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Wednesday, January 27, 2010

Olympic Bounce?

Hmmm, what a surprise.

Seems that Tsur Somerville, a professor in real state estate at the University of British Columbia, has just poked a hole in the Olympic R/E speculative bubble.

In a recent study Somerville analyzed house prices and construction employment in the years leading up to and after the Olympics in Australian, Canadian and U.S. cities.

The conclusion?

Cities that win Olympic bids experience neither boom nor bust in real estate prices but they get a boost in construction jobs.

"We do not find support for the argument of host city backers that the Olympics delivers positive economic benefits, nor of the arguments made by opponents that there is some post-Olympic bust," Somerville said. "Our results conclusively demonstrate that while construction employment dramatically increases in the period prior to the Games, house prices are the same as they would be in the absence of the Games."

The study comes as the second slap in a double whammy of bad news for speculators.

Last week we heard how all those who loaded up on real estate in hopes of capitalizing on renting out during the Olympics are finding that their units are sitting empty, both in Whistler and Vancouver.

And now the anticipated land rush after the Olympics is being exposed as a myth.

Who could of known?

Guess the government should compensate them, eh?

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Tuesday, January 26, 2010

Vancouver is Number 1!

So the big news yesterday was the release of the latest Demogaphia survey which compares house prices in Canada, the US, the UK, Australia and elsewhere in the world.

The result? Vancouver is declared the most unaffordable housing market in the world.

Now faithful readers know that our little Village on the Edge of the Rainforest is North America's most bubbly city and Demogaphia now portrays us as the most bubbly in the world. But don't expect that to change local perceptions.

The Bull vs Bear debate on the wet coast will remain unchanged.

Bears will hail the news as further proof that fundamentals are out of whack. And Bulls will counter that the Bears don't understand Vancouver fundamentals (nor does Demogaphia) and that Vancouver's prices rebounded faster than anywhere else in the world precisely because of those strong 'fundamentals'.

In other words... nothing new.

And it's intriguing to watch how it is starting to make some of the Bears question themselves.

On another blog I like to check out from time to time, the longtime Bear author is having doubts.

Convinced that the 2008 correction was the start of the long anticipated bursting of the bubble (and fulfillment of the boom-bust model); convinction has now given way to self-doubt.

The problem, of course, is that people assumed we were at the peak of the bubble. The 2008 dip in prices was, in reality, just part of the jagged climb to the true peak. The boom-bust model will play out... just not necessarily on the timeline many want it to.

The Vancouver (and Canadian) market was starting to correct in 2008. But that correction was hijacked by the actions of the Bank of Canada and the federal government.

  • For the first time in history the central bank rate was cut to just 0.25%.
  • Through policy and stimulus programs, the Federal Government engineered mortgages rates in the 2-3% range.
  • This was supported with CMHC insurance for anyone leveraging 95% of a house purchase.

What other possible result could come from those actions? It triggered an explosion in demand and the average house price in Canada rose last year by 19%, or twenty times the rate of inflation and average wage gains.

Households in Canada are more in debt than ever before, the economy is stalling, government deficits are giving way to massive looming tax hikes and the pressures are building up.

The end result is not all that hard to predict.

Just the timing of it.

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Sunday, January 24, 2010

Sunday Funnies - January 24th, 2010


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Friday, January 22, 2010

What the hell is a 'Froogle'?

Have you ever heard of the Vancouver Real Estate Anecdote Archive (VREAA) ?

It's a unique blog that was started up in February of 2008 to serve as a repository for accounts of what people are experiencing and observing regarding Vancouver’s real estate boom.

For the most part the blog is a giant collection of quotes (with references as to the source) from the greater real estate community.

Yesterday they added an interesting sidebar to their blog.

Billing it as a 'serialized anecdote', VREAA aims to highlight the personal and social effects of the boom through a Vancouver couple who bought a house in September 2003.

'Froogle Scott' is the online handle of the Vancouver homeowner who will share his story.

From the introduction to the series by VREAA:

  • "The 2001-2010 Vancouver RE market has affected our city profoundly, and touched many of us in ways that have changed our lives. We started collecting anecdotes here at VREAA out of a fascination for the personal and social effects of the boom. A similar captivation has led a Vancouver homeowner to write of his own experience, and we are very pleased to bring you his serialized account, with its numerous anecdotes. ‘Froogle Scott’ will share his story of buying a house in Vancouver, and the journey that he and his wife have been on since that day in September 2003. In the first episode, we hear the story of the buying itself. Here begins one couple’s multi-faceted experience of this boom."

The series can be found on the main page of VREAA or you can access a permanent link to the series here.

I'm told comments on the entries are welcome, if you are so inclined.

Maybe someone can ask him what the heck a 'Froogle' is.

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Thursday, January 21, 2010

Will that be cash or chargex?

Remember those old commercials?

Seems to me it has become ingrained in Canadians to choose the latter.

Maybe that explains why, throughout 2009, we witnessed our housing market rebounding while America's foundered.

Unemployment in Canada has been consistent with that of the United States, but the Canadian economy has seemingly fared better. Perhaps it has something to do with the profound credit numbers Jonathan Tonge posted on his blog this week.

It seems that while Canadian incomes are falling, credit is skyrocketing

According to the Conference Board of Canada, Canada’s income per capita fell in 2008—the first time this has happened since the 1990–91 recession.

The income gap between Canada and the U.S., as of 2008, now stands at $6,400 per person; double what it was in 1984. At $6,400 per person, Americans earn more than 20.2% per person than Canadians.

Yet our economy is doing better than America's... why?

I wonder if it has to do with the fact Canadians are hell bent on spending money they don't have?

Average home prices in Canada are up 20% in 2009.

