Has the housing market stabilised in the United States? The question is hard to answer. Housing prices in the US for instance have maintained a downward slope since 2007. However, there are also signs of recovery where one could see that the delinquency rate for residential mortgages is no longer rising. These mixed signals suggest that one needs to maintain a close watch on the American Housing markets because market signals continue to contradict each other.
The foreclosed homes in the US have dented the housing market big time. With a lackluster economy that refuses to generate jobs for the millions who are now unemployed, the morale of the American consumer is low, thus keeping the housing markets down.
There were some celebrations by speculators since the starts were down by only 1.5% over the last month. Thus a less than expected decline in housing starts prove to be a good news!
The reality remains as unemployment rate remains consistently high over the years, the housing market continues to perform significantly lower than its historical highs.
“A bloated inventory of unsold homes and a weak economy are weighing down on the housing market, whose collapse was the main catalyst of the 2007-2009 recession. A large foreclosure pipeline also is not helping, leaving builders with little incentive to break ground on new projects.”
The latest figures for the US housing starts continue to portray a dismal picture. The housing starts are at historic lows in the US showing a collapse in demand for new housing units.
Many observers are looking at the short term gain in housing starts that shows a six month high in housing starts for June 2011. However, the long-term picture (see the graph below) suggests otherwise.
The housing starts in the United States are not getting a fresh start. The decline that lasted through the recession was reversed only for a short while.
However, a close-up of the past couple of years in the time series suggest that the housing markets in the US are still in uncertain times. The sustained decline in the number of housing starts is reflective of a declining demand in housing, which would result in further decline in the price of housing assets.
While I was working on my doctoral thesis on housing starts in Canada, I was intrigued by the fact that housing starts always served as leading indicators for recessions, and times, for recovery. The following graph from St. Louis Federal Reserve presents an explicit picture of the same phenomenon:
The role of housing was unique in the last recession. Consider the following graph, also from the same source, which shows that unlike previous recessions, the last recession in the United States saw a significant decline in housing prices.
What happened to the middle class in Toronto? University of Toronto's urban/social geographer, David Hulchanski, and colleagues argue that the middle class has disappeared from Toronto in a recently released update on the growing income disparity in the City of Toronto. They argue that the income disparities have reached new heights where wealth and poverty in extremes define the City.
The report also raises alarm about the urban poor, which in Toronto's case appear to be visible minorities and immigrants who do not posses adequate education or job skills required by the Toronto's specialized job market.
I have a hypothesis, which may help locate Toronto’s missing middle-class. I believe demographics and affordable housing are behind the trends that the authors have highlighted in their report. The missing middle-class from Toronto, which comprise to a large extent of immigrants from South Asia and the Asia-Pacific, has perhaps migrated to the outer suburbs in the Durham, Peel, and York regions of the Greater Toronto Area. Furthermore, non-immigrant households with children have also abandoned Toronto in search of affordable housing in the suburbia.
The question to ponder is why financially “successful” immigrants (well-educated professionals who have migrated in the past 20 years to Canada from South Asia and Asia-Pacific) not settle in droves in Toronto after they have gained some economic traction in Canada. And why those immigrants who struggle in the job market stay behind in Toronto?
It appears that the financially “successful” immigrants leave Toronto for demographic reasons. Multi-generational households with children and grandparents need larger homes, which are available in plenty in the outer suburbs and at affordable prices. A 4-bedroom house in a reasonable neighbourhood in Toronto costs in excess of $550,000. The same-size housing unit in a newer neighbourhood in the suburbs costs at least $100,000 less.
Larger household size of the new middle class immigrant households, which cannot be readily fit into the small-sized housing units in the transit accessible, and prohibitively expensive, neighbourhoods in Toronto, may partially explain why the “brown flight” has taken place.
Source: Statistics Canada, 2006 Census
The missing middle class has abandoned Toronto for the outer suburbs where affordable housing and new infrastructure is in plenty. The housing markets in Mississauga and Brampton, one of the fastest growing places in Canada with a combined population of almost a million people, are to a large extent driven by the immigrants from South Asia. Chinese immigrants drive the housing markets in the York Region, which is situated to the north of the City of Toronto.
The following graphic from the report reveals almost non-existence of extreme poverty in the outer suburbs in the greater Toronto Area, which is now home to the missing middle class from Toronto.
