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Wednesday, October 31, 2012

All Hallows' Eve


Halloween or Hallowe'en (a contraction of "All Hallows' Evening"), also known as All Hallows' Eve, is a yearly celebration observed in a number of countries on October 31, the eve of the Western Christian feast of All Hallows (or All Saints). 

According to many scholars, it was originally influenced by western European harvest festivals and festivals of the dead with possible pagan roots, particularly the Celtic Samhain.

Others maintain that it originated independently of Samhain and has Christian roots.

North American almanacs of the late 18th and early 19th century give no indication that Halloween was celebrated there. The Puritans of New England, for example, maintained strong opposition to Halloween and it was not until the mass Irish and Scottish immigration during the 19th century that it was brought to North America in earnest.

Confined to the immigrant communities during the mid-19th century, it was gradually assimilated into mainstream society and by the first decade of the 20th century it was being celebrated coast to coast by people of all social, racial and religious backgrounds.

Typical festive Halloween activities include trick-or-treating (also known as "guising"), attending costume parties, carving pumpkins into jack-o'-lanterns, lighting bonfires, apple bobbing, visiting haunted attractions, playing pranks, telling scary stories, and watching horror films.

How so ever you choose to mark the day, to each and all... a safe and happy night.





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Wed Post #1: Federal Government indicates it plans to stay the course on mortgage changes



Back on October 3rd we told you how the real estate industry was gearing up with it's campaign against the Federal Government to undo it's mortgage changes.

The Globe and Mail reported:
The federal government eliminated the approval of 30-year amortization periods on government-backed mortgages in June – and the decision’s impact can now be seen most vividly in the cooling off of Greater Vancouver’s market, with sales falling for everything from entry-level homes to luxury houses... Real estate sales across Greater Vancouver are sinking. There were 1,516 residential properties that changed hands in September in the region, down nearly 33 per cent from the same month last year. In West Vancouver, where the posh British Properties are located, the number of detached homes sold fell to 43 last month from 71 a year earlier.
The Industry's thrust is that the mortgage changes are hurting everyone, not just the entry level buyer. It's hurting you.  Ergo... you should pressure the government to turn the taps back on.

Eugene Klein, President of the Real Estate Board of Greater Vancouver said:
“There’s been a clear reduction in buyer demand in the three months since the federal government eliminated the availability of a 30-year amortization on government-insured mortgages. This makes homes less affordable for the people of the region.”
It's a theme we have covered numerous times this month as the Industry has kept up the pressure.

Yesterday the Federal Government once again served notice they intend to stay the course.
Canada’s deputy minister of finance says he isn’t convinced tighter mortgage rules his department announced in June are behind the recent cooling in the housing market. 
In a rare public speech, Michael Horgan argued that recent comments linking the two are premature.
“There’s some evidence that the housing market, particularly in some markets, is cooling and slowing at the moment,” he said Monday during a presentation to business students at Carleton University. “We read a lot of press commentary that’s saying it’s because of the government’s changes to mortgage insurance rules. I think it’s actually too early to make the direct link.”
 The Globe makes note of the increasing pressure from the Industry:
In recent weeks, several economists have issued reports or made comments in the media linking the latest housing market data to the policy change. 
Earlier this month, the Canadian Real Estate Association reported that Canadian home sales were down 15.1 per cent in September from a year earlier. More than half of the country’s markets were down by at least 10 per cent. 
The association’s chief economist, Gregory Klump, told The Globe and Mail at the time of the report’s release that the data were linked to Ottawa’s June moves. “The recent mortgage insurance changes are working, it is cooling the market and sales have ratcheted down compared to a year ago,” said Mr. Klump.
But Hogan isn't buying the argument. Hogan says there is likely some cause and effect at this point, but he suspects it is more likely that Canadians are starting to realize their household debt levels need to be addressed and are pulling back on their own:
Mr. Horgan pointed to data released this month that the ratio of market household debt to disposable income hit 163 per cent in the second quarter, which the deputy minister noted is at similar levels as those in the United States before the recession. “We do have a home-grown risk,” he said, as he listed Canada’s housing market among a group of factors that could throw Canada’s projections off track. “This is something we pay a lot of attention to.”
And what does Minister Flaherty think of his underlings comments?
During an appearance on CTV’s Power Play, Mr. Flaherty was asked about his deputy minister’s comments. “I’d certainly agree that the full impact [of the changes to mortgage rules] has not been felt yet,” said the Minister.
The full impact hasn't yet been felt?