During the period of April 2008-October 2009, government insured and securitized mortgages (NHA securtized loans)increased by a whopping 67%. Total household credit (consumer credit and residential mortgages) grew 14% or by $165 billion.

Then there is this data. According to the latest release by the Bank of Canada, during the period of February 2008 - November 2009:

  • personal loans have increased 19%
  • balances on credit cards have increased 14%
  • 'other' types of loans have expanded by 14%
  • and personal lines of credit have grown 39%

All of this borrowed money has been a massive stimulus on the domestic Canadian economy, but spending on credit like that can't continue forever.

These numbers start to show clearly why the Bank of Canada has forecast that by the middle of 2012, 10% of Canadian households would have a debt-service ratio that is at a severe risk to financial shock.

Americans have taken heed of the 2008 financial crisis and over the past year have increased their average savings rate to approximately 5%.

Canadians, however, are still spending like drunken sailors.

With each passing day it is becoming increasingly clear we have not avoided our day of reckoning here in Canada at all... we've only postponed it.

And when things start to tumble... look out. It's not going to be just real estate that crashes hard.

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Wednesday, January 20, 2010

Bonus Post: Lehman Bros to disrupt Olympics?

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INTRAWEST UPDATE 3: VANOC denies Intrawest financial woes will impact Olympic skiing events
__________________________

Interesting article in the New York Post today...

Intrawest foreclosure a threat to Olympics

The drama at ski resort and Winter Olympics venue Whistler Blackcomb may go beyond the competition related to the Games.

Sources tell The Post that creditors holding $1.4 billion of debt on Whistler owner Intrawest are planning to foreclose on the company within the next week and a half, casting a shadow on the resort, which will host the alpine events of the 2010 Olympics. "It will probably happen within 10 days," a source said...

The Vancouver Olympic Committee (Vanoc) guaranteed that it would make Intrawest whole for the time that its events take place at its resorts. But now, according to a source, Canadian officials are threatening to pull that roughly $50 million guarantee. That, the source said, has compelled Edens to privately say he has a legal right to keep the Games from taking place at Whistler.

(Click on link above for rest of article)


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To Infinity and Beyond?


Two days ago I made a comment that "if [interest] rates stay low we will remain protected and secure."

It was a bit of a sarcastic comment because long time readers of this blog know I don't think interest rates are going to stay low at all.

One reader (jungberg) asked, in the comments section, what the chances were that the government will raise rates?

Let's be clear. Rates are going up. The Bank of Canada has sounded enough warnings to Canadians about that very fact to leave not doubt. The only question is: how high will they go?

I think without US intervention (more on that in a bit) they will go far higher than Carney would like... and he won't be able to prevent it.

It all has to do with the cost of money.

All Western governments are in record states of deficit. The global competition for money is about to heat up the bond market.

What's keeping things down right now is Quantative Easing.

Your mortgage rates are directly tied to the yields of the sale of US Treasuries, and right now those yields are artificially low. Very low.

They have been manipulated that low by US Federal Reserve intervention throughout 2009.

Three weeks ago we talked about a report from Eric Sprott, the Toronto-based money manager, which pointed out that the actual number of US Treasuries being sold to foreigners in 2009 was next to nothing and that the purchase of those Treasuries by the Fed was far higher than originally acknowledged by the government.

Of the $1.75 trillion in 2009 US Treasuries sales, only $200 Billion was actually bought by entities besides the US government.

As Sprott pointed out, the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing.

In 2009 we had a situtation where the US Federal Reserve was printing far more dollars to buy Treasuries than they 'officially' announced they had planned to do. This amounted to a means of faking the Treasury's ability to attract outside capital. Since the US bought the vast majority of it's own Treasuries, the yield (interest rate) was kept artificially low. Only $200 Billion was actually sold to investors.

In 2010, the United States needs to fund $2.21 Trillion worth of Treasuries sales. Since $200 Billion of those Treasuries will be absorbed in the 'official' conclusion of Quantative Easing, it means in the 2010 fiscal year (November 2009 to October 31, 2010) the US will have to sell $2.01 Trillion in debt to the rest of the world.

So who going to buy them if there weren't enough buyers in 2009?

Either interest rates are going to have to jump dramatically... or the US is going to have to embark on Quantative Easing to Infinity.

Since November 2009 marked the start of a new fiscal year, we can now start to answer that question.

And the first bits of evidence coming in are disturbing.

Yesterday the latest US Treasury International Capital Flows data covering November 2009 were released (the date is about two months behind the current month).

The data reveals a huge surge in capital flows predominantly as a result of a massive buying binge in US Treasuries. The implication is that there is, presumably, a strong market for the purchase of US Treasuries.

The surge in purchases is so strong that the November data is the largest amount of purchases for any month since 2005 (reference this analysis by Jim Sinclair's Mineset).

(Note: the previous high in purchases of US Treasury's occurred during the month of June 2009 when $100 billion worth of Treasuries were purchased on net)

November 2009 topped that by another $18 billion. So all is good, right?

Not so fast.

Dan Norcini, who did the above referenced analysis, had the following comments:

  • "Strangely enough, when you look into the breakdown of the Treasury buying by country, we see a decrease in the biggest buyer of US Treasuries, namely China. They sold about $9 billion worth. Japan compensated for that by buying another $11.4 billion. The biggest increase however came out of Great Britain where some $47 billion were added. Keep in mind that London is often the primary conduit through which foreign entities affect purchases of US Treasuries for the purpose of secrecy as that information generally does not get revealed until the Treasury revises the TIC data in June of each year.

    Call me cynical but we really have no idea who actually bought all those Treasuries through London offices.

    In times past the revisions have seen many of those purchases being credited to China but that does not guarantee anything of the sort this time around, especially with China being a net seller this month.

