Canadian Housing

Monday 08/03/15

     Turn on HGTV and you are bound to see some shows about home renovation. Pay close attention to the hosts and you might even detect a bit of an accent, eh. Currently three out of four HGTV Canada shows are picked up in the United States. Many of these shows are about home flipping or spending a lot of money to increase the value of your home. It’s strange watching these shows because it feels like traveling back in time to the U.S. before 2008. This week we will take a look at the red hot housing market in the frozen north.
    When U.S. home prices collapsed after 2008, the Canadian housing market barely even blinked. In places like Toronto, home prices have been climbing at an extraordinary pace as shown in figure 1. Homes in Toronto are regularly selling much higher than the original asking price. Toronto is a desirable place to live for Canadians who want the urban experience, but costs are becoming prohibitive for many. Figure 2 shows the change in median hourly wages since 2007 compared to the change in home prices. This kind of disconnect was what many skeptics of the U.S. housing bubble pointed to as well. Toronto has a thriving economy at the moment, but there could be trouble in the future for Toronto and Canada as a whole.
    Toronto is the business and financial capital as well as the largest city in Canada. Toronto is located in the province of Ontario which is the most populous province of Canada. Ontario has the largest economy of all the provinces with Quebec being the next largest and yet only half the GDP of Ontario. Ontario’s largest export is automobiles followed by gold. Figure 3 shows the GLD ETF which tracks the price of gold, this has been putting pressure on gold miners around the world. Many businesses whose primary operations are outside of Ontario are headquartered in Toronto in order to be closer to the capital markets. This means that Toronto’s service oriented economy could be hurt by events outside of Toronto.
    Canada’s GDP has been contracting for 5 consecutive months, one more month of contraction would mean that they are in a recession. Much of this decline can be linked to a drop in commodities prices. Oil, gold, metals, lumber, agricultural products, you name it—they have all been falling and most are at multi-year lows. Much of Canada’s oil is more expensive to extract and transport than oil in other parts of the world, which means that the longer that prices stay lower the more job losses will occur. While the oil slump has yet to hurt the Toronto real estate market, its impact can already be seen in Canada’s largest oil producing province, Alberta.
    The housing market had been booming in Calgary, Alberta’s largest city. However, since oil prices have fallen the economy in Calgary has been hurting. Unemployment rates are starting to rise with more job cuts expected in the near future. Home prices have stalled and are even starting to fall in recent months. There will certainly be an uptick in foreclosures, but it will take time to manifest. Oil companies don’t layoff employees until they are confident that lower prices are here to stay, mortgage holders don’t miss mortgage payments until they have run out of savings and banks don’t foreclose until borrowers have missed several payments. Yet optimism is still high in Calgary, according to the Calgary real estate board (CREB) president Corinne Lyall,

“We’ve seen less concern from consumers lately…One of the main reasons is that we haven’t seen the worst case scenarios play out in the energy and housing sectors…Consumers who were waiting for wide-spread price declines have been surprised to see that it just hasn’t happened yet, and so they’ve decided to take advantage of the improved selection and lower lending rates”

    Figure 4 shows the changes in home prices for Calgary and figure 5 shows the year-over-year decline in June sales. Calgary could be the canary in the coal mine for Canada’s natural resource dependent economy.
    The Canadian dollar has been steadily losing value relative to the U.S. dollar over the last several years (see figure 6) and it will most likely continue. I suspect that oil will remain lower for longer (read this for my take on oil). Slowing growth in China, increased oil production from technological innovations and politics all spell trouble for Canadian oil and as a result the Canadian economy. A Canadian housing decline will not create as much global chaos as the U.S. housing crash did, but it is still the United States’ largest trading partner and could have an impact on trade and various other industries.