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Saturday, June 30, 2012

Are bloggers Public Enemy No.1 in an attack on the fundamentals?



Watching the news this week, you can  can see the real estate industry mounting their latest counter offensive to spin their message.

And that message will be... 'fundamentals don't matter'.

Despite having rejigged they way the benchmark price is calculated (twice this year, actually), the reality of the market is becoming hard to ignore.

Sales in May for all forms of housing across the Multiple Listing Service were down over 15.5% from last year, and the lowest for the month of May since 2001. For detached homes sales, the news is  even worse: They were down 25% for the same period last year.

While sales have fallen, the number of listings has risen. In the Vancouver westside, which is held up as the main beachhead for the Asian invasion, the total of active listings — those homes for sale that haven’t sold — has risen to 1,100 properties at present from 600 a year ago.

The pathetic attempts to neutralize the impact of these figures prompted Vancouver Sun columnist Pete McMartin recently to state the obvious:
Commenting on these numbers, the resolutely sunny Real Estate Board of Greater Vancouver decided this was “indicative of balanced market conditions.” But then the board would have viewed the crash of the Hindenburg as the result of “normal deflationary conditions.”
Yesterday we drew your attention to one of the latest piece by Global TV (Global reports the facts, concludes ours is now a 'depressed market', but then claims we're 'different').

 Global has also been unable to ignore the obvious:
Vancouver Real Estate had defied trends and showed steady growth for far longer than anybody believed possible. The evidence is not in the polls, which very often contradict one another, but on the ground, in the neighbourhoods where plum properties have always sold quickly and at a profit. Sellers are finding the days of multiple, over-asking offers have disappeared... and buyers are getting the pick of the crop with buyer reduced signs popping up all over the place.
They were even forced to admit that Vancouver is now "a depressed market".

So if the spin no longer works and the ugly numbers cannot be ignored, what do you do?

Invalidate the usefulness of the numbers, of course.

You could see the strategy launched when Bob Rennie spoke to the Urban Development Institute on May 17, 2012. Rennie said:
I joked with the CHMC’s board a couple of years ago, that the Vancouver market never went up on fundamentals, so why would we go down on fundamentals.  
However, our market really does have fundamentals but our fundamentals cannot be captured in a 90 second elevator conversation, at the water cooler, in a sound bite, and especially not on a blog or 140 character tweet.
And what are those fundamentals that cannot be captured in a 90 second conversation?

I think we saw that in the Global TV piece yesterday as well.

The spin we are going to see is the same as we have heard over and over before. "Rich people wanna live here.  We have limited area due to the mountains and the ocean.  And we have the scenic and lifestyle advantages of those same mountains and ocean." 

This is basically what Global TV said when they trotted out Tsur Sommerville:
Sommerville: Now we have a situation where prices aren't rising, they're flat. We have a situation were listing are rising, sales are falling and there isn't any of the kind of angst or anxiety out there in the marketplace. Instead what it's replaced with is less worries about people driving prices up and more worries about Greece blowing up the world economy.

Global Reporter: Vancouver is that market that is way different than any other kind of market.

Sommerville: Vancouver is very hard to figure out because so much of the purchases are done by wealth. Either people immigrating with wealth or people receiving wealth from parents or relatives so the normal 'what are incomes doing and what are prices doing', that just doesn't work out here well.

Global Reporter: And that may explain that while there are price reductions, average selling prices just aren't going down. Unlike other depressed markets in the world, there's no pressure to sell. And with our geography, the mountains and the ocean, it's not likely to change.
I suspect this will be the theme for the foreseeable future.

Claim prices simply can't go down here.  Tell everyone that wealth wants to be here. And desperately try to convince you to "buy now or be priced out forever".

And to the one segment of the community that the industry can't influence the peddle this message - the blogosphere - Rennie summed up his frustration in that May 17th UDI speech:
I do have a huge concern over what Tracie McTavish, the president of our company calls, your “Keyboard Courage”, referring to what is becoming a dangerous and apparently acceptable practice which is, negative market commentary that is nothing but speculation.

Speculation made by spineless, signature‐less, individuals on a blog, on a blog that in most cases has less than 500 followers.

Then the next thing you know, the mainstream media picks up on the negative as fact and all of a sudden, it’s breaking news and our industry spends the next 6 months attempting to dispel the rumors and sound bites.

The dispelling of the "rumours and sound bites" of the basic market fundamentals (ie. the inescapable reality of the hard sales data) has begun.

And it would appear that in this attack on the fundamentals, the blogosphere is being cast as Public Enemy No.1.

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Friday, June 29, 2012

Global reports the facts, concludes ours is now a 'depressed market', but then claims we're 'different'


If you are new to reading blogs which focus on the Vancouver or Canadian Housing Bubbles, you probably aren't aware of the complete distain many in the community have for the uncomfortable relationship that seems to exist between those work in the real estate industry and the mainstream media.

Critics pinpoint advertising dollars as the foundation of what appears to be a symbiotic relationship between the two and complain the media isn't giving the Canadian public a proper, critical view of the dangers - or existence - of the growing real estate bubble.

Worse... critical media is subjugated and transformed into nothing more than a public relations arm of the real estate industry.

And when it comes to television, no one station seems to epitomize that corrupt relationship to the critics like Global TV.

Bearish Real Estate blogs rail against the fluff pieces that Global TV seems to generate. 

In fact, when it comes to Real Estate stories, Global always seems to be the ultimate optimist.

Like the man who is finds himself standing in horse sh*t up to his waist - Global TV is the station that looks around and proclaims, "Gee... there must be a pony around here somewhere!"

This belief is hammered home by a story which aired earlier this week.

