Statistics Canada's national home price index contracts the most since December 2009

Yesterday, Statistics Canada, the government agency responsible for widespread data collection in Canada, released it's home price index for June. The data points toward the IMF's warning about a severe national home price collapse, which may now be unfolding. This is something analysts were not able to conclude from the data for June reported by the Teranet-National Bank of Canada index (TNBC index), released back in July.

The TNBC index reported a positive 0.50 percent increase in national prices for June when compared to the same period the previous year. The analytics also reported how home prices in cities across Atlantic and Eastern Canada were experiencing between 0.25 and 2.15 percent month-over-month growth rates just as the Canadian home sales season got underway.

National home prices contracted (lost value) by -0.194 percent in June. This technically brings home prices into negative territory for the first time since December 2009 in the government agency's database. We haven't seen these kinds of figures since the tail end of the 2008 financial crisis. It should be noted, that the TNBC index has yet to post a negative figure since 2009.

You'll also notice that I've included a few other bits of information in the charts above. As I've discussed recently, the fuel that has correlated the most with rising and falling home prices has been residential mortgage credit, the majority of which has long been issued by the large Canadian commercial banks. Over 75 percent of the Canadian mortgage market is dominated by the banks, and during the summer of 2017, they began experiencing declining mortgage originations. This has been reflecting in the credit statistics ever since. So now, when I discuss home prices, I generally throw mortgage statistics in, as well.

I've also added CMHC's 5-year conventional mortgage rate, so that you can get an idea of how things ebb and flow together. What you should notice is that interest rates tend to flow and correlate together with mortgage growth and home price growth, at least over the short term. Over the medium and long term this is not the case, as interest rates are influenced by other factors such as interest rates in the Canadian bond market, and rates set by the Bank of Canada. So, there's a lot of noise in the 5-year mortgage rate data.

This may all seem very new to your eyes (and ears, if you're listening to this post), particularly because home prices are generally not considered and discussed in relation to credit growth. What's more, most analysts will tell you that lower interest rates tend to spur home price growth. But when you look at the data above, this explanation is misleading, because the banks will charge interest on mortgages based on demand. 

If you look at the data above, closely, you'll see how spikes in mortgage credit growth (which means that more mortgages measured in Canadian dollars) are followed by spikes in aggregate mortgage interest rates. This is what happens with any good or service; more demand, in general, spikes higher volumes (mortgage growth) and costs (mortgage interest rates are the price of the mortgage).

Zooming in closer shows us that this is not a blip in the data; the contraction is now confirmed by the trend in the data. In technical-speak, the formation of a lower-low (or higher-high) is a confirmation of the direction of the trend. And that trend is now in negative territory. This is a significant event in the data going back 10 years, and one that many analysts occupying bank lending departments are watching very carefully.

We can see how mortgage credit growth has rebounded from a low of 2.835 percent to 3.467 percent. However, the data for mortgage credit growth is still, technically, in a declining trend. This latest bounce is likely attributable to the seasonality of the residential home market, which tends to experience an uplift in activity (sales) between June and September of each year. We can also see how the 5-year mortgage rate has been decreasing along side the home price contraction, even though mortgage credit growth is moving up slightly. The banks are likely lowering mortgage costs to spur mortgage credit growth. It may be working, but home prices are still contracting.