All that had to happen to bring all the housing bulls out of hibernation was for existing

Canadian home sales to show a faint pulse in October, rising by 0.9 per cent on the month. Prices also showed some consolidation, which has everyone and their mother calling for a “bottom.” Not so fast.

One month is not a trend, but the year-over-year trajectory is, and what we see is that sales are still down by 4.4 per cent and average prices are deflating by around three per cent — not to mention off by 17 per cent from the cycle bubble peak.

New listings have risen as much as sales have declined over the past 12 months, adding to the nationwide unsold inventory and creating the demand-supply conditions for more price erosion down the road.

There are a range of impediments to a recovery in the Canadian

The household debt bubble

residential real estate market worth noting. It is amazing that Canadians bellyache about debt excesses in the government sector when they really should be looking in their own backyard.

The debt-to-income ratio in the household sector remains near unprecedented territory at nearly 170 per cent, which is about double the total government debt ratio (including the provinces) at around 90 per cent. That is some 20 percentage points above the level that prevailed just before the roof caved in back in the 2008-09 bursting of the housing and credit bubble south of the border.

Even with the aggressive Bank of Canada easing cycle, the plain fact of the matter is that the power of compound interest on this mountain of liabilities has kept the aggregate personal sector debt-interest/income ratio far above historical norms at around 14.5 per cent.

By way of comparison, when interest rates were more than double today’s level in the early 1990s, that ratio was below 13 per cent. And the economy slipped into recession even with that level of interest-expense constraint on spending.

There’s more. Even with the Bank of Canada cutting rates three times this year to 2.25 per cent, the grim reality is that nobody outside the banks borrows at this rate. The average effective interest rate has been stuck near five per cent since February, and that is punishingly high in real terms, considering that inflation is running closer to two per cent.

Part of the problem is that the bond market has been range-bound for the past eight months because 90 per cent of the yields that matter in the country are correlated with the United States Treasury market, which has also been stuck in a range. In other words, when people look to the Bank of Canada, the reality is that it really only controls the very front end of the yield curve.

Balance sheet strains

It’s not just financing costs, but also the availability of credit that is critical for the housing market. On this score, for back-to-back quarters, the Canadian banks on net have tightened their mortgage credit guidelines by more than 27 per cent, which is unprecedented.

The growth in mortgages on chartered bank balance sheets has throttled back to below a four per cent annual rate from double digits just a couple of years ago.

This begs the question as to why. And the answer lies in the sharp deterioration in consumer credit quality. The number of mortgages in arrears and the level of personal insolvencies have both risen by more than 10 per cent in the past year.

The loan-to-income ratio for first-time borrowers this cycle ended up ballooning to a record 367 per cent; close to one in five have a ratio in excess of 450 per cent.

Affordability constraints

While interest rates and home prices have come down, for the

marginal homebuyer , this has not been enough just yet. The nationwide homebuyer affordability index is still nearly 20 per cent more stretched than the historical norm, and this ratio is indeed a mean-reverting indicator.

But there needs to be more both on the interest rate front and home price deflation. This negative cycle for Canadian housing will not end with the affordability ratio as high as it still is today.

A shrinking first-time buyer population

The bottom of the pyramid for any housing market is the first-time buyer cohort , or what is generally referred to as the “20-somethings.” They are at the root and are the ones that enable the trade-up crowd in their 30s and 40s to make the next move to a bigger home.

That process has been clogged up by the bleak job prospects for the 20-to-30-year-old segment of the population, whose employment base has shrunk by more than one per cent in the past year and whose unemployment rate sits at a punishingly high 9.1 per cent level.

It is little wonder that net household formation in this critical segment of the demographic scene has been a no-show.

And with no signs of recovery. Meanwhile, the 65-and-up age cohort has seen job creation of nearly three per cent in the past year, but this is not the group you want to see with the job prospects because they are in the stage of their life when they are downsizing their housing needs.

Tack on a Canadian demographic profile that is rapidly aging, even with the immigration boom of the past decade. The median age of the domestic population is now 40.6 years. Go back to the start of the housing boom in 1980 and the median age was 29.1; in 1990, it was 32.9. We have never been so old.

But what any housing market needs for growth is a young and vibrant workforce. Canada, sadly, has neither. If you want to invest in youthful demographics, think of Mexico, where the median age is closer to 30, which is where Canada was over four decades ago.

  • Home sales and prices edged up in October but still down year over year: CREA
  • Federal budget offers tax relief to a ‘very small’ group of homebuyers

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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