Unable to ignore the impact of market conditions, Global TV starts off it's latest examination with hard facts that would have most in the Real Estate 'bear' community believing Global is finally presenting a balanced picturet:
Vancouver Real Estate had defied trends and showed steady growth for far longer than anybody believed possible. The evidence is not in the polls, which very often contradict one another, but on the ground, in the neighbourhoods where plum properties have always sold quickly and at a profit.

Sellers are finding the days of multiple, over-asking offers have disappeared. At least in the condo market. And buyers are getting the pick of the crop with buyer reduced signs popping up all over the place.
A real estate agent takes the Global reporter to several upscale apartments in choice Vancouver neighbourhoods and highlights their desirable selling points. Viewers are then told the units are being reduced in price, an action completely unheard of through most of our ballooning housing bubble.

The take on the situation from the realtor?
"If you want them (condo's) sold, you have to reduce."
This view is identical to the one we shared with you yesterday from Richmond realtor James Wong. And the Global TV reporter summarizes the real estate situation in Vancouver succinctly:
It seems to be a growing trend in Greater Vancouver. Drop you asking price to get results. With listings up over 15%, and sales down by the same amount from May this year to last year, 1 in 5 sellers have reduced their price.


What's different is the frenzy created with the flood of Asian buying has cooled.
Global rounds out the state of the current market by next showing you that even single family houses are seeing prices slashed.

But it's at this point where Global seems to change direction - dramatically.

Sales are down, listings are soaring, realtors are saying if you want to sell you must slash your prices.  A declining market, right?

Not according to the real estate industry... err, Global TV.

Global trots out their favourite apologist, Tsur Sommerville.  And suddenly Global TV makes the case that Vancouver is different. And that the fundamentals of the market simply don't apply here:
Sommerville: Now we have a situation where prices aren't rising, they're flat. We have a situation were listing are rising, sales are falling and there isn't any of the kind of angst or anxiety out there in the marketplace. Instead what it's replaced with is less worries about people driving prices up and more worries about Greece blowing up the world economy.


Global Reporter: Vancouver is that market that is way different than any other kind of market.


Sommerville: Vancouver is very hard to figure out because so much of the purchases are done by wealth. Either people immigrating with wealth or people receiving wealth from parents or relatives so the normal 'what are incomes doing and what are prices doing', that just doesn't work out here well.


Global Reporter: And that may explain that while there are price reductions, average selling prices just aren't going down. Unlike other depressed markets in the world, there's no pressure to sell. And with our geography, the mountains and the ocean, it's not likely to change.
Did you catch that?

Global TV slips in that ours is now a 'depressed market'.

Then they quickly gloss that over by saying that we're "unlike other depressed markets", that ours is different. Then they imply that the inevitable outcome for depressed markets won't happen here.

What drives observers crazy is that it's not Sommerville, a supposed expert, making these statements.

These are the conclusions of the Global reporter.

It's as if Global is trying to reassure the market instead of reporting on what's going on in the market (and possibly triggering panic).

Is it balance reporting or manipulative massaging of the facts?

When Global TV puts out pieces like this, and makes these types of conclusions, few in the blogosphere think 'balanced' even enters the vocabulary.

(Hat tip to GreenhornRET and Liam for the video clip)

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Thursday, June 28, 2012

Seller's Unite!


On Tuesday we were telling you just how bad it is for real estate sales in Richmond right now.

Realtor James Wong's monthly R/E report, released June 16th but covering the May 2012 sales data, advised that total listings have hit all time highs, daily price reductions are common, and detached home listings in the million dollar plus category are dying on the vine.

Of the 556 homes on the market with an asking price north of $1,200,000, sales have been so bad that there were 17.7 months of inventory on the market by the end of last month.

Wong's advice to sellers was blunt: If you have to sell, much deeper price cuts are needed.

And if the data from the month of May was bad, June's results are abysmal.

Using sales reported between May 27, 2012 and June 26, 2012, and actives as of today... there is now 23 months of inventory on the Richmond Real Estate market.

Word has it that for the majority of those rare sales that are occurring, most are closing below assessed value of the property as some sellers are obviously taking Mr. Wong up on his sage advice.

But as you can imagine, this is causing a great deal of consternation for other Richmond sellers.

One Chinese real estate forum is calling on 'sellers to unite' to prevent further price drops. (hat tip to VMD on Vancouver Condo Info).
“A brand new house in good area of West Richmond, 8111 Dalemore Rd, was just sold for $1.58M, $170k lower than assessed price of $1.75M. It’s a shame that the (owner) went through so much to purchase this property and build a new house, hoping to earn some money while doing a service to the community, only to (then) recklessly slash (the) price. I call on the sellers to withhold giving in to under-asking offers. We should all pull our listings and wait until a better market to sell in a bidding war situation”
Of course, as VMD notes, do not lament too long for the hardships endured by the seller at 8111 Dalemore Road.



The 5 bedroom, 5 bath mansion was built in 2010 to replace an old-timer teardown which last changed hands for $533,000.

And while the property did recently sell for $170,000 below the 'current' assessed market value of $1,750,000, a final sale price of $1,580,000 hardly qualifies as hardship for this seller - right?

Or does it?

Maybe it really is "a shame that the buyer went through so much to purchase the property and build a new house" and not have it sell in the type of bidding war that one year ago would have realized offers of $300,000 - $400,000 over asking.

Perhaps I am being callous to the needs, hopes and dreams of the Richmond speculator?

Proletariat Unite! Protect the Richmond real estate flipper now!

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Wednesday, June 27, 2012

Huh?


Meet Randal Denley. Currently he writes for the Ottawa Citizen.

Last week he penned the most bizarre column that took issue with the recent actions of Federal Finance Minister Jim Flaherty.

As you know by now, the federal Conservatives have taken action to shorten the amortization period for mortgages and reduced the percentage of your income it will allow you to spend on housing.

