Blame Game – What’s The Cause Of Softening Real Estate Sales?

The Royal LePage House Price Survey was released today detailing 2012 Q3 average price and sales results.

Before we get into “blame game” which is well underway, here’s RL’s take on the Calgary real estate market:

National average house price changes do not always reflect the markets of individual cities, which are closely tied to their local economies. Case in point, some $29 billion in energy related investments are now underway in Alberta and Calgary is expected to lead the nation in economic growth through 2013. The city posted healthy price appreciation for both detached bungalows and two-storey homes, as predicted in previous Royal LePage House Price Surveys and Market Survey Forecasts.

“When the underlying economy of a city is sound and growing, house price appreciation is sustained. Calgary has enjoyed solid growth in home values this year. I have also been very pleased with the growth in commercial brokerage transactions seen in our Royal LePage Commercial business in the region.”

You can read the release in its entirety here.

Alright, let’s continue with some interesting quotes from the report which will focus on other Canadian markets:

“A drop in the number of homes trading hands typically precedes a period of softening house prices. Where there is reduced demand, those who want to sell their homes adjust their asking price to stimulate interest.”

“We had predicted this cyclical change early in the year, a natural market reaction after a period of strong expansion. Changes to mortgage regulations, which took effect on July 9th, accelerated the correction.”

I was pleased to see that Royal Lepage was not blaming the softening activity on the mortgage rule changes themselves, only that it brought the “adjustment” forward. However some are trying to blame the slowing sales on the mortgage rule changes instituted in July.

For example:

“There’s been a clear reduction in buyer demand in the three months since the federal government eliminated the availability of a 30-year amortization on government-insured mortgages,” the Real Estate Board of Greater Vancouver president, said in a statement. “This makes homes less affordable for the people of the region.

I can’t decide whether it’s a case of being disingenuous or if it’s outright ignorance.  It’s much easier to blame decelerating sales on new changes & say that’s why market is tanking rather than admit they were too blind to heed the warnings of the looming correction months in advance.

Take a look at the chart below – when did sales actually start dropping?

Some industry associations are already trying to get the government to rollback the newly instituted changes.  Hopefully Mr. Flaherty will be immune to such  lobbying efforts.  There might be some short term pain, but it will pave the way for a much more healthy real estate market down the road.

7 responses to “Blame Game – What’s The Cause Of Softening Real Estate Sales?

  1. If you’re interested in reading more about the blame game and the Vancouver correction underway, take a look at the following non-industry blogpost:

    Conflicting messages. Should the Federal Government back off on their mortgage changes?

  2. Hi MIke
    Great post, but the Royal LePage Calgary report says condo sales are down 2% because of the new mortgage regulations:

    “The decrease in the condo market is a result of the change in Canadian mortgage regulations. The new regulations allow for a maximum amortization period of 25 years, as opposed to the previous maximum of 30 years. This is the fourth change made by the Minister of Finance, and appears to be having the largest change on the overall market thus far.”

    Regardless, I agree with your assessment and observations of the Vancouver market. The exact same thing has happened this year in the Toronto new home market, with year over year sales declines every month. What goes up must eventually go down — government or not.

  3. Hello Myke,

    Thanks for your comment. Do you have a link to the Calgary regional report?

    Calgary Q3 2012 condo sales did not fall -2% y/y. Condo-Apts were up 17%, while Condo-Townhomes were up over 18% in Q3 year-over-year.

    If the report was saying that sales dropped between Q2 and Q3, that’s an automatic given. It happens every year and cannot be attributed to just the rule changes.

    But where are they getting the -2% from?

  4. It amazes me at the lengths some real estate boards go to making excuses for a poorly performing market. Here’s the latest, this time out of Toronto, and it fits nicely with the “blame game” theme:

    The number of transactions was down by 21 per cent in comparison to September 2011. However, it is important to note that there were two fewer working days in September 2012 compared to September 2011. The majority of transactions are entered on working days. On a per working day basis, sales were down by 12.5 per cent year-over-year (Source)

    Technically, they’re right. See my post on Year-over-Year Comparisons and the “micro-seasonality” seen in sales during the week. But I wager you won’t find a past board release saying that sales were up because there were more working days in the month.

  5. On the blame game, here is Scotia Economics view from today’s briefing note:

    Real estate boards have been heaping the full blame on mortgage rule changes, which is an exaggeration in my opinion. Pro-cyclical housing finance regulation that eased too much in 2006-07 and which in my opinion tightened too far since then is playing a role in a large regulatory push that has contributed toward sharply slower debt growth, but there are more important structural factors at work.

    Housing and consumption were bound to cool as I’ve expressed for a long time now because the country is operating at all time structural peaks for virtually every variable in housing and consumer markets stretching from a 70% home ownership rate through record highs in renovation spending, inflation adjusted consumer spending and leverage variables.

    Canada’s insulating strengths are excellent strength in corporate balance sheets including bank capital ratios, and vastly stronger micro-foundations to its mortgage market than is the case in the United States and parts of Europe. As one bit of evidence in support of this point it merits noting that through episodes of harsh price corrections in Toronto and Vancouver over the past quarter century, 90 day +mortgage delinquency rates in each of their provinces barely budged in comparison to the United States.

  6. Mike

    Sorry, I mistyped that — Royal LePage said condo prices, on average, were down 2.1% in Q3.

    Myke

  7. Thanks, Myke.

    I respect Mr. Soper for stating his thoughts despite what other industry members may think.

    Even Phil Soper, chief executive of Royal LePage Real Estate Services Inc., is feeling the heat to promote real estate after his company’s release yesterday suggested a decline is to be expected after a long expansion. “I got a hate email from someone in the industry saying ‘how could you talk about negative things in the housing industry.’ Well it’s a cyclical industry,” says Mr. Soper.

    I believe the industry would have a better reputation if there were more members like him.

    As housing market slows, industry scrambles to paint positive picture
    Financial Post, October 3, 2012

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