The City of Toronto's housing stock is in fact more conducive for smaller-sized households. Unlike the recent immigrants from South Asia, who have larger-sized families, former immigrants and their descendants from Western and Eastern Europe have small-sized families, which could be accommodated with ease in the available housing stock in the City of Toronto.
So what about the immigrants who stay behind? The answer lies in the availability of social services, e.g., shelters for homeless, subsidized housing and other similar facilities, which are more prevalent in Toronto than they are in the outer suburbs. It would make sense for households that rely on state's assistance to stay in Toronto to avail readily available social services.
Thus, Toronto's inner suburbs are now acting as the staging grounds or intermediate neighbourhoods for the new immigrants who save enough while living their to buy a home in the outer suburbs and eventually relocating their to start a new suburban life as the missing middle class of Toronto.
While the University of Toronto's study does not explain if the income polarization is causing further harm by limiting or preventing access to health-care, education, or the like for the low income households, it is still a very important contribution to the on-going debate on how to create a socially just and egalitarian society.
Shrinking middle class makes Toronto a city of socioeconomic extremes - The Globe and Mail
A quick answer is yes. However, a detailed look at the graph below, which presents a month-by-month account of seasonally adjusted housing prices in the major urban markets in Canada, suggests that housing prices have faltered as of April 2010 in three major urban markets, namely Toronto, Calgary, and Edmonton, which have also pushed the overall average housing price in Canada lower in the recent months.
The graph presents seasonally adjusted housing prices for the major urban markets in Canada including Vancouver, Calgary, Edmonton, Saskatoon, Toronto, Montreal (truncated), and the average value for Canada.
The most inflated housing market in Canada is that of Vancouver, which is going strong and is only $30,000 shy of reaching the $700,000 average housing price landmark. Since March 2009, the Vancouver housing market has appreciated by $172,000. This is certainly an unsustainable pace of price appreciation. At $11,450 per month in average price appreciation the housing market in Vancouver has certainly outpaced any growth or gain in wages. Thus, a mild decline in housing prices in Vancouver should be forthcoming unless offshore investors yet again bailout the inflated prices in Vancouver.
The average annual price appreciation in Toronto at $6,700 from February 2009 to March 2010 is certainly much less hyped than the one observed in Vancouver. Housing price losses should therefore be milder in Toronto than in Vancouver.
The Canadian housing markets, as of late, have alarmed many a households and economists in Canada. Unlike the United States, where the housing market struggles even today to dig its way out of the housing slump, the Canadian housing markets started to recover as early as in January 2009. The sudden reversal in housing fortunes in Canada is indeed a concern for the market watchers and seller households searching for home buyers.
The Canadian housing recession was relatively short-lived. The nominal housing prices after rising steadily since 1996 dropped only in 2008. Starting January 2009, the housing prices in Canada started their upward climb, which continued until April 2010. However, the past few months have revealed a dismal state of affairs in the Canadian housing markets where prices have started to decline again. This is happening during summer months when housing markets in Canada usually heat up. It is the time when multiple bids become the norm.
As the housing prices decline month after month, economists and government policy makers wonder if this is going to be a double-dip recession.
I have argued previously that the rise in housing prices in Canada in 2009 could be attributed to constrained supply rather than other market fundamentals (such as interest rates, wages, and unemployment), which have not changed much during the recent months. The support for this argument could be found in the above graph.
In November 2008, there was an abundant supply of resale housing in the market. The sales to listing ratio stood at 0.38, suggesting that there were 2.7 homes listed for each sale. However, this also suggests that more sellers were active in the market than buyers. This resulted in a drop in housing prices, which in turn brought in more buyers to the market.
As the buyers returned to the market, the sales to listing ratio started climbing upwards from a low of 0.38 in November 2008 to 0.64 in June 2009. In a short span of seven months, the market turned from abundant supply to constrained supply. For every home sold in June 2009 there were only 1.5 homes listed in the resale market. The immediate effect of constrained supply in the housing market was a steady rise in housing prices that began in January 2009 and lasted until April 2010.
As the prices climbed swiftly in 2009, they soon reached the point where buyers withdrew from the market. By October 2009, the sales to listing ratio had peaked. Starting November 2009 the sales to listing ratio declined steadily and did not reverse the trend. As more sellers entered the market than buyers, it was only a matter of time that housing prices would also reverse their direction and start declining.
Given the fact that housing markets take time to react to new information, it should come as no surprise that the changes in the demand and supply of new housing influence housing prices with a lag of few months.