Denley disagreed with the moves and articulated his concerns in a column titled "Buying a house is our risk".

But right from the headline, you're left scratching your head.

If "buying a house is our risk", why are you arguing against the government withdrawing from what they will cover with CMHC insurance?

Denley says,

"Low interest rates play a big part in making more expensive houses affordable. The Bank of Canada, which supports low interest rates by keeping its prime rate low, doesn’t want us to take advantage of them. It could solve the problem by raising rates, but that would be bad for the economy. Instead, the government is using regulation to depress people’s ability to buy a house.


The government believes it needs to save us from ourselves. Left to our own devices, we will bury ourselves in debt that will take generations to pay off. If only we could be as financially responsible and debt-free as government itself."

Umm... if Canadians want to plunge themselves into insane mortgage debt, we should let them.  Freedom to make your own decisions and all. 

Okay.

But Denley goes on to argue...
"Why do we need government to intervene in the housing market?"
Err... we don't. That's the problem.

Any Canadian can walk into any bank and request a longer amortization under the new regulations.

You can apply for a 30, 35 or 40 year amortization. It might require a higher down payment, a higher interest rate on the loan, a more rigorous financial check, and a hell of a lot more capital backing your request... but if you qualify the bank will provide you with the the loan at the longer amortization.

Of course the average Canadian won't qualify for this. They NEED government interference to provide government guarantees to get that loan at all.

As we noted the other day, the cap on CMHC mortgage insurance funding in 2006 was $100 Billion.

In 2012 it sits at $600 Billion and CMHC is about to breach that ceiling.

In that one statistic lies the foundation which provided the crack cocaine of cheap money that fuelled our massive housing bubble.

It was massive government intervention that brought us to this point and facilitated Canadians to be able to assume all this debt.

By themselves, a huge number of Canadians never would have qualified for all those mortgages to begin with.

Denley argues that we don't need the government playing nanny for us and protecting us from our spending choices.

Agreed, how Canadians choose to spend their money is indeed up to them.

So how is it that Denley comes to the conclusion that other Canadians, through government intervention in the housing market via CMHC insurance, should be asked to assume the risk of those foolish expenditures by our fellow citizens?

"Looser mortgage rules do increase the risk that some people will get overextended and lose their homes. That’s unfortunate, but people make bad financial decisions all the time. Does that mean everyone else should face government controls on their investments?


Buying less house than you can afford and keeping your debt under control are prudent choices, but they should be our choices. It’s our money and our risk.

Bingo! It's your money and YOUR RISK.

Which is exactly why CMHC shouldn't be insuring those mortgages and passing that risk onto the backs of other Canadians through government guarantees in the first place.

It's comical to watch Denley criticize Flaherty for the changes he made.

We've become so addicted to government interference in our housing market that when the government does start to pull back... newspaper critics scream THAT'S government interference.

Huh?

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Tuesday, June 26, 2012

Tues Post #2: How bad is Richmond right now? "If you have to sell, much deeper price cuts are needed."


Meet James Wong.

Mr. Wong is a realtor in Richmond who publishes a monthly report on the health of the market.

On June 16th, before huge mortgage rule changes were announced by Federal Finance Minister Flaherty cutting million dollar homes off from CMHC high ratio mortgage insurance, Wong came out with this report for Richmond real estate.
Richmond’s total home sales for May, 20, 2012 at 271 units was 11% lower than the previous month sales of 306 homes.

The total number of detached homes, townhomes and condos/apartments listed for sale at the end of May at 2,680 units was 6% higher than the previous month’s total of 2,525.

The total active listings for the 3 types of homes in Richmond now surpassed the highest listings registered in September, 2008.

The supply of homes in Richmond at the end of May at 9.08 months edged higher compared to the previous month’s figure at 8.07 months of inventory. The supply of detached homes, townhomes and condos increased further in the month as more listings were put on the market. Overall, the housing market in Richmond is in favour of BUYERS, with a great selection of homes to choose from.

Daily price reductions are common as sellers adjust their selling prices to try to sell their homes.

Richmond real estate market outlook

Both the condo and detached homes markets are facing some challenges. Resale condos have to compete with presale and new homes that are competing for buyers.

Similarly, detached homes are having a tougher time to attract home buyers especially for detached homes that are over $900,000.
 
Homes over $1,300,000 and new homes that are over $1.80 million are not selling well. With current level of supply, price erosion is evident when more sellers are reducing their prices, and transaction prices are trending down.

Homes under $900,000 in Richmond and those priced realistically are getting more showing activities

There are 566 homes over $1,200,000 listed for sale in Richmond. With past 3 months average sale of 32 units, there are now 17.7 months supply of homes.

The slow sale pace will result in home sellers either taking their homes off the market, or allowing them to go expired unsold.

Some seller’s who must sell will have to resort to much deeper price cut to sell their homes.
Did you catch that?

For the 566 homes priced over $1,200,000 it is expected you will have to wait 17.7 months to sell.

And if you are in a position where you have to sell, you will "have to resort to much deeper price cuts to sell your home!"

And this rosy analysis, which comes from a realtor, came out before Flaherty cut all of these homes off from CMHC high ratio insurance eligibility.

Reports over the summer and into the fall from Mr. Wong should be interesting.

Perhaps even more interesting will be watching to see what sort of price cuts will be required if current conditions intensify.

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Tues Post #1: Changes, they are appearing


Question: "What is this coin worth?"

Answer: "What will you pay for it?"


Before I lead into today's post, a quick note to announce the launching of the Village Whisperer on Twitter. You can find us at @village_whisper. There have been issues posting on Facebook so it's time to give Twitter a chance after having followed others for a while now. For those who have requested to follow in the past month, finally just figured out you had to be approved - lol.