Can't make it much clearer than that, can he?

Meanwhile the plunge in home sales has made headlines in the Wall Street Journal. At the end of the article Flaherty is quoted commenting on the impact on house sales:
"We think that's a good thing. I would much rather have a soft landing than a hard landing."
Of course that is what the government is shooting for.  But there has never been a 'soft landing' from an asset bubble born of excess credit.

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Tuesday, October 30, 2012

Armchair Observations



You all remember the 'sell out' at Marine Gateway that we first talked about on March 22nd and again on March 26th.

The flagship launch of the development that would kick off the latest theme in real estate sales (transportation, transportation, transportation) was heralded as 'sell-out' just as sales had been sucking wind everywhere else.

Marine Gateway's 415 pre-sale units was big news back then.

At the time we couldn't help but notice that, despite the fact over 11,000 people had pre-registered for this development, by the morning of the big sale only about 100 - 150 people had actually lined up to buy condos that day.

(one commentator over at Vancouver Condo Info pegged the number at only 106)

So 106 people bought over 400 units?

It made us question how many of those units for sale that day went to real estate agents who had inside connections and how many were sold to actual buyers/speculators?

As we said in our March 22nd post, it's our understanding that most lenders will ask that 40 to 60% of the condominiums in a development have an option to purchase before the bank will fund the project.

It has been suggested that,  in order to guarantee this financing, some marketeers will strike a deal with real estate agents whereby in exchange for being able to exclusively market the condo units, they will pick up options on 5 to 10% of the condo's being sold themselves.

That's right, 5-10% of the pre-sale contracts in a development will be picked up an one of these exclusive real estate agents and that a large development might have 5 or 6 exclusive agents.

Doing the math, it is conceivable that half of a 400 unit offering could be spoken for by the very real estate agents exclusively contracted to sell the development.

This could account for why only 106 people could line up for a 400 unit launch and suddenly you have a sell-out - with the people at the head of the line lamenting that all the best units were already spoken for. Most of those units had conceivably been optioned to the real estate agents before the doors even opened.

Which brings us to MC2 and it's grand opening last weekend.

The 2nd phase of the Marine Gateway project was launched and profiled on Monday in the Vancouver Sun
When sales launched at 9 a.m. Saturday for the 443 homes in Intracorp’s MC2 project at Marine and Cambie, the development community throughout the Vancouver area was watching closely. 
Indeed. So how many sold this time around?
Marketer Bob Rennie, who has been spearheading the project’s sale campaign, believes that up to 60 per cent of the condos will be snapped up by the end of today, while his colleague — Rennie Marketing Systems president Tracie McTavish — thinks that up to 80 per cent will be gone within a week to 10 days. 
Only 60% snapped up by the end of the day on Monday?

That's a far cry from the sell-out of Marine Gateway last March.  It begs the question... if this project required that exclusive agents acquire the same ratio as has been suggested in the past, does that mean that less than 10% of the units for sale sold to actual buyers/speculators?

Ouch!

Of course there is an explanation for that:
“The hardest thing to do today is come out with a positive story on real estate because the armchair speculation is all the other way,” said Bob Rennie.
Ah yes, all those negative bloggers again.
Rennie says. “But the building [will be] already approaching 50 to 60 per cent sold out by the end of the day that first day. That’s our expectation ... This is one that the development industry is watching, based on design and [its] transit-oriented site and all of the [items on the] checklists. We’re not overly confident; we’re just really, really confident, based on fundamentals.”
Confidence based on fundamentals? What fundamentals? The requirement that exclusive agents purchase up to half the units themselves?

Ahhh... there we go again.  Being negative.

But you can't really blame us. We saw evidence of agents buying up units in the developments they were marketing with Cam Good back in April 2012.

And scepticism can only compound when the media portrays these agents as non-involved members of the public who have purchased as 'investors'.

It must be stressed, this practice isn't illegal.  But I suspect many in the general public would find it somewhat immoral.  The reality is we will probably never know how many of those units at MC2 were sold to individuals who were not real estate agents.

But considering that only 50-60% could be reported as 'sold' by the end of the weekend, I'm guessing that number sold to agents was probably very high and that - when it came to selling units to actual non-industry investors - MC2 was a disaster.

Of course it's all just armchair speculation. Something I understand is somewhat rampant these days.