    We also have a decent sized increase in Treasury buying out of those Caribbean based banks.

    Were it not for the binge in Treasury buying, the Agency, Corporate Debt and Equity categories would not have been sufficient to fund the negative balance of trade. This of course will be spun as a vote of confidence for the US Dollar as the spinmeisters will step up and proclaim that the world still has a strong appetite for US debt. Personally I think the Fed is buying the Treasuries."

Norcini's suspicions can't be confirmed until the June numbers come out. Last year the US Federal Reserve wasn't forthcoming with the true extend of how widespread and extensive the purchasing of their own Treasuries was, so it's not that much of a stretch to imagine the same deceptions are playing out again this year.

And Sprott called what was going on in 2009 a virtual 'ponzi scheme'.

If the Fed has embarked on QE to infinity - look out. Spiking interest rates will be the least of our worries if that's the case.

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Tuesday, January 19, 2010

The pressure ploy

Pressure Ploy or 'marketing'?

I started off the year telling you about James Schouw, Chairman of James Schouw and Associates. Schouw specializes in ultra high-end custom developments.

Schouw is keen to promote the old supply and demand argument about Vancouver. To wit: people are constantly moving here, no one is leaving, scare land results in a property shortage... ergo buy now or be priced out forever.

Central to the argument is the wealthy Asian component. They have money, it's nice here and they can afford it even if we can't... end result: real estate is going up, up, up.

Lest you think that last dynamic is self developing, you might find this of interest.

XinhuaNews is a Chinese news organization.

Recently, infamous local realtor Bob Rennie hooked up with XinhuaNews to do a little local promoting. The result was this little gem in it's english online site.

Rennie is keen to leverage the wealthy Asian angle and work the exposure of the Olympics to ensure the Asian influx to Vancouver intensifies.

As part of his campaign, Rennie seeks to separate Vancouver from other Olympic cities and tells XinhuaNews in an exclusive interview that:

  • "When people watch the Winter Olympics, I don't think they say 'I want to buy a house in Turin' or 'I want to work from Lillehammer'." (referring to the Italy and Norway cities, respectively, that hosted the Games in 2006 and 1994). "But they do for Vancouver. This is one of the most amazing cities on the planet to work from."

Rennie strives to assure Asians that now is the time to buy. He discounts an Olympic hangover and moves to a full court press to convince them that there is a shortage of rental housing in the City.

  • "Vancouver is going to face a shortfall of apartment units following its hosting of next month's Winter Olympics Games... If there was ever going to be an Olympic overhang we took care of it in 2008-2009 by canceling buildings. We are now coming into a shortfall where banks are very conservative, Canadian banking practices are always very conservative, and developers are just coming off the sidelines."

Rennie hastens to predict that by the first quarter of 2011 the shortfall in apartment units will be noticeable in downtown Vancouver as there were very few major sites left to develop. Also, with a lot of "money on the sidelines" earning low interest, coupled with a low supply of available properties, extreme pressure will be put on the real estate market.

Vancouver is then portrayed as a virtual licence to print money.

  • "The unique thing about Vancouver is nobody builds rental towers (anymore). For the offshore investor properties are easy to rent out as there is no rental stock."

So there you have it. If Vancouver is being too unaffordable for it's current residents to afford, what does the ambitious realtor do?

He finds customers in other parts of the world who will keep these values rising.

As Rennie says,

  • "With the amount of money being made in China, and with the acceptance of China to Vancouver, we have to be in the top two places on the planet for China to look at, to move money to. We see it happening right now, it's happening a lot. It used to just happen in the luxury market, now it's happening in all the market."

Rennie even plays the 'buy now' card with the Asians as he tells them:

  • "That's the danger of the Olympics. As the world sees [the Games on TV], they go from 'I want to spend two weeks in Vancouver', to ' spending two to five months in Vancouver', to 'I want to send my children to school here'."

So there you go, China.

Buy real estate in Vancouver now... or be priced out forever (what the hell, it worked on most of us who actually lived here, why not the Asians).

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Monday, January 18, 2010

Our Achilles Heel

I find it fascinating to watch how so many people think the Canadian real estate collapse is all but over, the fall in values last year merely a hiccup.

Twelve months ago many speculated that Canada's housing market would inevitably follow the U.S. into the same sort of catastrophe that began there more than three years ago.

But after a brief dip, Canadian real estate is up an average of 19% from a year ago, perching at about the same elevated level it reached at the 2008 peak.

Even more intriguing has been the number of media articles that reinforce what bloggers have been saying all along; that these levels are unsustainable because average incomes are rising at a small fraction of this pace.

But while article after article points out the basic economic fact: when prices rise faster than incomes for long, homes become unaffordable, sales falter, prices stagnate and ultimately values fall sharply... the general sense of euphoria is unshakable and the sense of 'buy now or be priced out forever' reigns.

It's driven by the mantra that says our conservative Canadian banks have saved the day with their stodgy ways and have guided us past the housing meltdown that struck the U.S, Britain, Ireland, Spain and others.

We are bombarded with the rationalization that, in Canada, sub-prime loans represented only about one-quarter the proportion of lending it did in the U.S, and sub-prime in this country had a different meaning: it included people who didn't quite qualify for prime loans, but were never hopeless deadbeats.

We are also told that the securitization phenomenon that let U.S. banks sell dubious mortgages to unsuspecting buyers never developed in Canada. Only about one-quarter of Canadian mortgages were securitized in 2007 (it was 60% in the U.S.), and they were solid, government-insured mortgages, not sliced, diced, leveraged subprime junk.

The 'solid' Canadian banking system saved the day, goes the platitude, and that's why in the U.S. (and elsewhere) near-zero interest rates haven't inflated housing prices. Their banking system is so sick that there just isn't much lending, while ours is healthy.