Technology... sigh! I have images of the flashing VCR 12:00. Et Tu, Whisperer?

Moving on.

As Canada Day approaches, I can't help but thinking of the coin pictured above.

A coin collector friend of mine brought it out on the weekend and used it in an analogy about the real estate market.

The coin is a Special Edition Proof Silver Dollar issued by the Royal Canadian Mint (RCM) in 2005 to commemorate the 40th Anniversary of the current Canadian Flag.

When it was originally issued it sold for an astronomical $99.00 - and it sold out almost instantly.

I say astronomical because prior to this coin, most RCM proof silver dollars only fetched $35 when originally issued.  The attraction with the coin at the time? There were only 5,000 made.

It threw collectors into a frenzy. The lowest mintage proof silver dollar before 2005 clocked in at 10,000 coins.  And because of this low, low mintage, speculators went wild.

Even before it sold out at the Mint, it was selling on eBay for $150.

Once sold out it jumped rapidly to $200, then $250.

At the height of the craze, many sold for over $600 and some as high as $850. It commanded asking prices of $1,200 for a while.

Wow! $1,200 for a Canadian coin with a face value of $1.

So what does this awesome collectible sell for today?

Now-a-days you can pick it up for $250 quite easily on eBay. Hunt around and you can get it for less.

If you bought a bunch at $99, it's no big deal. You can still sell them and make a profit. You can even undercut most of the competition currently offering the coin at $250. Sell it for $150 and you still make a handsome profit.

Buy my collector friend says a great many people bought those coins at the $250 - $400 price point. They were caught up in the frenzy and many hoped they would be an 'investment' they could sell as the coins raced up in value.  

Those who sold at the right time profited. Those who held too long have lost money.

Today there are still many who bought at $400 and are waiting for the market to come back.

I asked him on Sunday, "what is the coin actually worth?"

His answer, "whatever someone will pay you for it!"

A poignant comment.

Yesterday our friends over at the blog Vancouver Price Drop released their weekly top 20 price reductions of homes in the Lower Mainland.

Halfway down the list is 3856 W 8th Ave. in Vancouver.

Wonderful Point Grey home on a large, private lot. Renovated house with 3 bedrooms on the top floor & large family room with vaulted ceilings. Main floor has a nicely appointed living room, dining room, den & updated kitchen. Fully finished basement featuring office area, roughed-in bathroom, family room w/ gas F/P & lots of storage. 60 x 90 yard offers privacy from all directions. This is the quiet part of 8th Avenue with view to the mountains on a tree-lined street of oaks & character street lamps. Steps to Lord Byng Secondary, Queen Mary Elementary, shopping, transportation, parks & beaches.

As far as the price drop list goes, it's far from the biggest drop in asking price on the list but it stands out for an interesting reason.

The assessed value of the home today is $2,087,300. Current asking price: $1,680,000.

Was it only a year ago that similar west side homes in Vancouver were caught up in bidding wars and 'trading' for $300,000 - $400,000 over asking?... prices which in themselves were $300,000 - $400,000 over assessed value?

That's not the case now.

3856 W. 8th Avenue went on the market on May 12, 2012 for a modest $2,188,000... a mere $100,000 over assessed value.

On May 25th $190,000 was shaved off the asking price.

On June 14th another $100,000 was trimmed off the asking price, a reduction total of $290,000.

On June 19th the listing was removed.

Relisted on June 22nd, the property now sports an incredible asking price of only $1,680,000!!

That's a drop of $508,000 off the original asking price (23%) and $407,300 below assessed value!

Hmmm... almost makes you wonder what's wrong with it, doesn't it?

And it's exactly that psychology which is glazing buyer's eyes right now.

Of course some out there will suggest this is an example of realtor games (listing pulled, relisted below assessed value to produce a bidding war).

But I suspect we are, once again, seeing the Boomer Trigger being pulled. I suspect this is one of those houses that acquired for $60,000 - $80,000 in the early to mid 1970's. As a result, I think we will see that the current owner of 3856 West 8th will have no problem shaving another $500,000 off that asking price if need be.

It's a trend we have been seeing in areas like Richmond for a while now, properties being listed below assessed value because inventory simply isn't moving.

But a house in Point Grey for $400,000 below assessed value? In HAM (Hot Asian Money) central?

Of course a year ago, Richmond was HAM central too.

So what's 3856 West 8th actually worth?

The answer, of course, is what someone will pay for it.

And with the stunning developments of last week, it probably won't sell above the current asking price.

Will it ever sell at the 1973 price of about $80,000?

Doubt it. But like the 2005 proof enamel dollar, I am supremely confident you will see this home trade hands in a few years time for a multiple of $80,000 that is far closer to that 1973 price than it will be to $2 million asking price of 2012.

We'll keep an eye on on what it sells for in the immediate future to gauge just how much the landscape is actually changing.

Speaking of Richmond, check back later this afternoon as we introduce you to an Asian Richmond realtor who has a very blunt message to high end homeowners in the dyked city who wish to sell:
"If you have to sell you will have to resort to much deeper price cuts to make a sale!"
Coming up later today in Tues Post #2.

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Monday, June 25, 2012

Flaherty's Folly - updated


Took the day off and wandered down to Greek Days in Kits yesterday.

As you can see, tons of people in attendance.

If you've never been to Greek Days, the festivities all revolve around one basic theme - food.

Wandering the internet this weekend, the Canadian real estate blogosphere was also focused on one basic theme too: examinations and criticisms of 'the week that was.'

In describing last weeks events, a number of different sites invoked the phrase: "Flaherty's Folly" to describe events.

I agree with the moniker... but I would broaden the perspective in applying the term.

History won't remember 'Flaherty's Folly' as the sole actions he took last week. Instead it will refer to the past six years.

