Market Analysis Department Québec Federation of Real Estate Boards May 2010

Transcription

1 Market Analysis Department Québec Federation of Real Estate Boards May 2010 This text is based on the highlights of the report Population Projections for Québec and Regions, Edition 2009, published by the Institut de la statistique du Québec (ISQ) in July 2009, and analyzes the expected impacts on the resale housing market. In this document, we have opted to concentrate on the period up to 2031.

2 Table of contents Introduction... 1 The Situation in the US... 2 The Situation in Québec... 5 Prices have not dropped in Québec... 7 Profile and Breakdown of Foreclosures Across Québec... 8 Conclusion...11 Much ado about nothing Foreclosures in Technical Details about the Foreclosure Process In Québec In the United States References Notes List of charts Chart 1 - Delinquent Mortgages (more than 90 days)... 2 Chart 2 - New Foreclosures in the U.S Chart 3 - S&P/Case-Shiller 20-City Composite Home Price Index in the U.S (2000 = 100)... 4 Chart 4 - Deliquent Mortgages (more than 90 days)... 5 Chart 5 - Foreclosure Trends in Québec... 6 Chart 6 - Price Trends (2000 = 100)... 7 Chart 7 - Foreclosures by CMA... 8 List of tables Table 1 - Foreclosure Trends by Metropolitan Area... 9 Table 2 - Foreclosure Trends by Administrative Area... 10

3 Taking Stock of Foreclosures in the United States and Québec 1 Introduction In the United States, the meltdown of subprime mortgages and the ensuing financial crisis in had several major consequences. One of the most obvious was the clear increase in the number of foreclosures in the past two years, a topic that has been in the news since then. These foreclosures have caused an upheaval in the U.S. resale market, resulting in dramatically lower property values. Even if subprime mortgages are few and far between in Canada, thanks to more cautious lending practices and better rules and regulations, many were afraid that such a situation would also occur in Québec. To wit, the number of repossessed properties has been on the rise in Québec for the past two years. This analysis looks at foreclosures in the U.S. and Québec, as well as their impact on the resale market, and will allow us to clearly differentiate between the U.S. and Québec situation. An in-depth review of mortgage arrears data, foreclosures and price patterns has clearly established that these concerns were unfounded. Statistics for Québec show that foreclosures have in no way impacted the resale market and no residential price decreases were observed during the recession.

4 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Taking Stock of Foreclosures in the United States and Québec 2 The Situation in the U.S. The U.S. was the most deeply affected by foreclosures. Even before analyzing foreclosure trends however, it is important to consult an important indicator, the percentage of delinquent mortgages, as it often heralds the deterioration of the overall mortgage picture. This indicator started spiking as early as 2007, and this trend has gotten increasingly worse every quarter since then (see Chart No. 1). At the end of 2009, 4.6% of all mortgage holders in the U.S. had been in default for more than 90 days. This percentage was even greater in subprime mortgages, where 13.6% of overall loans were delinquent. Chart 1 Delinquent Mortgages (more than 90 days) 14% 12% 10% 8% United States - all loans United States - prime loans United States - subprime loans Canada - all loans 6% 4% 2% 0% Sources: Mortgage Bankers Association, Canadian Bankers Association, data compiled by FCIQ Another secondary indicator exists, called severely delinquent mortgages, which combines mortgages that have been in default for more than 90 days with mortgages in the process of being foreclosed. In the fourth quarter of 2009, close to 10% of mortgages were considered to be severely delinquent 1. This percentage represents close to 4.3 million properties 2 in the United States. Subprime mortgages were obviously the main delinquent category, with a severely delinquent ratio of 15% 3. Ultimately, we estimate that more than 2 out of 5 properties that have been in default for more than 90 days are currently in a foreclosure process.

5 Taking Stock of Foreclosures in the United States and Québec 3 The increase in the number of repossessed properties in the United States became noticeable in early After the first quarter of 2006, nine quarterly increases followed suit (see Chart No. 2). While statistics were more encouraging during the second half of 2008, the number of repossessed properties increased again at the start of According to RealtyTrac 4, foreclosure activity 5 during the last quarter of 2009 dropped by 7% when compared to the previous quarter, but increased by 18% on an annual basis (compared to the fourth quarter of 2008). There are no seasonal effects in the foreclosure process, which allows us to draw a comparison between two consecutive quarters. Across the country, one property out of 147 was affected by foreclosure during the last three months of At the end of 2009, 2,824,674 properties in the U.S. were involved in a foreclosure process, which represents an increase of 21% over 2008, and 120% over In 2009, foreclosures affected one property out of 45. At the end of 2009, 2,824,674 properties in the U.S. were involved in a foreclosure process, which represents an increase of 21% over 2008, and 120% over In 2009, foreclosures affected one property out of California, Florida, Arizona and Illinois 7, which combined had 1.4 million properties that had been or were in the process of being foreclosed, were involved in more than 50% of foreclosures in the United States 8, while these four states account for 23% of the total inventory of properties in the United States. Chart 2 New Foreclosures in the U.S. 700, , , , , , ,000 0 Source: Mortgage Bankers Association, compiled by FCIQ