I've said it before, and I'll say it again... what a crock.

Our day of reckoning hasn't been avoided, it's only been delayed.

The fact is our government threw everything they could at the crisis in order to keep our real estate market juiced and our banks afloat.

  • They changed mortgage rules from 10% down and a maximum 25 year amortization to zero down and first 35, then 40 year amortizations.
  • Then came emergency interest rates.
  • Next, a blatant blind eye has been turned to Canadian banks who are authorizing zero-down arrangements (with their 5% cash back offers) and allowing what amounts to liar loans.
  • Then there is the way the government back funded the CMHC and ordered them to dramatically hike their high-risk loan exposure and approve Canadians for loans who normally never would have qualified.
  • Then, at the height of the crisis, the Canadian government plowed tens of billions in funding to the banks by buying mortgages so room could be made for more to lend.

That's why credit continues to flow in this country. The Federal government is guaranteeing all that money.

We've thrown so much money at the problem that Kevin Page, the controversial Parliamentary Budget Officer has come out and said that the Federal Government's orginally announced 2 year deficit (since expanded to 5 years) is now worse. He says there's no way we’ll be balancing our books in 2014. It's impossible.

Canada now has a deficit so large it is now structural and will probably be with us for an entire generation.

And what has all of this bought us?

Before the crisis we had a large number of Canadians who assuming massive household debt. With the 'stimulus', Canadians have intensified this trend and many are max'ing out on the size of mortgage they can assume when rates are the lowest in history.

This, in turn, has spiked housing values up 19% in the last year. As Garth Turner noted on his site last Friday, "when inflation is 1.6% and the prime’s 2.25%... it means the cost of shelter increased at more than 10 times the cost of living, and acquiring it put Canadian families in a deeper debt hole than has ever existed before... if the price of food had increased 19% in a year, there’d be a Royal Commission and moms torching Loblaws. If taxes had gone up 19%, we’d be in a revolution. If cars had jumped 19% in price, the dealerships would be abandoned."

It's all considered good, thought, because this 'asset reflation' is what is keeping our nation ahead of the recession curve - for the time being.

Meanwhile outstanding Canadian mortgages have skyrocketed and Canadians now have more debt compared to income than at any other time in our nation's history.

Our nation's Achilles heel sits behind the future of interest rates.

As the Bank of Canada said, "using the current path of household indebtedness, and alternative assumptions about how quickly interest rates may increase... by the middle of 2012, almost one in ten Canadian households would have a debt-service ratio that makes them vulnerable to economic shocks."

If rates stay low we will remain protected and secure.

But if they go up... look out. The economic carnage in this country will be on par with the physical carnage that has hit Haiti.

'Devastating' won't even begin to properly describe it.

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Sunday, January 17, 2010

Sunday Funnies - January 17th, 2010


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Friday, January 15, 2010

Bank Failure Friday

As faithful readers know, bank failures in the US escalated dramatically in 2009. In 2008 there were 25.

In 2009... 140.

The 2009 total was an average of almost three per week and the most failures the United States has experienced in one year since 1992.

Because the announcement of these failures (and the actual take-over by the FDIC) are always delayed until late on Friday afternoons, Friday has come to be known as 'Bank Failure Friday' on many economic blogs.

But 2009 was just a prelude to 2010.

How do we know?

Because the FDIC has already publicly announced that they are preparing for a greater number of bank failures than in 2008 & 2009 combined.

The FDIC has set aside $2.5 billion for the handling of receiverships, almost double that allowed in 2009's budget of $1.3 billion.

The overall operation budget for 2010 has been set at $4 billion, significantly higher than that for 2009, a revised $2.6 billion.

And why is the FDIC preparing for such a huge wave of bank failures?

It's all in the chart at the top of this post (click on the image to enlarge it).

In 2006, 2007 & 2008, the defaults on a large number of resetting subprime mortgages took place (they are shown in mid green).

As the short term teaser interest rate on these mortgages can due for reset to a higher rate, homeowners couldn't negotiate a new mortgage with a new, ultra-low teaser interest rate (as they had done in years past).

That's how subprime mortgages caused the real estate collapse in the United States. Housing values fell in a few cities and when the first mortgages that came due with their ultra low interest rates (set at a two year duration before a higher rate would kick in), homeowners couldn't secure a new mortgage. In the past, because the value of the property had grown, they had always been able to negotiate a new mortgage (with a new two year, ultra low teaser interest rate).

Forced to assume the mortgage at a substantially higher interest rate - they defaulted.

As the market was swamped with a bunch of foreclosures, it drove housing values down across the USA. That triggered the same scenario with other cities subprime mortgages.

As the foreclosures picked up steam, those households with more normal mortgages were trapped because declining real estate values (from all the subprime foreclosures) meant that when it came time to renew their mortgages... they couldn't because the value of the mortgage was substantially higher than the value of the property (called being 'underwater').

No bank is going to give you a $500,000 loan on a property worth $300,000.

Now, looming on the horizon, are Prime, Alt-A, Agency and Option Adjustable Rate mortgages.

These 'normal' mortgages dramatically outnumber subprime mortgages.

Many of them are like sub-prime in that they reset at a higher interest rate, the only difference being they reset after 5-7 years instead of two.

Thus they are just coming due now.

And those who didn't have teaser interest rates that reset are facing the brutal proposition of being 'underwater'.

The end result will be the same as subprime.

The mortgages will reset to dramatically higher interest rates and/or the value of the property has dramatically fallen so renewing cannot be done without the mortgage holders bringing down the principle to the value of the property (which means paying off about $200,000 plus on renewal).

End result: another wave of defaults and foreclosures... which is what is putting all these American banks at risk.

They key element for Canadians here is that subprime was a minor player in all of this. Subprime mortgages were simply the first type of mortgage caught in the interest rate squeeze.