Let's wind the clock back 10 years and review.

In 2002 total outstanding mortgage debt in Canada was a cool $467 billion.

These mortgages were on the whole issued to households with good credit, and to people with proper downpayments. CMHC insured a small portion of this debt.

In 2003 CMHC decided to remove the price ceilings limitations. That is, it would insure any mortgage regardless of the cost of the home.

In 2007, after years of lobbying, the now defunct AIG found new hope with a newly elected Conservative government.

AIG was now permitted to insure high risk Canadian mortgages.

CMHC was also permitted to issue mortgage backed securities and exchange these on the open market.

At the same time, the Conservative government launched a radical policy that allowed CMHC, AIG & GE to insure 35 year amortizations that were coupled with 0% down payments. A few months, but before 2008 - this was expanded to 40 year amortizations.

Thanks to Canada economic stimulus package of 2007 the mortgage market radically changed.

Historically high home prices continued to gain steam. High risk borrowers flooded the real estate market.

Throughout 2007, the average Canadian home buyer who took out a mortgage had only 6% equity in their home. The 6% equity is or equals the national average downpayment for all mortgages including home buyers who traded up to more expensive homes.

In 2008, Canadian home prices started to dip as affordability became the worst on record in many cities.
CMHC publicly admitted that it was ordered to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.

In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.

Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.

Mortgage Securitization has accounted for 90.5% of all growth in total Canadian mortgage credit outstanding since 2007.

The cap on the Canadian mortgage securitizaton market has grown from

  • 100 billion in 2006
  • 130 billion in 2007
  • to 295 billion by mid-June 2009

In 2009 CMHC indicated in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of that year.

In 2009, at the height of a global recession, we started to see many individuals  being granted $500,000 - $800,000 mortgages for their first home purchase if their household income ranges from $110,000 - $170,000.

It forced the Canadian Government to raise the cap on CMHC insurance to $600 Billion. But at these rates of progression, it only took until 2012 for the cap limit to fill up.

In a February 3rd, 2012 article in the Vancouver Sun, the daily paper asked "Is the mortgage industry running out of money?" as CMHC closed in on their $600-billion cap for mortgage insurance.

Think about it. In 2006 that cap was $100 Billion. Six years later it is hitting $600 Billion.

In that one statistic alone lies the real foundation of what caused Real Estate values to skyrocket in Vancouver and the rest of Canada.

The explosion in real estate values was fuelled by the crack cocaine of cheap, easy money... it's that simple.

And now the supply of drugs is being drained away.

This is the fourth time in just four years that the government has made changes to mortgage rules. The first change occurred in 2008, when they shortened the maximum amortization period from 40 years to 35. In January of last year, the government announced that it would be reducing the maximum amortization period of government-backed insured high-ratio mortgages from 35 years to 30 years. Now it has reduced them from 30 to 25 years.

Dropping the amortization period back to 25 years and tightening HELOC rules isn't the problem. Increasing amortization periods and insuring HELOC's to begin with is what triggered this mess.

Flaherty is the man who brought us the 40 year, zero down mortgage.

Flaherty's folly was not, as some are suggesting this week, bringing us back to the 25 year mortgage.'

The folly lay in moving us from 25/10 to 40/0 in the first place.

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Saturday, June 23, 2012

CMT's 20 Observations on the New Mortgage Rules


Canadian Mortgage Trends came out with an interesting post today titled 20 Observations on the New Mortgage Rules
It's reposted here for your convenience...
====================

