{"id":7355,"date":"2022-05-31T09:04:14","date_gmt":"2022-05-31T16:04:14","guid":{"rendered":"https:\/\/www.stevesaretsky.com\/?p=7355"},"modified":"2022-05-31T09:04:14","modified_gmt":"2022-05-31T16:04:14","slug":"appraisers-are-skittish","status":"publish","type":"post","link":"https:\/\/www.stevesaretsky.com\/2022\/05\/news\/appraisers-are-skittish\/","title":{"rendered":"Appraisers are Skittish"},"content":{"rendered":"<p>More monetary tightening is heading our way this week with the Bank of Canada fully expected to hike interest rates another 50bps on Wednesday. Assuming they do indeed hike rates by 50bps on Wednesday, Markets are still pricing in another 125bps of tightening by the end of the year. Of course, much of this depends on the direction of housing. As my friend Ben Rabidoux notes, over the past 5 years, residential housing and consumption accounts for over 80% of Real GDP growth in Canada. In other words, housing and the knock-on effects of this sector ultimately drive growth and a good chunk of inflation. Policy makers are aware of this, and it&#8217;s why they are intentionally targeting a reverse wealth-effect. They want to make you less wealthy so you spend less and drive inflation lower. This is not a conspiracy theory, central bankers are openly discussing it in the media.<\/p>\n<p>So, let&#8217;s turn our attention to housing. I remain of the view that housing is weaker than policy makers are likely aware of. Greater Vancouver home sales are on pace to finish nearly 20% below their long term historical average for the month of May. We are only three months into this housing correction and we already have prices in the suburbs off 10-15% from peak valuations in February. Yes, price declines are much more modest in the inner city, but the pace of change has been rather dramatic. It&#8217;s not just Vancouver though. We are hearing anecdotal stories of aggressive price declines in the suburbs of the GTA. According to Ron Butler, founder of Butler Mortgages, one of the largest broker channels in Canada, appraisal failures have reached about 50%. Bank appraisers are skittish, worried about valuations and their conservative appraisal valuations are just another form of financial tightening. It is rather ironic that appraisals almost never miss in a bull market, despite some crazy numbers being thrown out at the time.<\/p>\n<p>As always, the tightening of credit always comes at the end of the bull market. Remember, the Bank of Canada started their rate hike cycle one month after the housing market officially peaked. Now we have OSFI, the banking regulator, actively pursuing a tightening of home equity lines of credit.\u00a0Household risk is elevated and HELOCs \u201clead to greater and more persistent outstanding principal balances, increasing risk of loss to lenders,\u201d it says. Per the always insightful Rob Mclister, OSFI is likely to target Readvanceable mortgages as they have been growing rather aggressively in recent years (chart below). For the record, historical default rates on HELOC&#8217;s are just 15bps.<\/p>\n<p>Readvanceable mortgages and HELOCs are popular tools for investors, particularly those who enjoy participating in the pre-sale market. Recent data from Urbanation suggests investors account for 70% of all new pre-sale purchases in the GTA. While they don&#8217;t cover the Vancouver market, from what i&#8217;ve seen those numbers would not be far off here. Put all of this together and we have continued tightening of financial conditions, policies which will certainly slow investor appetite and create challenges for developers who rely on these buyers to get projects off the ground. This is an important feedback loop many are not paying attention to.<\/p>\n<h3>Three Things I&#8217;m Watching:<\/h3>\n<p>1. Readvanceable mortgages have seen a lot of growth in recent years. (Source: Bank of Canada)<br \/>\n<img fetchpriority=\"high\" alt='54d63361-508f-d779-ed50-9f711dfe73ca-9497781' class=\"CToWUd a6T\" tabindex=\"0\" src='https:\/\/www.stevesaretsky.com\/wp-content\/uploads\/2022\/05\/54d63361-508f-d779-ed50-9f711dfe73ca-9497781.png' width=\"550\" height=\"430\" \/><\/p>\n<p>2. Tight labour market creating issues for Canadian businesses. Adding to wage pressures and challenges for the Bank of Canada. (Source: Bloomberg)<br \/>\n<a href=\"https:\/\/vancitycondoguide.us10.list-manage.com\/track\/click?u=d9981481bb50009e124e90bda&amp;id=840ec9cdc0&amp;e=73e15761d2\" target=\"_blank\" rel=\"noopener\" data-saferedirecturl=\"https:\/\/www.google.com\/url?q=https:\/\/vancitycondoguide.us10.list-manage.com\/track\/click?u%3Dd9981481bb50009e124e90bda%26id%3D840ec9cdc0%26e%3D73e15761d2&amp;source=gmail&amp;ust=1654035675244000&amp;usg=AOvVaw1fo-LC_js8csavZ6bya55h\"><img alt='e55c1a77-149f-eaea-3a3a-8dafbf107541-5598748' class=\"CToWUd\" src='https:\/\/www.stevesaretsky.com\/wp-content\/uploads\/2022\/05\/e55c1a77-149f-eaea-3a3a-8dafbf107541-5598748.png' width=\"550\" height=\"297\" \/><\/a><\/p>\n<p>3. Alberta is expected to see exceptionally strong growth this year. (source: Bloomberg)<br \/>\n<a href=\"https:\/\/vancitycondoguide.us10.list-manage.com\/track\/click?u=d9981481bb50009e124e90bda&amp;id=0ad614c914&amp;e=73e15761d2\" target=\"_blank\" rel=\"noopener\" data-saferedirecturl=\"https:\/\/www.google.com\/url?q=https:\/\/vancitycondoguide.us10.list-manage.com\/track\/click?u%3Dd9981481bb50009e124e90bda%26id%3D0ad614c914%26e%3D73e15761d2&amp;source=gmail&amp;ust=1654035675244000&amp;usg=AOvVaw2ZlDmXJZj5bcgwrmqMVOwq\"><img alt='5376812d-47f4-1ea6-bdf4-480a927bf19a-1416085' class=\"CToWUd\" src='https:\/\/www.stevesaretsky.com\/wp-content\/uploads\/2022\/05\/5376812d-47f4-1ea6-bdf4-480a927bf19a-1416085.png' width=\"550\" height=\"370\" \/><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>More monetary tightening is heading our way this week with the Bank of Canada fully expected to hike interest rates another 50bps on Wednesday. Assuming they do indeed hike rates by 50bps on Wednesday, Markets are still pricing in another 125bps of tightening by the end of the year. Of course, much of this depends [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":7356,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[70],"tags":[],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Appraisers are Skittish - Steve Saretsky<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.stevesaretsky.com\/2022\/05\/news\/appraisers-are-skittish\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Appraisers are Skittish - Steve Saretsky\" \/>\n<meta property=\"og:description\" content=\"More monetary tightening is heading our way this week with the Bank of Canada fully expected to hike interest rates another 50bps on Wednesday. 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