Look at the graph. Subprime mortgages are almost non existent in 2009 and beyond. While about 21% of all mortgage originations from 2004 through 2006 were subprime, when you add up all the mortgages due to reset from 2007 to 2015, the subprime portion of total mortgages is miniscule.

In fact, in June 2008, the total number of subprime mortgages in foreclosure or REO represent (as a percent of total housing units) less than 1/2 of 1 percent of all housing units in the United States (0.44%).

Yesterday we noted how the Bank of Canada has come out and stated that within 2 years 10% of Canadian households will be in danger of collapsing from rapidly rising interest rates.

That represents a higher percentage of all total Canadian mortgages than subprime did vs. the rest of the American mortgage family.

They are the first domino that will be affected by a dramatic change in interest rates.

And just like in the United States, when that first domino falls it can bring down the entire pack.

In Canada we don't have 'subprime' mortgages. But we do have scores of people who have taken on massive debt with ultra low interest rates that will reset. All those five year mortgages will come due for renewal. And if 10% can't handle the shock of a return of interest rates to their historic norm (over the last 20 years, that's a five year rate of 8.25%), then it means we are in a far more precarious position than the United States.

The collapse of that 10% will dramatically lower real estate values when those properties are eventually foreclosed upon and resold. When that happens, a great many of other Canadians will be in a sever 'underwater' position and will not be able to renew... further collapsing the real estate market.

In 2005 and 2006 the majority of the American financial sector ignored the looming threat these numbers represented. The only ones sounding the alarm for what was coming (and the threat it represented to the greater economy) were the likes of Peter Schiff.

In 2010, in Canada, we are just as ignorant.

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Thursday, January 14, 2010

Et tu, Mark?

Pontius Pilate was the Roman governor of Judaea from 26 CE to 36 CE; in this capacity, he was responsible for the execution of Jesus of Nazareth.

According to the gospels, Pilate refused to condemn Jesus of Nazareth but was forced to execute him by a hysterical Jewish crowd. In Matthew, Pilate acquiesces to the crowd's demands and washes his hands of the entire affair, reluctantly sending him to his death.

After re-reading last Monday's Bank of Canada speech, I can't help but wonder... is Mark Carney pulling a Pontius Pilate and washing his hands of the Canadian housing bubble?

As mentioned earlier this week, a significant portion of Monday's speech was dedicated to the housing market. Canadians are reminded several times that rate policy is to be used to control inflation, and that housing is only one factor of many that affects inflation.

  • “As Canada’s economic growth moves towards its potential, it is expected that a robust housing market, supported by exceptionally low interest rates, will continue to work as an important engine pulling the Canadian economy out of recession. This has implications for monetary policy, which, as I’ve said, aims to achieve the Bank’s inflation target of 2 per cent over the medium term. It’s important to remember that this target is symmetrical; that is, we are equally concerned about whether inflation is above target or below target – as we expect it to be until 2011. The revival of the housing market is one factor that is helping us to achieve our inflation target, and it is a powerful means through which monetary stimulus affects the economy. Of course, we need to keep a close eye on the housing market, along with all other sectors of the Canadian economy, to ensure that we are providing the right amount of monetary stimulus. In setting monetary policy, we view housing – or the exchange rate, the energy sector, the auto industry, or any other factor – through the prism of our inflation target.”

As mentioned in Tuesday's post, after refusing to raise the bank rate to deal with the housing bubble, the Bank of Canada then very deftly laid responsibility for the developing mess in housing directly at the feet of Finance Minister Jim Flaherty.

It came at this point in the speech:

  • “An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks. These include capital requirements for institutions, leverage ratios, loan-to-value ratios, terms and conditions for mortgage insurance, and a variety of other measures. These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions.

    Using these instruments to safeguard the whole financial system – not just individual institutions – is the essence of the macroprudential approach. Macroprudential supervision is one of several concepts in a current global initiative to strengthen supervision and regulation in the wake of the global financial crisis. In Canada, a system-wide, or macroprudential, approach is the shared responsibility of the Department of Finance and all of the federal financial regulatory authorities, including of course the Bank of Canada, the Office of the Superintendent of Financial Institutions, and the Canada Deposit Insurance Corporation. Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.

That last line is the killer and it begs the question... what gives?

Carney has, for the past two months, been just like a little blogosphere perma-bear with the alarms he's been sounding on the damage that will be caused by the inevitable rise in interest rates.

He's warned Canadians that they need to be 'prudent' and urged them to remember that "households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates."

Now, in one swift move, he's dropped all of it at the feet of the Minister of Finance.

Why?

I wonder if it has anything to do with this little gem from Monday's speech?

  • “Using the current path of household indebtedness, and alternative assumptions about how quickly interest rates may increase, the simulation generates a scenario indicating that, by the middle of 2012, almost one in ten Canadian households would have a debt-service ratio that makes them vulnerable to economic shocks.”

The day of reckoning is coming fast and Carney can see it.

In just over 2 years, the Bank of Canada forecasts that 1 in 10 of us will be in serious debt trouble.

And when the interest rate tide changes, the Canadian financial system is going to drown all of them and pull down many others as real estate values crash.

Seeing what's coming and sensing the inevitable fallout, 'Pontius' Carney has effectively said "pass the soap."

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Wednesday, January 13, 2010

Bubble? What bubble?

Every once in a while it's fun to compare real estate here on the wet coast with other areas.

One of the things you hear right now is that international demand is going to keep pushing Vancouver values up, up, up.

And who can disagree. Eight months of dreary, endless rain make Vancouver a destination paradise.

And if you had the cash... would you want to live here? Or some crappy local like Hawaii?

Let's compare the two, shall we.