Three months ago, Finance Minister Jim Flaherty told banks totighten lending on their own. Now he’s doing it for them.
The Department of Finance (DoF), in concert with OSFI, released a buffet of mortgage rules Thursday. By our count, there are eight salient changes that, when combined, will have a measurable impact on housing.
See: New Mortgage Rules and OSFI Guidelines [B-20] for rule summaries.
The motivation for these moves is captured in Flaherty'spress briefing comment: "I have been listening to the market, and quite frankly I don't like what I hear.” Loose translation: The debt and housing train is in danger of running off the rails.
The DoF's solutions to this problem will influence our market for years to come. Below are 20 musings on the new mortgage rules, sprinkled with a few tips and predictions:
1. Hurried Implementation:
mortgage-rule-implementationThe government knew full well that borrowers would try to front-run these restrictions. So it provided only 18 days lead time until the changes take effect. Most lending execs had no idea that new mortgage insurance rules were imminent. As a result, lenders were not fully prepared.
Because of this, and because banks like to appear prudent to regulators, there's a chance some lenders may implement rules (like the 25-year amortization restriction) before the July 9, 2012 deadline.
2. The Stampede:
Mortgage-rule-rushSeemingly every mortgage adviser in the country is blasting out emails advising clients about these changes. The sense of urgency will spike mortgage volumes near-term. But high-ratio borrowers who rush to get a 30-year amortizationor 85% loan-to-value (LTV) refi should be warned:
  • Underwriting during the interim period (June 21-July 8) may be especially vigilant, in an effort to weed out the marginal borrowers who spring from the woodwork
  • For the next three weeks, the lenders with the best rates, or those that are less efficient or less staffed, could have abnormal underwriting delays (keep that in mind if you have financing condition deadlines)
  • In most cases, mortgage rule changes are not a reason to rush a home purchase.
3. Rate Warfare:
Battle tank cutoutIf you’re a well-qualified borrower, you’ll be happy to know that you just became more appealing to lenders. These rules will shrink the pool of prime borrowers. As a result, we’ll see bankers and brokers battle harder for your business. That means the rate wars that Flaherty “discourages” will intensify, whether banks publicize it or not.
4. Side-Effects:
affordabilityShorter amortizations, higher qualification rates and lower debt ratio limits will restrict buying power. To that, Flahertysays: “Good. I consider that desirable.”
Canada's 9.6 million existing homeowners, however, may not deem it so desirable—not if these actions trigger a bigger or longer-than-normal selloff that jeopardizes their home equity.
Equity is the biggest source of retirement savings for millions of Canadians. For this reason, even Flaherty would admit that these proposals are essentially a calculated gamble.
On the other hand, waiting for the market self-correct has its own risks, namely a much longer economic recovery if the speculative balloon is punctured.
Either way, the market is propelled by payment affordability. Reducing buying power will weigh on prices. Whether other supply/demand factors offset this pressure is unknowable.
The DoF wants Canadians to believe the side-effects won’t be extreme. And, if market reaction is anything like the 2008, 2010, and 2011 mortgage changes, it won't be.
Flaherty states that "less than five per cent of new home purchasers" will be affected by these changes. If he simply means buyers of brand new homes, five per cent equals ~9,600 people a year (based on CAAMP's 2012 housing starts estimates).
If Vegas made an over/under line on that 5% figure, we’d bet the “over.”
In the new-build market, there are 95,000 first-time buyers each year alone. If you include new and resale purchases, there are roughly 261,000 newbie buyers annually. These are people who are disproportionately affected by these changes, albeit a minority of them.
On top of this you have a minimum of five per cent of repeat buyers (20,000+ a year) that will likely be curtailed by the rule changes to amortizations, qualifications rates, stated income, and debt ratios.
5. The Amortization Effect:
Reducing amortizations to 25 years from 30 chops the maximum theoretical mortgage by roughly 9% (versus ~7% when amortizations dropped from 35 to 30 years). That’s equivalent to paying almost 1% more on your mortgage rate.
Put another way, a qualified family earning $75,000, with no debt, will qualify for $49,000 less mortgage by being forced to take a 25-year amortization.
amortization-comparisonAccording to CAAMP, 40% of new mortgages last year had amortizations over 25 years. Of all the new rules, this will have “the most direct impact on the Canadian housing market,” states RBC. It “will raise the barrier to entry into Canada’s housing market.” (That is Flaherty's point, of course.)
TD thinks it could take up to a year for changes like this to negatively impact prices. But some expect a more imminent result.
Robert Kavcic of BMO Nesbitt Burns notes: “After the 35-year amortization was eliminated last March…existing home sales fell by more than 3 per cent over the subsequent two months.”
6. Market Stability:
Most industry observers, ourselves included, believe in the merits of shifting some housing risk to the private sector and building savings rates. "Our economy cannot . . . depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” explains BoC chief Mark Carney.
The government adds that these new rules will bring “long-term stability” to Canada’s real estate market. Note: They say “long term” because they know the effects could be adverse in the short term. The DoFcalls that risk “manageable,” however.
Home prices, which are already self-correcting in various regions, will see additional pressure as payment affordability drops. (Ironically, a correction in prices would then, in theory, improve affordability.)
Flaherty has “tapped the brakes at precisely the right time,” says BMO CEO Frank Techar. From our viewpoint it's more like stopping short than a little tap.
All one can hope for is that the brakes don’t lock up, with mortgage affordability being so intimately related to home prices.
That’s partly why the Canadian Association of Accredited Mortgage Professionals (CAAMP) feels the government has “overreached” with this latest round of changes. In a statement Thursday it said:
“CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines…may precipitate the housing market downturn the government so desperately wants to avoid.”
But heck. With housing-related activity comprising 1/5 of GDP and resale housing adding ~$20 billion in spending and 165,000+ jobs this year, what’s the worst that could happen?
7. So Much for High-Ratio Refis:
Refinance-MortgageRefinances above 80% LTV will soon be a memory at primelenders. Refinance volumes will then fall off a small cliff. The last time the Ottawa lowered LTVs on refis, insuredrefinances tumbled 22% (source: CMHC).
The result will be more people being saddled with high interest debt that they can’t refinance. (Insert your favourite home-ATM analogy here.)
We’ll also see home improvement spending slow. The renovation business is a $66 billion industry and $17+ billion a year is financed with mortgages and HELOCs. (Reining in overleveraged and chronic home renovators is healthy. They are a small wedge of the refi pie, however.)
If you own an average priced home, you’ll be able to refinance $18,780 less debt to your mortgage. If your rate on that debt is 19.99%, for example, the 80% LTV refi restriction could cost you an extra $9,000+ in interest (or more if it takes greater than five years to pay off that rolled-in debt).
On the upside, a loan-to-value ≤ 80% would save you $5,587 in default insurance premiums.
Now more than ever, it will pay to have a competant mortgage adviser run the math and compare all your refi options.
8. Non-Prime is Where It’s at:
ProfitAlternative lenders like Equitable Trust and Home Trust are lovin’ life. Their target market has just expanded as regulators force banks to turn away more near-prime borrowers.
If alternative lenders can manage defaults through the eventual housing downturn, they’ll profit handsomely from this volume boost. We're talking borrowers who are less rate sensitive (because they have fewer options) and at least three times more profitable than “A” borrowers.
In addition, given greater demand for Alt-mortgages and a constant funding supply, we may see "B" lenders exert more pricing power for a period of time.
From a broker perspective, this growth in near-prime lending is the silver lining of these rule changes. Comparison shopping is important for prime mortgages but it's utterly essential when it comes to non-prime mortgages. And brokers are the only significant source for this service.
9. Exceptions:
new-BFS-mortgage-rulesIf you need a mortgage and have less than 20% equity, then as long as you apply before July 9, you will qualify under the old rules.
That’s true even if your purchase offer isn't final. “…The new parameters will not apply, even if the conditions of [a purchase] agreement have not been waived,” says the DoF.
If your application does not conform to the new insured mortgage guidelines, however, you’ll have to close byDecember 31, 2012. (See: these rule FAQs.)
Note: If your income situation, debt ratios or loan amount change, and you need to modify your mortgage after July 9, you may be bound by the new rules (even if you were already approved under the old rules).
10. Pre-approvals:
Pre-approvalIf you get pre-approved before July 9 and want to avoid the new rules, you’ll need to:
a)  Have a purchase agreement dated before July 9, and