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Monday, October 29, 2012

Freak out



For the past few days we have been showing you what could happen if panic sets in and people realize the bubble is starting to collapse.

There are lots of people who can - and will - move very quickly on price. And that's the one thing the real estate industry doesn't want you to do.

That point was driven home on the weekend by Peter Simpson, CEO of the Greater Vancouver Home Builders Association, who was headlined in this Vancouver Province article urging people: Don't fret or freak out, says homes veteran.
Peter Simpson wants to offer reassurance to new Lower Mainland homeowners worried about the shrinking value of their houses. Don't be dazzled or depressed by price changes. They go down, then they recover and rise over time, he says.
Clearly the industry is worried about people who are keeping close tabs on things.
Simpson believes people only hurt themselves if they become obsessed with tracking week-by-week house price changes. "They should not consider their home and its value as a pork belly future," he says. "That causes a lot of people angst. "Live in it, enjoy it and if you have to move somewhere else, sell it and move on."
If you must worry, Simpson wants you to channel you energy into helping his members develop more properties into high density housing: 
If you must worry about something, worry about the resistance from some people to letting their neighbourhoods evolve into a mix of single and multi-family housing, Simpson says. Densification is the key to providing affordable housing choices as the Vancouver region grows, he says. "We have to start building more high-density housing along arterials and even up side streets in existing neighbourhoods."
What ever you do, don't let affordable housing choices come about by letting the value of properties slide.

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Sunday, October 28, 2012

Update on 2905-438 Seymour Street - how a seller could cut 60% off asking price and still profit




A lot of people simply can't conceive of how a market could collapse.  

The idea that anyone would shave 50% off the asking price of their home and lose all that money just boggles the mind.

But as we have shown you, there are properties currently listed in Vancouver for 23% below their assessed value and in Richmond for 25% below their assessed value.

Even at the lower end of the market, prices are listed below assessed value right now.

On Friday we were talking about #2905-438 Seymour Street in the downtown core of Vancouver. It's a 1 bedroom, 1 bathroom condo which is currently listed at $319,000. (click images to enlarge): 



The $319,000 asking price is a big reduction from the original listed ask price.  On August 20th, 2012 the unit hit the market for $389,000.

That's a cut of $70,000.

But detractors will tell you idiots can always ask wild prices, that doesn't mean squat in the big picture and it certainly doesn't mean prices are falling.  All it means are sellers are becoming more realistic with their asking prices in today's market.

The real test comes when we look at the assessed value:


As you can see... this property is assessed at $376,000.

So in a so-called 'flat' period the owners of this property have cut their asking price to more than 15% below assessed value.

Why?

Cameron Muir attempted to kibosh any housing collapse concerns by demanding to know what is going to occur in Vancouver to get people to sell for 75 cents on the dollar? Muir insists theirs no reason for this to happen.

But at the same time, media 'experts' like Tsur Somerville are predicting Vancouver home prices could drop by 10% next year.

With 498 Seymour, we hypothesized on Friday the fact this seller was listing below assessed value probably has something to do with the fact this is the first time this unit has been on the market since the original sale. 

The building was built in 1996. Since then we have seen a huge loosening of credit (which triggered our massive housing boom -see our post here).  As a result it's not hard to surmise we have a situation very similar to the Boomer Trigger - i.e. people can move on price, they are worried about a housing collapse, so they will move on price - and in doing so they still get out of the market with a healthy capital gain.

This is an element that both Muir and Somerville appear to completely ignore. Many of these people selling for below assessed value aren't taking 75 cents on the dollar for their original 'investment'. 

Yesterday a diligent reader  advised that this unit originally sold in 1996 for $135,000.

The asking price right now ($319,00) is more than 15% below assessed value.  

But if it fails to sell, and more concern and panic grips the market... these sellers could cut their asking price by as much as 60% below assessed value and sell for $15,400 more than they paid for it.

If sellers the market continues to stagnate, there are lots who would have no problem exiting with massive cuts because they would still be making a profit in the midsts of a cataclysmic crash.

There are many sellers who could fuel such a panic.  

And in the midsts of that panic, not one seller would view the transaction as them having only gotten 40 cents on the dollar.

If people are cutting asking prices now by as much as 25% below assessed value in what is termed as a 'flat' market now, is it so hard to imagine sellers enacting real time price cuts of 40 - 50% when the news tells us prices have already collapsed by 10% in the months ahead?