Hat tip to Vancouver_Bear who points out that you can currently procure this little 3 bedroom, 2.0 bathroom, 1,568 sq ft single family rancher home in Kailua. It sits on over 9,000 sq. ft. of land and comes with swimming pool, updated kitchen, indoor laundry, and mountain views.

Asking price $725,000 USD. Here are some photos...


Beauty, eh?

Or you can plunk down an extra $625,000 over and above the 'asking' price of that Hawaiian home and get this four bedroom, 1 bathroom, 1300 square foot dump which could easily pass as the local crack shack. It sits on a 1/2 acre property adjacent to the 401 freeway and just north of Canada Way (another freeway) & Sperling.

Available now for only $1,350,000.

I wonder if the ladders are included?

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Tuesday, January 12, 2010

Not my responsibility!

The housing market in Canada has (so far) avoided a US-style collapse because the federal government of Stephen Harper's Conservatives in 2007 directed the CMHC to dramatically change its rules to create relatively very loose lending requirements.

Those requirements combined with an amortization period that was extended from 25 years to 35 years... and extended again to 40 years.

Then, in an effort to further prop up the real estate market (when affordability nosedived), the Harper government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing. This happened in 2008.

These efforts combined with the Bank of Canada's historic low interest rates is what has kept the Canadian economy from crashing and has prevented calamity in the real estate market.

But now that the initial crisis has past... who is responsible for trying to clean up the mess in housing?

Yesterday Bank of Canada Governor said, "Not me!"

As we have noted on this blog, Carney knows the ultra-low interest rate policy is creating a time bomb in housing. But he can't intervene because intervention right now will destroy the fragile recovery.

So what to do?

The first step was to begin a public speaking campaign calling on banks and Canadians to exercise 'prudence'. Carney then noted the obvious and said, “consumer borrowing cannot not grow faster than the economy forever.”

He also had a warning for Canadians: "We remind people that borrowing is for the period you are going to borrow, not just for the moment you take out the loan... It's not my job to give investment advice to Canadians. But on the general point anybody, anytime they borrow for a longer period of time, wants to [ask themselves], 'can I sustain that borrowing over the course of that time? What happens when interest rates ultimately normalize?'”

But raise interest rates? Nope - the general economy can't handle that right now.

So what to do? This week we found out.

Deputy governor Timothy Lane wrote a speech delivered by an adviser on his behalf in Edmonton.

“Some observers – those who see a housing bubble forming – have said that since low interest rates have stimulated housing market activity, the Bank should now raise interest rates to dampen that activity. But that poses a problem.”

Mr. Lane said the bank understands the concern, but it uses its lending rate to keep inflation in check for the whole economy and the housing market is “only one of several factors” that influence inflation. Other sectors could be adversely affected if the rate jumped before the broader economy was ready, he said.

“If the Bank were to raise interest rates to cool the housing market now – when inflation is expected to remain below target for the next year and a half – we would, in essence, be dousing the entire Canadian economy with cold water just as it emerges from recession.”

So Lane made it clear that the Bank of Canada won't raise interest rates to cool the country's hot housing market. If any action is to be taken, it must come from the country's Finance Minister.

And Lane was specific about that action.

He said the government could increase capital requirements for lending institutions, adjust loan-to-value ratios and change the terms and conditions required to obtain mandatory mortgage insurance.

“These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions. Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.”

In one simple speech Carney has delivered a simple message.

The housing bubble? Not my responsibility.

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Monday, January 11, 2010

A slow motion train wreck...

So many topics to touch on... but only so much time in the day to sit down and talk about them.

So today I will focus on American events.

Bank Failure Friday returned last week when the FDIC released information regarding the first US bank closure of 2010 – Horizon Bank of Bellingham, Washington.

You can't really hit much closer to home (in relation to Vancouver) than Bellingham (Blaine is too small).

But it's the size and scope of the closure that is so astounding. If it is indicative of things to come it will be a very rough year for our American cousins and the FDIC.

According to the FDIC, Horizon Bank had $1.1 billion in deposits and balance sheet assets of $1.3 billion; yet the FDIC’s estimated cost to close the bank is $539.1 million.

Say wha???

That means the real market value of Horizon’s assets is believed to be about $561 million – 41.5% of the value claimed.

Ay carumba!

As has become the norm, the FDIC had to enter into a loss-share transaction with respect to $1.0 billion of the assets purchased, meaning there is significant concern the assets will turn out to be worth even less than presently estimated.

This cost of closing this bank amounted to 49% of the value of Horizon’s deposits – the highest relative cost seen so far in this crisis.

By way of comparison, the cost of closing the first three banks in this crisis (in late 2007) was about 5.7% of deposits.

Perhaps you now have a keener appreciation of the importance of the FDIC's 'Interest Rate Advisory' for banking institutions.

That's the FDIC's stern warning for US Banks to prepare to "manage interest rate risk." Soaring rates will further depress market values which will further undermine the real worth of the bank's assets and balance sheets.

It does not bode well for the year ahead and we will watch the banking developments with keen interest this year.

But banking isn't the only story you should pay attention to.

Last Friday also bore witness to the stunning announcement that another 661,000 jobs were lost in the United States.

This at the height of the Christmas hiring period.

The broad U6 category of unemployment statistics rose to 17.3% (that's adding all the Americans who did not show up in 'official' statistics because they have stopped looking for work).

That is the stat that really matters. It means that December was the worst month for US unemployment since the Great Recession began.

Can you see what is coming next?

The home foreclosure axe usually drops for homeowners a year or so after people lose their job, and exhaust their savings. After six months they drop off the unemployment rolls. Six months from now that axe will start dropping.

That's what 2010 is going to be all about Charlie Brown. And that's despite the fact that foreclosures are already setting new records.