b)  Apply for a full mortgage approval before July 9.
11. HELOC Pullback:
HELOC sales will drop once banks implement the B-20 guidelines. The reason: Fewer homeowners will meet the lower 65% loan-to-value (LTV) limit and higher qualification rates.
Fortunately, HELOCs_OSFI tells us it willnot require existing HELOC holders with LTVs over 65% to drop down to 65% LTV.
Borrowers are still able to submit HELOC applications today at 80% loan-to-value. There’s no telling for how long. As the October 31, 2012 implementation deadline approaches for the big banks, we’ll see 80% LTVs start disappearing. It could happen sooner than some expect.
In the coming days, we’ll run a piece on how HELOC LTV changes impact the Smith Manoeuvre and similar leveraged investing strategies.
12. CB D/Ps R.I.P.:
Cash-back-mortgageAccording to one high-level bank exec we spoke with, Cashback downpayment mortgages look to be dead, effective October 31, 2012 (possibly much sooner). But no lender has announced anything on this, as of yet.
Cashback refinances, however, may live—unless the DoF ends up restricting them too.
Barring that, cashback refis may get more common as time goes on.
Borrowers can use CBs to refinance to 85% LTV, via an 80% LTV mortgage plus 5% cash back. They'll have to pay a cashback interest rate (1.70%+ higher on 5-year terms), but the "free" cash effectively reduces that rate premium to about 50 basis points. CB users also avoid the insurance premiums that typically apply to 85% LTV refinances.
Just beware of the cashback clawbacks if you get one of these mortgages and discharge it before maturity.
13. Debt Ratio Double-Whammy:
debt-ratio-calculations-mortgageDebt ratios are one measure of how much mortgage you can afford. The new 39% gross debt service (GDS) limit will only impact high-ratio borrowers with a 680+ credit score. (High-ratio borrowers with scores below 680 are already capped at a 35% GDS.)
Dropping from 44% to 39% will restrict a subset of the market. Most people won’t be affected, however. The reason we say that is because the typical high-ratio buyer has a total debt service (TDS) ratio in the mid-30% range, according to analyst research we’ve seen. The latest CAAMP data on the subject estimates the TDS for all buyers combined at 32.5% (as of 2010).
That said, not everyone is immune from this GDS restriction. The new 39% cap will lower the maximum theoretical mortgage by roughly $57,000, or 12%, for a household earning $75,000. (This assumes a 3.09% 5-year fixed rate with a 25-year amortization, no debt and 5% down.)
If you combine that with the amortization reduction (from 30 to 25 years), it's quite a one-two punch—amounting to a 20% reduction in maximum theoretical purchasing power.
You better believe that will impact home prices, other things being equal. The good news is that the number of people this effects is relatively small and a 10% price drop would largely offset it. As mortgage rates rise, however, the GDS limit becomes more constraining.
14. Long-am Options:
Mortgage-Amortization-ComparisonAfter July 9, there will still be some lenders offering 30-year amortizations to people with 20% equity. But not the major banks.
If history is a guide, banks will enforce 25-year amortizations on all mortgages. Some might even do it before July 9.
15. Bundles:
According to OSFI, lenders will no longer be able to offer “a combination of a mortgage and other lending products (secured by the same property) in any form that facilitates circumvention of the maximum LTV ratio limit…”
bundle-mortgageThere is question on how this will impact “bundle mortgages.” A bundle refers to an 80% LTV non-prime mortgage with another lender’s 5% second mortgage behind it. This lets non-prime lenders offer 85% LTV lending solutions.
Bundles exist partly to avoid mortgage insurance. Federally-regulated lenders must insure mortgages over 80% LTV by law. If another lender holds the 5% second, it's a way around that limitation. (Borrowers can also arrange 5% seconds on their own if they like.)
As a side note, and slightly unrelated: This 80% uninsured LTV limit is rumoured to be one reason why TD shut down TDFS. The speculation was that OSFI didn’t like the fact TDFS was offering 85-90% LTV uninsured mortgages—albeit through a structure that was technically onside of the regs.
The OSFI spokesperson we asked wasn't able to offer clarity on the bundle question, other than to say, “The language in the guideline is clear.”
We can tell you, however, that many in the industry are anything but clear on it. 
If one interprets OSFI’s rule as preventing lenders from promoting bundles (as we’ve defined them), that would seem unreasonable. The risk to the regulated first mortgage lender is negligible because the highest risk money (the extra 5% LTV) comes from a totally separate, private and uninsured lender with segregated capital. Moreover, the first mortgage lender underwrites its risk as if it were lending at 85% LTV or above anyway.
16. Million-Dollar Babies:
…are going down with the bathwater. People buying $1 million-plus properties will soon have to plunk down 20%. Otherwise, they’ll no longer qualify for high-ratio insurance.
iStock_000013379755XSmallThat said, the Department of Finance tells CMT: “…$1 million properties with a down payment of at least 20% would still be eligible for (low-ratio) mortgage insurance offered by CMHC and private mortgage insurers.”
Flaherty says that wealthy people’s access to mortgage insurance is “not my concern…If someone can afford to pay a million dollars…they don’t really need CMHC. That’s not what CMHC is there for.”
If that’s true, Jim should probably update CMHC’s mandate. Last time we looked, its mandate was: “to allow as many Canadians as possible to access home-ownership on their own” and “in all parts of the country.” Vancouver and Toronto happen to be parts of the country, and they've got more $1+ million homes than homes under $300,000.
From a nationwide standpoint, high-ratio million-dollar mortgages are a small fraction of the pie. In Toronto and Vancouver, however, million-dollar home sales are 6-18% of the market respectively. 53% of single-family homes in Vancouver-proper are over a mil. (for now anyway).
By all accounts, a cut-off at $1 million is purely arbitrary. A million-dollar mortgage buys a lot less than it used to. Granted, it implies you’re better off than most, but it doesn’t make you “rich,” especially if you have to live in a major city.
