Last October (2012) I read an article in Canadian Business with the ominous title of “The Crash Begins” which looked at the supposed coming collapse of Canada’s Housing Real Estate market. For reasons unbeknown to me, many financial authors and pundits just love trying to find the next coming calamity that they are sure will wipe out hundreds of billions of dollars in wealth and savings and leave people horrified. Everyone always wants to be the “first” to spot these kinds of terrifying events. I am not sure why but it just seems to be the case.
The collapse of the US housing market stunned a lot of people and definitely was at the epicentre of the financial crisis, but Canadian financial authors seemed perplexed by Canada’s enduring housing real estate market. Constantly looking for any signs of a crack so they can point to impending doom, I thought the comments today from Gord Nixon, CEO of Royal Bank of Canada, interesting.
Royal Bank of Canada CEO Comments On Canada’s Real Estate Market
Gord Nixon indicated that there is a slowdown in certain markets such as Toronto and Vancouver but overall he sees no crisis and he expects Canada’s housing market to remain solid. Speaking at a RBC Conference, Nixon indicated that he expected the bank’s consumer lending growth to slow to mid single-digits but some of that should be offset by commercial loans. He explained that Royal Bank Of Canada has small exposure to the condo market and because of regulations there are controls in place that protect the bank from lenders who are in financial trouble.
Meanwhile he pointed out that a significant decline in the real estate market would impact the broader economy but honestly this is to be expected of any economy should housing take a tumble. He is NOT indicating that Canada’s real estate market is in trouble. In fact, the opposite is true. There is softness with the major metro areas of Toronto and Vancouver but no crisis and much of the softness is contained to the condo market which is a result of so many new condo developments being built in those markets, exceeding demand by a wide margin. However the continuing inflow of immigrants may impact the condo market.
Royal Bank Earnings For 2013
He went on to say that he is confident in Royal Bank’s ability to grow its bottom line and the bank will continue to focus on containing costs. He also plans to focus on Royal Banks underperforming Caribbean operations.
No Canadian Housing Disaster
There is no Canadian Housing Disaster looming. Prices for houses fluctuate constantly at different times of the year and during different years, but Canada’s housing market is far different from the United States both in regulation, requirements and leveraging.
Many of the analysts who continue to harp on the warnings signs point to Vancouver’s housing market which many indicate is the second most unaffordable housing in the world. The median price in Vancouver is 10.6 times greater than the median income according to the company Demographia. But Vancouver has always been an “expensive” city with housing prices far beyond the norm so any pullback in housing prices in Vancouver should be expected. As well reduced housing prices should bring in buyers, helping to eliminate any housing glut.
What Canada’s housing market normally experiences is a cooling effect in housing prices and rarely a true collapse and certainly not a collapse of the US magnitude. Vancouver for example between 1995 to 2001 saw prices fall on average about 20% over a period of 7 years or less than 3% a year. Toronto prices over extended periods of time have also seen a cooling off after big run-ups, but nothing like the US experienced.
Any cooling effect would be noticeable within the reduced mortgage lending amounts from Canada’s big banks. This should impact Canadian Bank earnings but only to a small degree.
Canadian Bank Stocks Worth Buying
Over the past 5 years I have been buying and selling Canadian Bank Stocks. The interesting thing is now that Canada’s housing market looks set to cool and mortgage money may not be in such high demand, investors are back buying Canadian Banks and pushing them into new highs. Today (Jan 8 2013) Bank of Montreal Stock (BMO) set a new 52 week high. Royal Bank of Canada Stock is back up to $60.80 a new 52 week high. Canadian Imperial Bank Of Commerce Stock (CM), Bank Of Nova Scotia Stock (BNS), and National Bank Stock (NA) are all flirting with higher valuations as money keeps finding its way into Canadian Bank stocks. Only Toronto Dominion Bank Stock (TD) is down slightly from its highs as investors felt earnings in the last quarter could have been better.
Meanwhile I am holding naked puts on a number of the Canadian Banks, I have a lot of their stock and buckets of covered calls. While investors keep pushing up Canadian Bank valuations, I am happy to start being exercised out of my Canadian Banking shares and wait for the next pullback in Canada’s Banking sector. It’s sure to come if investors keep worrying about the supposed coming Housing Real Estate Collapse.