6 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Home Price Index Taking Stock of Foreclosures in the United States and Québec 4 The high number of foreclosures caused a sharp drop in residential home prices, which led to a vicious circle that was amplified every quarter. The S&P/Case-Shiller 20-City Composite Home Price Index is a value-weighted average of single-family home resale prices in the 20 largest metropolitan areas in the U.S. After a period of sharp growth in the early 2000s, prices underwent a freefall starting in 2007 (see Chart No. 3). Since January 2009, annual decreases have become less pronounced, with the index dropping by 3% in December 2009 compared to December 2008, and by 21% compared to December Prices had dropped so much that in December 2009, their levels were comparable to those seen in September Prices had dropped so much that in December 2009, their levels were comparable to those seen in September Chart 3 S&P/Case-Shiller 20-City Composite Home Price Index in the U.S (2000 = 100) July Spetember 2003 December April Source: S&P/Case-Shiller Index

7 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Taking Stock of Foreclosures in the United States and Québec 5 The Situation in Québec Québec has also seen an increase in home owners experiencing difficulties in making their mortgage payments. The first indicator of this trend has been the increase in delinquent mortgages since 2006, and more specifically since the third quarter of 2008 (see Chart No. 4). In the fourth quarter of 2009, 0.38% of mortgages in Québec, and 0.45% of mortgages in Canada, had payments that were in default for more than 90 days. However, these figures are very far from the 4.6% recorded in the United States during the same period. It must be noted that subprime mortgages are much rarer in Canada, where mortgage lending practices have always been more cautious and conservative 9. In April 2010, Canada tightened some of its eligibility criteria to qualify for mortgages in order to further decrease the risk of delinquent loans. In the fourth quarter of 2009, 0.38% of mortgages in Québec, and 0.45% of mortgages in Canada, had payments that were in default for more than 90 days. However, these figures are very far from the 4.6% recorded in the United States during the same period. Chart 4 Deliquent Mortgages (more than 90 days) 0.50% 0.45% 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% Canada - all loans Québec; Tous les prêts Source: Canadian Bankers Association While the proportion of delinquent mortgages in Québec and Canada has increased in the past two years, it is still lower than it was in 2001, when the real estate market was booming in both Québec and Canada. With interest rates that reached historically low levels during the recession, many people with variable-rate mortgages or mortgages that were up for renewal were able to take advantage of reduced monthly payments. Others took the opportunity to renegotiate the terms of their mortgage. This could result in a decrease in delinquent mortgage numbers across the country and the province.

8 Number of foreclosures Taking Stock of Foreclosures in the United States and Québec 6 In terms of foreclosures, it is true that the number of seizures has increased since the end of 2007 (see Chart No. 5). In Québec, the peak was reached in the third quarter of 2009, with 643 foreclosures 10. When comparing the number of foreclosures in the fourth quarter of 2009 with the previous quarter, we can observe a small decrease; however, when comparing it to the same period in 2008 we observe an increase of 1.6%, and an increase of 50.1% when compared to the fourth quarter of The 639 foreclosures recorded during the last three months of 2009 only affected one property out of every 2,874. Proportionally speaking, while the increase in the number of foreclosures remains high when compared to 2007, the number of properties affected is still very low when contrasted with the total pool of approximately two million properties owned in Québec. Chart 5 Foreclosure Trends in Québec Q Q Q Q Q Q Q Q Q Q Q Q Source: JLR recherche immobilière, compiled by FCIQ Contrary to the United States, we can state that, even if the increase in foreclosures is very high on a percentage basis since 2007, their overall number has remained too small to have affected the resale market. The impact was much greater in the United States, leading to a jump in the number of properties for sale, and sharp price decreases.