Realtytrac says defaults and repossessions have been running at over 300,000 a month since February in America. One million American families lost their homes in the fourth quarter. Moody's Economy.com expects another 2.4 million homes to go this year.

Meanwhile commercial real estate is a disaster. Check on this article in Time magazine.

"It's not that everything's fine in the commercial real estate business. Everything's awful and will probably get more awful. But unlike 2008's Wall Street panic, this particular financial unraveling looks as if it will play out over a period of years, not weeks."

Headlining the news is Tishman Real Estate in New York City. They will miss payment on a commercial loan of over $5 billion on a massive New York apartment complex, the 2nd largest default in commercial real estate loans in history.

As this unfolds, California declares an economic emergency. They are the biggest concern but there are another 40 states in deep trouble. Hawaii can't even afford to hold a congressional election.

Meanwhile apartment vacancies hit record highs.

Really?

Riddle me this... if foreclosures are skyrocketing... and rental vacancies are soaring... where are the people going?

Does it suprise you that homelessness is rising dramatically?

And then there is consumer credit. Consumer credit in the US last month dropped a record $17.5 billion.

This despite the fact that many cash-strapped US homeowners are doing exactly what their UK counterparts are doing: "New research from Shelter, the homeless charity, [suggests] that as many as 1 million people have used their credit cards to pay mortgage bills or rent demands in the past year."

And what is that going to lead to?

"You would have to be relatively desperate, at least in the short-term, to go down this route. Many of those people are likely to end up defaulting on their credit card bills, or on their mortgages, or both," quotes the article.

Against this backdrop, does anyone really think American quantative easing is going to end in March?

All the talk about the US Federal Reserve draining the excess reserves is comical. That's why gold shot up on the weekend.

And that's why it's going to shoot even higher. Watch the next big spike to take the metal to over $1,650 an ounce.

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Sunday, January 10, 2010

Sunday Funnies: January 10th, 2010

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Saturday, January 9, 2010

Succinct

Yesterday's Vancouver Sun had an article that succinctly summarizes the current state of Vancouver's Real Estate bubble.

The article insightfully notes that the main trouble with real estate is that while prices are rising, incomes are not.

And the main culprit for this imbalance is that rock-bottom borrowing costs continue to lure buyers, and investors are rushing in — despite a shortage of listings — for fear that if they don't get into the market now, they'll miss their chance.

And what are the dire concerns/consequences?

From the article:
  • "It's absolutely not debatable that housing prices cannot rise faster than incomes over the long term," said Will Strange, professor of real estate and urban economics at the Rotman School of Management. "Sooner or later, incomes have to rise, or home prices fall, for balance to be attained."
  • "If I didn't personally have most of my wealth tied up in housing, this would not be the time that I would choose to jump in," Strange cautioned.
  • "At the same time, interest rates have nowhere to go but up, which could leave some buyers in a position similar to U.S. homeowners, who had houses worth less than their mortgages after the subprime bubble burst and prices crashed."
  • "We're certainly urging people to error on the side of caution," said Bruce Cran, president of the Consumers' Association of Canada. "If you're paying an amount of money, whatever that might be, that you couldn't sustain if interest rates rose by say 25 or 30 per cent — I can see that being a problem for a lot of people."
  • "Don't buy [a house] because you think the price is going to go up."

Couldn't have said it better myself.

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Friday, January 8, 2010

America's Bank Failure Friday hits close to home...

It's the start of a new year, and thus a new Bank Failure Friday count.

And on this first Friday of the year, we have one lone casualty... but it hits close to home.

Not too far south of us Horizon Bank of Bellingham, Washington was closed today by the Washington State Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

As of September 30, 2009, Horizon Bank had approximately $1.3 billion in total assets and $1.1 billion in total deposits.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $539.1 million. Horizon Bank is the first FDIC-insured institution to fail in the nation this year, and the first in Washington. The last FDIC-insured institution closed in the state was Venture Bank, Lacey, on September 11, 2009.

Just think... housing values are booming here. And 20 minutes south of us, the real estate collapse is pulling down banks.

Bubble?

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Thursday, January 7, 2010

Snapshots

Let's take a peek around the internet today, shall we?

First up is the lastest stats from the Real Estate Board of Greater Vancouver (REBGV).

December stats reveal that the bubble is blowing ever higher and the average price of a detached home in the Village on the Edge of the Rainforest now sits at an astounding $952,927.00!

(click on image to enlarge)

Will we hit a million dollars? Possibly.

Canadian Banks continue to ignore the warnings from Carney and Flaherty to be 'prudent' with lending. Offers to get you in for zero down, such as this one from TD Canada Trust, continue to exist.

And realty companies, like Royal Lepage, continue to pump the market by suggesting that buying now will result in an 7.2% increase in value of your purchase this year in the Lower Mainland... "so long as the expected mid-year rise in mortgage rates isn’t a dramatic spike."

But that's the rub, isn't it?

That's the entire essence of the warnings we have been blurting out for the past year: rising interest rates will destroy you if you buy now.

And the warnings continue unabated.

The National Post chides today that "happy times for interest rates can't last forever".

So dire is that potential problem that the Post notes that a simple 1% increase in rates could dramatically affect you bottom line. "For a home buyer, rate increases mean hefty payment boosts. For example, it will cost $3,252 more per year to pay down a $500,000 mortgage balance when the interest rate rises from 3.5% to 4.5% , assuming a five-year term and a 25-year amortization."

The 25-year amortization comment is particularly important given the fact the Finance Minister is sounding warnings that the permitted amortizations could be reduced from the current 35 year maximum. Before 2006, that maximum was 25 years.

It means those with a mortgage face the double whammy of increased interest rates plus a shorter amortization period when they renew.

