mutual funds to make the above statement any time they discuss their past performance, and rightfully so.  Human psychology is such that we tend to view trends as stable, projecting them into the indefinite future.  It explains why the average mutual fund investor achieves several percentage points below the returns achieved by the average mutual fund, since they are so prone to chasing the latest hot fad.  The trend reversion that typically follows several years of out-sized returns catches most investors off guard.  They promptly withdraw what money they have left and go looking for the next ‘hot’ fad.

Industry regulators recognize this inherent flaw in our psyche and demand that as mutual fund companies compete for our money, they also must remind us of the predictive power of past returns:  zero!

This same ethic evidently does not govern other purveyors of ‘investments’….namely the real estate industry.

To wit:

‘Wild card’ props up Canadian housing markets over past decade– RE/MAX Canada

Average price increases from 2000 to 2010 ranged from an annually compounded rate of return of 4.82 per cent in London-St. Thomas to a high of 9.56 per cent in Regina. The national average was 6.82 per cent.

Of course no mention of the associated rise in incomes and rents, which significantly underperformed.  Who wants to talk about fundamentals when most new home buyers will make their purchase based on momentum alone?

“Housing markets have been remarkably hearty over the past decade and the stage is set for a better than expected 2011.  Inventory has proven to be an effective form of market self-regulation, providing both an ideal climate for price escalation and a shelter in periods of softer home-buying activity.  As a number of city centres are already reporting stronger than usual activity out of the gate, it’s clear supply will continue to be the wild card in 2011.”

An era of generally declining interest rates, loosening lending standards, and higher ownership rates will do that to housing.

As far as ‘stronger than usual (sales) activity out of the gate’ goes, I’m not sure which centres they are looking at.  If we look back at the January sales numbers, all major markets we looked at reported lower sales than last year.  Barring a strong bounce in some smaller centres, I think I’d be inclined to call that a straight-faced lie.

“There’s no question that price growth has been solid over the past decade, but history tells us that exceptional growth supported by sound fundamentals is healthy.  Concern is only raised when the underpinnings are insufficient to justify the trajectory.  By all accounts, Canada’s real estate market measures up to conventional wisdom and the faith in homeownership has not been misplaced.”

“By all accounts” might be a bit of a stretch!  Caveat emptor!

CREA updates 2011 forecast

The blitz is on!  CREA is joining the real estate pump-fest by updating their 2011 forecast.

“Home buyers recognize that low mortgage interest rates represent a once in a lifetime opportunity.”

The problem is that home buyers are not blessed by information asymmetry. Buyers are also fully aware of this, and prices have reflected this.  Despite the record low interest rates, affordability has fallen or flat-lined in most markets, negating the impacts of low mortgage rates.

“Recent additional changes to mortgage regulations will further ensure that buyers don’t buy more home than they can afford when interest rates inevitably rise,” said Klump. “The announcement of the new changes to mortgage regulations will likely bring forward some sales into the first quarter that would have otherwise occurred later in the year, particularly in some of Canada’s more expensive housing markets. This is expected to produce a milder version of the volatility in sales activity that we saw last year which resulted from additional transitory factors.”

I fully agree with this statement, but I’m not convinced that buyer activity will rise, then fall, then rise once again to pace the level of demand seen before the new rule changes.  There are significant unanswered questions surrounding these rule changes, and I wouldn’t be too quick to dismiss them as insignificant.

“The national average home price is forecast to rise 1.3 per cent in 2011 and 2012, to $343,300 and $347,900 respectively.”

Sustaining house prices requires at these levels and with the current level of housing starts requires two things: a fairly constant influx of new buyers and readily available credit great enough to fund the average purchase.  With ownership rates at historic highs and with rising rates and tightening standards providing a one-two punch against credit availability, this forecast is highly unlikely.  I’d suspect the losses in value will be significantly greater than this.

China once again raises rates

China is once again taking steps to tame inflation by raising interest rates another quarter of a percent.  The result was predictable:

“Fearing tighter monetary policy will dampen China’s demand, commodity markets fell after the central bank announcement. Three-month copper fell below US$10,000 a tonne and U.S. crude futures prices dropped.”

I maintain that the greatest risk to the Canadian economy and the TSX is not a renewed downturn in the US (though that would certainly hurt too), but rather a hard landing in China.

Taking it one step further, Jim Chanos, in an interview with the Financial Times, has once again suggested that China is the greatest threat to the entire global economic recovery, and is a massive bubble set to burst.

For those interested, VREAA did a nice job of transcribing some of the pertinent quotes.



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3 Responses to Housing starts flatline; Remax discusses past real estate performance; CREA updates 2011 housing forecast; China raises interest rates

  1. jesse says:

    To give some perspective, to have price increases limited to basically zero, months of inventory (MOI) will need to average around 6 in major city centres. The real killer for prices happens in the off months, not in the spring.

  2. Jordan says:

    I seem to recall that CREA changed their 2010 forecast several times last year. (Or maybe that was TREB…)

  3. triplenet says:

    Past performance, future performance or non performance.
    If you understand that change is a constant especially in business then you’ll know why projections, pro-formas, valuations and both long term and short term plans are constantly amended. Almost daily.
    Unless of course you are a card carrying union member or a bureaucrat where nothing changes except your wage increases.
    ……..we were mid-term planning on stable oil prices until the Egyptians got restless. Got any ideas on the myriad of changes that has initiated?
    Come out from under that rock…..silly boy! Or be a non-performer.

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