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Trading  | June 20, 2018

  • Rising rates? Check.
  • Chinese capital controls and a slump in foreign buyers? Check.
  • Trade war with the US? Check.

Things are not looking good for Canada’s national housing market, which as VCG reports, continued its sluggish performance in the month of May. Despite the warmer weather and usually busy spring selling season, buying activity has been awfully quiet. New mortgage regulations which are now in full swing have stymied fringe buyers, particularly millennials. According to new data from credit bureau TransUnion, new mortgage originations among millennials in Canada fell by 19.5% between the last quarter of 2017 and the first three months of 2018.

That has also been showing up sales data. 

As shown in the chart below, national home sales in Canada plunged by 16% Y/Y for the month of May. This was the worst decline since the great financial crisis in 2008 when home sales dipped 17% that May. Furthermore, total home sales of 50,604 marked the lowest total since May 2011.

Seasonally adjusted home sales edged 0.1% lower on a month over month basis, and 15% on a year over year basis. Or, as Steve Saretsky put it, “either way you slice it not a great month for one of the worlds most resilient housing markets.”

And as sales continue to slide inventory is beginning to build. For sale inventory crept up by 4% year over year, increasing for the first time in three years, and the highest May increase since 2010.

In light of the above, it is not surprising that the average sales price dipped 6% year over year in May, which however was not nearly as bad as April when year over year declines registered a head turning 11% decline.

But more troubling is that when looking at the smoothed out index of the MLS HPI prices showed the smallest possible increase of just 1% year over year in May, the lowest since September 2009. Not only did this mark the 13th consecutive month of decelerating year over year gains per the Canadian Real Estate Association, but at the current rate of slowdown, next month Canada will record the first annual drop in home prices since the global financial crisis.

The silver lining: condos continue to hold up well as buyers tumble down the housing ladder; here prices posted a 13% increase from May 2017.

CREA’s chief economist Gregory Klump shouldered much of the blame on tighter borrowing conditions, “This year’s new stress-test became even more restrictive in May, since the interest rate used to qualify mortgage applications rose early in the month. Movements in the stress test interest rate are beyond the control of policy makers. Further increases in the rate could weigh on home sales activity at a time when Canadian economic growth is facing headwinds from U.S. trade policy frictions.”

Klump’s theory stacks up well with recent data which suggests fringe borrowers are being pushed towards the private lending space, particularly in Ontario. Mortgage originations at private lenders in the Q1 2018 rose to $2.09 billion in Ontario, a 2.95% increase from last year. The market share of private lending went from 5.71% of originations in Q1 2017, to 7.87% in Q1 2018, despite originations at other channels dropping.

In other words, there is a surge in unregulated, non-bank lending, just as the housing bubble pops, precisely what happened the last time there was a full-blown financial crisis.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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