9 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Property price index Taking Stock of Foreclosures in the United States and Québec 7 Prices have not dropped in Québec Québec s real estate market remained strong during the financial crisis. While property prices in the U.S. lost close to half of their value, those of Québec properties continued to increase across all metropolitan areas of the province. In the fourth quarter of 2009, the median price of single-family homes reached $200,000, an 8% increase compared to the same period the year before. While prices weathered the storm, it would be wrong to think that Québec was not affected by the recession, as sales decreased significantly in the fourth quarter of 2008 and the first quarter of While property prices in the U.S. lost close to half of their value, those of Québec properties continued to increase across all metropolitan areas of the province. Prices were not as resilient in the rest of Canada, specifically in the major metropolitan centres of Vancouver, Calgary and Toronto. Average residential prices decreased in all four quarters of 2008 in Canada (see Chart No. 6). However, immediately at the start of 2009, and contrary to the U.S., prices in Canada bounced back, making up the ground lost in 2008 and setting the stage for new record highs at the end of The sustained increase in property prices lessens the risk of foreclosures. Owners who have missed payments can elect to sell their properties without being in a negative equity situation, i.e. where prices are at least equal to the outstanding balance of the mortgage. Foreclosure can then be avoided if delinquent owners succeed in selling their property and reimburse their mortgages within the grace period set by their financial institution. 225 Chart 6 Price Trends (2000 = 100) Canada Québec United States 75 Sources: S&P/Case-Shiller Index, ACI and FCIQ by Centris

10 Number of foreclosures Taking Stock of Foreclosures in the United States and Québec 8 While Québec is subject to the same mortgage requirements as the rest of Canada, questions can be raised as to the reason why prices in the province remained firm during the recession. The most likely explanation is that home prices in Québec are still the most affordable when compared to real estate markets in other provinces and major Canadian cities. According to Desjardins Affordability Index, properties were less expensive in Québec compared to the rest of the country before the recession shook things up. In 2007, the index of Québec s six metropolitan areas showed that properties there were much more affordable than elsewhere in Canada, specifically Vancouver, Toronto and Calgary. Profile and Breakdown of Foreclosures Across Québec Foreclosures typically affect properties that have been recently acquired by their owner. In most cases, delinquent mortgage owners purchased their property within three years of the foreclosure. In fact, close to three out of 10 owners became involved in a foreclosure less than two years after having bought their property. In less than a quarter of cases, owners had to remit their keys more than four years after the purchase. While foreclosure figures have been on the rise during the past three years in all of the province s census metropolitan areas (CMA), foreclosures are not distributed evenly across Québec (see Chart No. 7). In 2009, Montréal was the area In most cases, delinquent mortgage owners purchased their property within three years of the foreclosure. In fact, close to three out of 10 owners became involved in a foreclosure less than two years after having bought their property. most affected in terms of total numbers among Québec s six metropolitan areas. It tallied 40% of all foreclosures. However, its pool of properties owned amounted to 43% of the provincial market, which gives it a ratio of one property out of 845 being foreclosed. Québec City is the CMA with the lowest number of foreclosures per properties owned, with a ratio of one property out of 2,659. Chart 7 Foreclosures by CMA 1,200 1, Montréal Gatineau Québec Sherbrooke Saguenay Trois-Rivières Non-CMA Source: JLR recherche immobilière, compiled by FCIQ

11 Taking Stock of Foreclosures in the United States and Québec 9 The strongest concentrations of foreclosures are found in the Gatineau region and in non-cma sectors 11, where one owner out of 505 and one out of 691, respectively, gave back their keys to their lenders in 2009 (see Table 1 and 2) While these ratios are the highest in Québec, they remain nonetheless much lower than those in the U.S., where one owner out of 45 was affected in Table 1 - Foreclosure Trends by Metropolitan Area Foreclosures in 2009 Properties owned (2009)* Index Number Relative Importance Ratio (1/x) Number Relative Importance Province = 100 Province 2, % 845 1,997, % 100 Montréal CMA % , % 93 Gatineau CMA % , % 168 Québec CMA % 2, , % 32 Saguenay CMA % 2,001 42, % 42 Sherbrooke CMA % , % 108 Trois-Rivières CMA % 1,428 38, % 59 Non-CMA 1, % , % 122 Foreclosures in 2008 Properties owned (2008)* Index Number Relative Importance Ratio (1/x) Number Relative Importance Province = 100 Province Montréal CMA Gatineau CMA Québec CMA Saguenay CMA Sherbrooke CMA Trois-Rivières CMA Non-CMA 2, % 870 1,972, % % , % % , % % 2, , % % 1,226 38, % % 1,843 46, % % 1,434 41, % 56 1, % , % 121 Foreclosures in 2007 Properties owned (2007)* Index Number Relative Importance Ratio (1/x) Number Relative Importance Province = 100 Province Montréal CMA Gatineau CMA Québec CMA Saguenay CMA Sherbrooke CMA Trois-Rivières CMA Non-CMA 1, % 1,245 1,946, % % 1, , % % , % % 2, , % % 1,561 37, % % 1,457 45, % % 3,425 41, % % , % 137 Sources: JLR recherche immobilière, Statistics Canada 2006 Community Profiles, Housing Now CMHC, compiled by FCIQ