There’s no public data on insured million-dollar mortgages, but CMHC tells us: “Of our total insurance-in-force distribution, five per cent of our mortgage portfolio had a loan amount exceeding $550,000 at origination. This includes high-ratio, low-ratio and multi-unit.” As a pure guess, high-ratio million-dollar mortgages are probably near or less than one per cent of CMHC’s overall portfolio.
Of course, even a fraction of one per cent of Canada’s 9.85 million homeowner households is tens of thousands of homes. If this news spooks a portion of those owners into selling more urgently, or concerned buyers defer buying, or buyers who need high-ratio insurance can’t get it, some high-end markets will suffer.
It’s worth noting that many million-dollar borrowers have sufficient net worth to make a 20 per cent down payment. They simply prefer to leverage their capital in other ways. Where that buyer has assets, impeccable credit and strong employment, those are very profitable low-risk insurance premiums for the government—premiums the government will no longer collect.
At day's end, assuming strong underwriting and conservative appraisals, the justification for this change is questionable. Alternatives could have been:  (a) setting the $1M threshold higher, (b) raising premiums on $1M+ properties, or (c) scaling back insured loan-to-values over $1 million.
17. Appraisals:
appraisalOSFI says, “In general, FRFIs should conduct an on-site inspection on the underlying property…” Lenders can still use automated appraisals, but OSFI expects them to use live appraisers if an application is deemed higher risk.
It will be interesting to see if more high-LTV mortgages are appraised. Currently, lenders and default insurers rely on auto-valuation systems on most of these applications.
18. Renewals:
mortgage-renewalIf you have a high-ratio insured mortgage with an amortization over 25 years, you shouldn’t have a problem renewing with your existing lender.
You’ll also still be able to switch lenders and keep an existing amortization over 25 years, assuming:
  • You don’t increase your loan amount.
  • Your loan-to-value doesn’t increase (which could happen if home prices dive), and
  • You have a regular mortgage (i.e., it’s not acollateral charge mortgage).
Of course, if you need to increase your mortgage in the future and have less than 20 per cent equity, you’d be limited to a 25-year amortization. People should keep that in mind if they’re buying with a 30-year amortization today and thinking of upgrading their property down the road.
19. Changes for Self-employed:
Self-Employed-Mortgages-WomenBanks who still have flexiblebusiness-for-self (BFS) underwriting policies today (there aren’t many left), probably won’t for long. OSFI has put more pressure on lenders to obtain “reasonable…income verification” from self-employed borrowers, such as an NOA and business formation documentation. Banks have been checking those docs very closely for income reasonability.
Mainstream lenders may stiffen BFS qualifications in other ways as well. As a result, many self-employed borrowers who tax-manage their earnings (i.e., don’t pay themselves enough salaries or dividends) will find mainstream stated income programs ineffective. That’ll force some otherwise-qualified borrowers into the arms of alternative lenders with much higher interest rates.
Some critics might ask, "Why should the government take risk for self-employed borrowers?" To that, one could argue, why should the government take risk for any mortgage borrower?
The answer is beyond the scope of this article (which is long enough already), but in a nutshell: There are substantial economic and social benefits to making home ownership accessible to low-default-risk borrowers who contribute to job growth and pay aprofitable insurance premium to the taxpayers of this country. Default risk is not linked to one-factor (income). It's determined by a borrower's total credit profile (assets, debts, cashflow, income stability, equity, beacon score, and so on).
20. Interest Savings:
interest-savingsThe DoF’s press release heralded the “$150,000” that “typical” families could save in interest, thanks to it winding amortizations back to 25 years. That’s great, but this is no consolation for qualified borrowers who are forced to allocate cash flow towards a mortgage instead of better uses.
The fact that shorter amortizations save interest is simple mathematics. But that doesn't make a 25-year amz the optimal strategy (or lower risk) for all.
Many qualified borrowers are better off with a long amortization and lower payments. They can then budget that money towards a higher-returning use, which might include education, retirement investing, a small business or a contingency fund.
Flaherty says that "most Canadians” borrow responsibly. Unfortunately, those responsible people will be restricted by these rules nonetheless.
Ottawa could have made borrowers qualify at a 25-year amortization, and leave the option of 30-year amortizations for payment flexibility. Like it sometimes does, however, the government took an easy shotgun approach to regulation with few provisions for exception cases. But it wasn't really about that. The real aim behind the amortization change was to slow the market, plain and simple. Policymakers probably barely considered the micro-economic repercussions for individual borrowers.
*******
Despite the short-term pain and any critical comments above, it is clear that housing volatility will be reduced by these moves, over the long term. And that’s a positive...if you look far enough out.
The questions are, how long is long-term, how unpleasant are the side effects, and could those side effects have be minimized by a more incremental implementation?
Whatever the case, credit is due to the DoF, OSFI and Bank of Canada on two fronts:  #1) They want to do the right thing, and #2) they are by no means intellectually challenged. All three consulted with some of the top minds in the country before making these decisions.
Their analysis has led them to conclude that deflating the housing market is appropriate at this uncertain juncture. Hopefully, their decision to substitute mortgage regulations for monetary policy works out. As Flaherty told reporters Thursday, it all comes down to a “judgment call.”


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