A simple 1% rise in rates could translate into $3,252 increase in yearly payments on that $500,000 mortgage.

When you consider that the conservative estimation on what will happen to interest rates is that we will see a minimum of a 2.5% spike in rates, it means the cost of renewing adds up quickly.

With that theme in mind, Report on Business is also warning mortgage holders to "Fasten your seatbelts".

They suggest you have roughly six to nine months to get a personal plan together for dealing with higher interest rates.

Yikes! At least they try and offer several strategies to get ready.

And it's not just in Canada that warnings are being issued.

In the United States, the FDIC has now come out with an 'Interest Rate Advisory' for institutions.

US Banks are being reminded "of supervisory expectations for sound practices to manage interest rate risk (IRR)."

The warning is very specific:

"In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates."

The only real question is how high might it go?

And THAT, of course, turns us once again to the issue of the US Dollar and US Treasury sales to foreign countries - particularly China.

With that in mind, consider this article from 'The Business Insider' which lays out a series of charts showing clearly that "China's Dumping of the US Dollar has begun". The yellow line represets the plunging level of Treasury purchases by China.

(Click on image to enlarge)

To sell sovereign debt, the purchasing of that debt is going to have to be made very attractive.

And there's only one way to do that: increase the yield. That means higher and higher rates on home mortgages.

We've been through this before... in the late 1970s.

22% mortgages, anyone?

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Wednesday, January 6, 2010

More US Quantative Easing?

A report out from Reuters indicates that the US Federal Reserve is discussing re-entering the mortgage-backed securities market later this year if its buying power is needed to hold down interest rates.

The Federal Reserve is supposed to end its $1.25 trillion agency MBS purchasing program at the end of the first quarter of 2010.

Fed officials, however, "are prepared to contemplate changes if need be, depending on conditions in the economy, housing finance and in financial markets more broadly," according to a Market News story written by Steven Beckner.

"Among the options that has been discussed, say people in a position to know, is doing additional MBS purchases."

When the Fed stops buying at the end of the first quarter, rates in the market are widely expected to rise, pulling mortgage rates higher as well.

The question becomes... how long before confidence in the US dollar is lost when the massive debt is expanded at the same pace as last year?

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Tuesday, January 5, 2010

Fed Chairman's Non Mea Culpa

The big news yesterday was Ben Bernanke's non mea culpa for the US Federal Reserve on the housing bubble in the United States.

While addressing the annual meeting of the American Economic Association in Atlanta, Bernanke said that a lack of regulation, rather than low interest rates, was the main reason for the housing bubble which, when burst, was largely responsible for the recent global financial crisis.

Bernanke argued that the housing bubble began before the Fed pushed interest rates low and that the size of the bubble cannot really be explained by monetary policy alone.

Perhaps more importantly, however, Bernanke makes the extraordinary claim that regulatory and supervisory policies would have been effective means of addressing the run up in housing prices. What makes this claim so extraordinary is that it completely ignores the fact that regulatory and supervisory policies weren’t just ineffective at popping the housing bubble—they were actively fueling it.

“Clearly, for lenders and borrowers focused on minimizing the initial payment, the choice of mortgage type was far more important than the level of short-term interest rates,” Bernanke said.

Bernanke argues that exotic mortgages and rubbish underwriting standards that he thinks are “the key explanation” for the housing bubble. But he ignores the fact that these “alternative mortgage products” were created in response to regulatory pressure to expand home ownership.

In many ways it echos the ignorance that is going on in Canada right now.

In the United States the process looked something like this:

  • Ultra low interest rates led to a scramble for yield by fund managers;
  • Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers;
  • Since they were writing mortgages for resale (and held them only briefly) these non-bank lenders collapsed their lending standards; this allowed them to write many more mortgages;
  • These poorly underwritten loans — essentially junk paper — was sold to Wall Street for securitization in huge numbers.
  • Massive ratings fraud of these securities by Fitch, Moody’s and S&P led to a rating of this junk as TripleAAA.
  • That investment grade rating of junk paper allowed those scrambling bond managers (see #1) to purchase higher yield paper that they would not otherwise have been able to.
  • Increased leverage of investment houses allowed a huge securitization manufacturing process; Some iBanks also purchased this paper in enormous numbers;
  • More leverage took place in the shadow derivatives market. That allowed firms like AIG to write $3 trillion in derivative exposure, much of it in mortgage and credit related areas.
  • Compensation packages in the financial sector were asymmetrical, where employees had huge upside but shareholders (and eventually taxpayers) had huge downside. This (logically) led to increasingly aggressive and risky activity.
  • Once home prices began to fall, all of the above fell apart.

There was no one single factor that caused the collapse. Rather, an there were many, many failures occurring in a very specific order that contributed to what occurred.

Inadequate regulations and “nonfeasance” in enforcing existing regs were, as Chairman Bernanke asserts, a major factor.

But the regulatory and supervisory failures came about AFTER the 1% Fed rates had set off a mad scramble for yields. Had rates stayed within historical norms, the demand for higher yielding products would not have existed — at least not nearly as massively as it did with 1% rates.

In Canada we had the combination of low interest rates in the 2000's combining with the Federal Government expanding the amortization period for mortgages from 25 years to 35 and then 40 years. Direction to the CMHC to approve higher, riskier candidates and, in the last year, ultra low interest rates.

The non mea-culpa in Canada has been Flaherty and Carney coming out and warning Canadians that they have to be 'prudent' along with lending institutions... as if those above mentioned policies weren't directly responsible for what's going on.

In the US, Bernanke's failure to recognize the Fed's role in the crisis will prevent him from taking those measures needed to avoid another crisis.

In Canada, our official's artful dodging will prevent them from undertaking the harsh, short term actions now that could mitigate/diffuse the hard crash that is coming.

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