12 Taking Stock of Foreclosures in the United States and Québec 10 Table 2 - Foreclosure Trends by Administrative Area Number of Foreclosures, variation 2008 variation 2007 Abitibi-Témiscamingue 31-28% 43-17% 52 Bas-Saint-Laurent 51-6% 54 6% 51 Capitale-Nationale 90 7% 84 9% 77 Centre-du-Québec 75 34% 56 0% 56 Chaudière-Appalaches 61-39% % 72 Côte-Nord 27-10% 30 0% 30 Estrie % 70-7% 75 Gaspésie Îles-de-la-Madeleine 9-57% 21 40% 15 Lanaudière % % 185 Laurentides 362 4% % 182 Laval % 86 46% 59 Mauricie 72-1% 73 70% 43 Montérégie 500 0% % 298 Montréal 231-5% % 146 Nord-du-Québec 14-18% 17 6% 16 Outaouais 196-2% % 145 Saguenay Lac-Saint-Jean 89 29% 69 11% 62 Province of Québec 2,364 4% 2,267 45% 1,564 Sources: JLR recherche immobilière, Statistics Canada 2006 Community Profiles, compiled by FCIQ

13 Taking Stock of Foreclosures in the United States and Québec 11 Conclusion Much ado about nothing Our analysis has established that foreclosures have been much more prevalent in the United States than in Canada and Québec, and their impact has also been felt much more deeply. While foreclosures and lower prices led to a vicious downward spiral south of the border, this did not happen in Québec, as the impact of foreclosures was too minimal to significantly affect the resale market. In addition, no price decreases have been observed. Moreover, the slowdown in sales which took place in Canada from fall 2008 to spring 2009 was mostly the result of the overall recession. Job losses and lower consumer confidence scared off some buyers (the situation in the U.S. served mostly to affect Canadian and Québecer consumer confidence), who instead chose to put off buying a house to a later date. The resale market was actually able to recover quickly, thanks to measures implemented by the Government of Canada to help buttress the economy against the recession, and the Bank of Canada s aggressive lowering of interest rates. Real estate prices even reached new heights. Foreclosures in 2010 While the S&P/Case-Shiller 20-City Composite Home Price Index shows that the prices of homes in the 20 largest metropolitan areas of the United States have increased since the low point of April 2009, the growth curve is rather tepid. Owners will have to be patient before seeing prices climb back to their pre-recession levels. The most recent statistics are not very encouraging, and many economists expect the number of foreclosures to continue growing in 2010 in the U.S., as interest rates are slated to rise starting this summer 12. The era of historically low interest rates is coming to an end, and its primary impact will be the increased monthly payments that new mortgage holders will have to pay beginning in the summer of Owners with a variable-rate rate or short term mortgage will also feel the effects of the interest rate hike. We will therefore have to monitor the impact that interest rate hikes will have on the capacity of owners to pay down their mortgages. This impact should be low however in Canada, according to the Canadian Association of Accredited Mortgage Professionals 13. In relation to the inevitable rise in interest rates, the Government of Canada has announced measures to restrict eligibility to mortgages, which became effective as of April The objective of one of these new measures is to provide buyers with an additional buffer in light of the expected rate increases. With a labour market that is showing signs of improvement, there is nothing that leads us to believe that foreclosures will increase markedly in Québec in The Québec real estate market therefore needs not be concerned with a substantial rise in properties on the market subsequent to a higher level of foreclosures. On the contrary, the trend is quite the opposite at this time, with a marked decrease in the number of listings and sustained price increases everywhere in Québec since the fall of 2009.

