North American Economics

Back in 2005, as the US housing bubble started to pop, Paul Krugman wrote That Hissing Sound.

This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won’t come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

It appears as though the process has now started in Vancouver. From the latest monthly report from the Real Estate Board of Greater Vancouver:

• Residential property sales were 2,853 in May – a 15.5% decline compared to May 2011.
• May sales were the lowest since 2001 and 21.1% below the 10-year May sales average.
• New listings totalled 6,927 in May 2012 – a 16.8% increase compared to May 2011.
• Last month’s new listing total was 15.3% above the 10-year average for listings in May.
• At 17,835, the total number of homes listed for sale increased 21% from this time last year.

Sales have stalled and inventory is rising. To make things worse, yesterday the Canadian government made major changes to mortgage rules.

• Mortgage amortizations were reduced from 30 years to 25.
• Refinancing limit reduced from 85% of home’s value to 80%.
• Gross Debt Service ratio reduced from 44% to 39%.
• Government insured mortgages now limited to homes purchased for under $1,000,000.
• Minimum down payment of 20% for homes priced above $1,000,000.
• Cash-back and stated-income (liar) loans eliminated.
• HELOC maximum reduced from 80% to 65%.

Also, consider that these mortgage rule changes are coming at a time of record low affordability. From RBC’s latest Housing Trends and Affordability report:

Any time the government tightens mortgage rules, it can have a negative effect on home prices. Coming at the same time as the market appears to be turning and with affordability at record lows, it will probably speed up the decline and could turn that hiss into a pop.