The first time the CMHC released their quarterly housing assessment I mocked them for using out of date information and thought that surely their all-green report for Victoria was because they hadn’t looked at the insanity we were experiencing in the early spring. The second time they again decided that there was nothing out of the ordinary in the Victoria market, and I puzzled at how they could possibly conclude that our market was about as unremarkable as Moncton’s.
Well another report is out, so let’s take a look. It’s the third analyst in as many reports, so let’s see if he’s come to a different conclusion than his predecessors. First of all, the CMHC has for the first time raised their Canada-wide alert level to high, so surely given we are amongst the most expensive markets in the country that should be reflected in our assessment.
Nope, they are sticking to their guns here. Victoria is green damnit!
Never mind that the average single family home costs $100,000 more than it did a year ago (more in the core). Never mind that the entire market had under two months of inventory for six months straight which has never happened before. Never mind we have record low inventory and record high sales. Never mind we have a frenzy of multiple unconditional offers on anything half decent. These all don’t qualify as problematic.
How is it possible to come to this conclusion? Let’s take a closer look at the actual assessment for Victoria. The first issue as I’ve pointed out before is that the data is ancient history. They are looking at second quarter data (to the end of June) and releasing it 4 months later. Wouldn’t it be useful for a framework that purports to identify problematic conditions in the housing market to actually be up to date? As an example, back in June the foreign buyer’s tax was just a glimmer in Christy Clark’s eye, our dear finance minister was months away from sideswiping first time buyers, and Vancouver prices were merrily spiraling into the sky. That was a world away but the CMHC lends their reports the appearance of recency by stamping Fourth Quarter on the front page.
But there has to be more to it than that. After all the CMHC isn’t run by dummies and they do say they are relying on “market intelligence” up to the end of September (they even read this blog). The real reason the CMHC thinks there isn’t yet too much to worry about is because our prices are still in line with fundamentals.
The framework indicates weak evidence of overvaluation as the level of observed prices was in line with fundamentals, despite the presence of overheating and price acceleration
And unfortunately that is where the report is really lacking detail. They say the fundamentals are measured based on things like job creation, income growth, and low interest rates, and conclude that prices are OK based on those measures. Unfortunately they only provide one useless chart of a few years of disposable income vs prices.
In order to investigate further, we need to look at the income data they are looking at, which is from the Conference Board of Canada. Disturbingly the data source has no information about how it was collected and goes from 1987 to 2020 without any indication of whether the data points are measurements, estimates, or projections. Ohwell, $116 later I have the data and here is how it compares to Victoria house prices.
So price to income is at an all time high in Victoria and has tripled in 30 years. Clearly there is no indication from there that we are within any kind of historical norm. However, when we consider that interest rates have dropped in that time, the picture becomes a bit different.
Now we see where the CMHC might be coming from. Despite the runup in prices over the decades, the actual mortgage payment as a percentage of disposable income has been moving between 73% (1987) and 118% (2007). The current value of 96% is indeed not outside of historical norms. So as I have said many many times before, affordability is the only measure of the market that exhibits some kind of recognizable pattern in Victoria.
Don’t get me wrong. The market conditions are definitely problematic and if they don’t let up prices will quickly appreciate to beyond historical norms. Victoria should not be marked green, and I suspect once their data catches up with reality (in another 3 months) the CMHC will upgrade us to yellow as well. But because of our long stagnant period where prices went nowhere while the rest of Canada appreciated, we had some slack in the market to take up.
What do you think? Is the CMHC right to assess the Victoria market as not overly problematic based on affordability or is it now me that is out to lunch?