14 Taking Stock of Foreclosures in the United States and Québec 12 Technical Details about the Foreclosure Process In Québec In Québec, a mortgage is considered in default as soon as the borrower (debtor) misses a payment. The creditor, wishing to stave off recurring late payments, can then issue a notice of exercise to the debtor detailing: 1) the property that shall be seized within 60 days 14 if all outstanding amounts are not paid in full and 2) the terms and conditions of the foreclosure process. The debtor has several options to interrupt the foreclosure process, including negotiating an agreement with the creditor, paying off the amounts outstanding or selling the property before the grace period ends. If a defaulting owner cannot interrupt the foreclosure process and continues to live in the mortgaged property, then the creditor has several recourses to settle the outstanding debt 15. In the U.S. In the United States, the word foreclosure refers to the seizure process of a mortgaged property, and means the recourse by which a creditor recovers a mortgaged asset if the debtor is in default. The foreclosure process comprises three steps: first, the foreclosure process begins when a notice of default 16 is sent to a debtor who is in default on their payments. A predetermined grace period, which can vary according to the administrative region (county) is then given to the debtor to allow him to settle the outstanding payments or sell his property himself, thereby interrupting the foreclosure process. Should the mortgage terms and conditions continue to be breached, then the debtor in default receives a notice of forced sale, and the creditor undertakes various measures to announce the sale of the property by public auction. While a third party can purchase the property during the auction, the creditor usually takes possession of the property by reaching an agreement with the debtor or by repurchasing the property at auction 17.

15 Taking Stock of Foreclosures in the United States and Québec 13 References MLS database by Centris JRL recherche immobilière database Canadian Bankers Association Statistics Canada 2006 Community Profiles Mortgage Bankers Association RealtyTrac Inc. Desjardins Affordability Index Housing Now CMHC Foreclosure Glossary, T.D. Service Company Standard&Poor s for the S&P/Case-Shiller Index BERNIER, Michel C., Johanne LECLERC and Martin SIMARD, «Choisir un recours hypothécaire», La signification Bernier-Beaudry, vol. 1, no 7, November (French only) Barreau du Québec, (French only) Civil code of Québec, lang=en&division=239&title=28&book=6&chapter=108 Notes 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) MBA quarterly data MBA, calculated by FCIQ MBA, quarterly data RealtyTrac does not compile data in the same way as the MBA; data vary from one association to the next. Number of properties in the foreclosure process = properties that have received a notice of default or a lis pendens, properties that have received a notice of forced sale or foreclosure, and properties whose creditors have taken possession.. The number of affected properties increases the longer the period in which this ratio is measured, in proportion to a pool of owned properties that remains relatively stable regardless of the duration of the period. (In the fourth quarter of 2009, the ratio was 1/147 and for the full year of 2009, it was 1/45. The following six states close out the top 10 list of most affected states: Michigan, Nevada, Georgia, Ohio, Texas, New Jersey. La crise financière : ses origines américaines et ses répercussions canadiennes, FCIQ, June 2009 (French only) Residential properties only include houses, mobile homes, condos and plexes with two to five units. They exclude land, semi-commercial and commercial properties, industrial properties, public utilities as well as buildings with more than five units. Non-CMA: all areas outside of the six census metropolitan areas (Montréal, Québec City, Trois-Rivières, Saguenay, Gatineau and Sherbrooke). According to the Fusion IQ Research Group and the Financial Times Prudence Paying Off for Canadian Mortgage Borrowers, Canadian Association of Accredited Mortgage Professionals, May In reality, the period is much longer than 60 days. The debtor usually tries to negotiate a longer grace period and creditors can modify their notice at their discretion. Two recourses are available in Canada: sale by judicial authority and taking in payment. The first option requires that every sale condition of the foreclosed property be established by a court decision, and also grants the creditor the right to initiate any other legal proceeding to recover the total amount of the loan should the sale of the property not be sufficient. This is the least risky process for the creditor, but it is longer and more expensive than the second option: taking in payment, which does not require the involvement of a court. However, the debtor (or any other creditor of the asset) may respond to the taking in payment procedure and require that it be interrupted in order to sell the property himself or to have the sale be done by judicial authority. In such a case, the creditor who wishes to continue with this procedure must be heard in court in order to obtain the right to continue. Taking in payments constrains the creditor to be satisfied only with the value of the repossessed property for the final payment, and precludes any other recourse against the debtor to recover the balance of his debts. This option is often preferred because of its flexibility and ease of processing, as well as its low costs and timeliness. Depending on the legal proceeding option chosen, it could be either a Notice of Default (NOD) or a lis pendens. During a public action, the creditor becomes the owner of the property if no third party offers an amount that is equal or superior to the amount of the debt. The creditor can also accept a short sale, i.e. selling the property for a price that is lower than the outstanding debt. * Properties owned are estimated based on the number of properties owned according to the 2006 Communities Profile, to which have been added new units that have been absorbed by owner-occupants.