Forecasting with precise accuracy is difficult to do, and nearly impossible to do on a consistent basis. Yet there is no shortage of said forecasts as we head into 2019. Many of these forecasts come from within the Real Estate industry, most with an underlying objective or bias that comes naturally when your job or stock price depends on it. While I will stop short of providing another forecast, I think there are perhaps better indicators to watch moving forward, many of which come from the very regulators who control the policy levers that can move real estate prices on a meaningful level. Recent actions and communication from policy makers including the Bank of Canada, OSFI, and CMHC all suggest a further desire to curb household borrowing and contain the runaway housing market. Here are a few things to watch from policy makers/ regulators in 2019: The Bank of Canada The Bank of Canada has recently taken a step back from the rate hiking path, with market odds suggesting the Bank of Canada could be done for good. While this is certainly possible, it has sent the Canadian dollar into a downwards spiral, dropping about 7% against the US dollar

Home sales activity is generally considered a leading indicator for future price movements, while the overall housing market is considered a leading indicator for future economic growth. Both of which are signalling volatile times ahead. Per recent data from the Canadian Real Estate Association, national home sales fell 12.6% from last year, with total sales falling below the 10 year average for the month of November. Part of the decline can attributed to a strong November 2017 which saw a flood of buyers rushing to enter the housing market before the new mortgage stress test. However, the year to date numbers suggest there is some significant underlying weakness across the nations historically resilient housing market. Year to date sales (January through November) are down 11% from last year, and have fallen below the 10 year average. It is the fewest home sales for this period since 2013. As a result, this is beginning to weigh on home prices. CREA’s HPI home price index has been decelerating rapidly since annual price gains peaked in April 2017. As of November, the index has decelerated to a 2% annual increase. Essentially flat when adjusted for inflation. However, over the past 6 months price

Canada’s mortgage credit growth continued to decelerate in Q3 2018. Per a recent report from RBC, mortgage credit growth decelerated to 3.2%, the weakest pace of growth in 22 years.  The result of banks reigning in loan growth is significant for a number of reasons. Over 90% of new money is created through banks issuing new loans, with a large portion of that growth derived through new mortgage loans. Essentially banks are shrinking the growth of new money supply, which is also called M1 and is considered the most liquid portion of the money supply because it contains currency and assets that can be quickly converted to cash.  As credit growth begins to contract it is effectively reducing aggregate demand, not only for housing but also has a subsequent knock-on effect, slowing new spending and wage growth. This ultimately impacts debt servicing, as wage growth is needed to offset the increasing rise of interest payments. Per RBC, Interest payments rose at their fastest rate (14.8% y/y) since 2007.  This is also important to keep in mind for rent prices. As rents are typically tied to the labour market. Rents rise when the housing boom is in full swing because credit

Per CMHC, Canadians total household debt relative to disposable income slowed to a standstill in Q2 2018. The recent pause comes after years of household debt rising faster than incomes. Unsurprisingly mortgage debt has been the largest contributor, accounting for two-thirds of all outstanding household debt in Canada. While Canadians debt to income ratio has flatlined at 170%, it continued to grow in Vancouver & Toronto. The debt to income ratio climbed to a new high in Vancouver, ballooning to 242%. Vancouver households pushed the mortgage debt-to-income ratio to 177% and the HELOC debt-to-income ratio to 31%. In other words, the debt-to-income ratio tied to real estate in Vancouver sits at an eye watering 208%. With interest rates on the rise this can squeeze households ability to service the debt. This is whats called a debt servicing issue, where the rise in interest payments outpace the rise in incomes. As a result, households could begin to deleverage, which causes credit to contract, consumption to slow, and home prices to drop. While this is certainly not the case in Vancouver at the moment, it appears the Bank of Canada is preparing behind the scenes. In November they announced they would begin purchasing

The sudden shift in the Vancouver housing market has been well documented. In November, home sales across all property types sank to a ten year low for the month. The drop is rather unprecedented considering the current economic backdrop suggests unemployment across Canada has plunged to a 42 year low. And while unemployment may be a lagging indicator, the housing market is certainly not. Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. So too does the yield curve, which continues to flatten. Earlier this week the Canada 2 and 5 year bond yields inverted, the first time since 2007. A flat or inverted yield curve is when short term rates exceed long-term rates. This is often taken as a signal that investors are more optimistic about short-term prospects versus the long term, suggesting a lack of confidence in continued economic growth. This can also impact bank profitability, as banks pay short-term rates on deposits and take in long-term rates on loans. A flat or inverted yield curve, therefore, could lead to negative net interest margins. In simpler terms, this can cause bank lending to further tighter, leaving borrowers high and

The detached housing market remained sluggish in November. In the city of Vancouver detached sales fell 32% year-over-year and trickled in at a ten-year low for the month. Again, to suggest sales are weak would be an understatement. Detached sales were 55% below the 10-year average for the month of November. Sales volumes are incredibly weak with buyers looking for steep discounts and many sellers still unrealistic with their asking prices. However, sellers who need to sell for whatever reason are increasingly having to lower their prices. There is often a rhetoric that “sellers simply won’t sell” if they don’t get their price, and while this may be true the reality is there are still sellers who absolutely need to move on, such as estate sales, divorces or job relocation. These sellers are ultimately setting the benchmark lower. Homeowners who are actually wanting to sell would be wise to create the market, i.e. set an asking price that factors in current conditions and anticipate that prices will move lower, as opposed to slowly cutting prices and constantly chasing the market lower. On a more positive note, new listings actually fell 26% year-over-year, this pushed inventory lower by 6% compared to last

Vancouver’s condo market saw the steepest decline in sales this month. Condo sales in the city dropped a rather concerning 46% year over year in November to a ten year low. While this steep decline may surprise some people, we have been cautioning of this for quite some time. A weakening detached market which has pushed prices noticeably lower has finally trickled down into the condo market. The strength of the detached market was important for a number of reasons. Firstly, most first time buyers are receiving help from Mom & Dad. Per Will Dunning of Mortgage Professionals Canada First time buyers sourced $4 of every $10 of their down payment from the bank of mom in Canada between the years 2015 to 2018. The reality is, mom and dad have lost some equity over the past year or so, at least on paper.  This makes it more difficult to refinance and/or tap home equity lines of credit which are frequently used to help with the down payment for first time buyers (The average HELOC balance in BC sits at $123,797). This may get even more difficult moving forward as OSFI has put pressure on the banks to reign in