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Saturday, October 27, 2012

Media notes R/E groups attempting to "calm fears of a local housing crash"



On Thursday we told you how the media was filled with economists and 'experts' who were now predicting that prices will, in fact drop, but will do so by a moderate level that does not resemble the U.S. crash.

The purpose of all these ascertains? Preventing panic. A fact the Vancouver Sun noted yesterday:
Greater Vancouver will see home sales tumble by one-fifth this year, but the market should rebound in 2013, the B.C. Real Estate Association says in its new forecast as the group moves to calm fears of a local housing crash.
It is exactly those types of fears which are encouraging sellers to accept 75 cents on the dollar for properties (examples of which we have profiled over the past couple of weeks).

Of course the sellers aren't actually taking only 75 cents/dollar on their real estate.  Most bought before the big blow-up of the bubble during the 00's and they are still enjoying a large capital gain.  They just see the writing on the wall and are cashing out while there are still profits to be realized.

And those signs are everywhere.

Vancouver movers are reporting stiff declines in business due to the falling real estate market and the slowdown is effecting a broad segment of society:
Tradesmen, Builders and Craftsmen, worry about the later half of 2012 and the speculation around the slow down of the Vancouver Real Estate Market... Competitively priced houses are now sitting on the market for an average of 5 to 7 months. 
Scott Moe of RE/MAX says: "All across the board people are saying how slow it is out there. I have 24 listings right now and only had 4 showings on the weekend!" The slow down of BC's real estate industry extends well beyond just builders and realtors. Many local businesses are affected by slow real estate sales.
Which is why early signs of panic are now starting to pop up.

And there signs of more problems ahead.

Concerns are spreading through the Chinese media with headlines that: “All Canadian banks will introduce new mortgage rules by November 1st, 2012”What will those new rules entail?
All-Canadian banks and financial institutions will start on the 1st of next month to take up increased tightening housing mortgage measures. There will be new rules for those without sufficient proof of income documents.  This will include the self-employed who will only be able to obtain no more than 65% of the mortgage property value in their loans. Prior to the implementation of the new requirements, some banks allowed self-employed people up to 75-80% of property values in a mortgage. 
Mortgage experts believe that the new measures will have the greatest impact on new immigrants.
As one contributor on VCI noted (hat tip VMD), the OSFI will require lenders to limit maximum LTV ratios of “nonconforming residential mortgages” (eg. Self-employed without adequate income verification) to 65%, meaning the borrowers will need to put 35% up as a down payment.

New immigrants will be impacted due to inadequate income documentation, which looks at average income of the last 2 years. - (Previously new immigrants were required to put down 30% DP) - 

HELOC LTV limitations will be implemented by Nov 1st as well.

In other words, the saviour of wealthy Asians buying our overvalued property at prices high above what local incomes can support is about to take another big hit.

Combine that with tightening regulations on what entry level buyers can now overspend on greasing the property ladder at the entry levels and you have a recipe for even steeper declines.

Perhaps that's why a Winnipeg real estate agent is now running this ad (hat tip Makaya):


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Friday, October 26, 2012

It's not just the million dollar homes falling below assessed value

L


Reading this blog you know we are watching the comments of the likes of BCREA chief economist Cameron Muir and UBC Sauder Associate Professor Tsur Somerville with keen interest.

Last month we have Somerville saying:
“Most people don’t have to sell their house,” he said. “You bought it for $200,000. The price is now $150,000. Unless you have to, why would you sell it?” 
For prices to go down ­significantly, contended Somerville, “You need people who have to sell, either because the economy has collapsed and they don’t have any income or developers have built a whole bunch of units that are unsold and the bank is screaming at them or foreclosing or something like that.”
None of those conditions appears imminent. 
This week he changed his tune and said Vancouver home prices could drop by 10% next year.

Meanwhile Cameron Muir insists:
"we don’t see a recession on the horizon, and we don’t see interest rates going up any time soon, so what kind of financial calamity is going to happen in Vancouver to get people to sell for 75 cents on the dollar?
We've shown you examples of Vancouver detached houses that currently have asking prices 23% below assessed value and Richmond detached houses 25% below assessed value.

Some have suggested that these are these extreme examples and that no such worry exists on the lower end of the spectrum where the average Vancouver income earner resides.

Without getting into the debate about whether the 'average Vancouver income earner' is into million dollar properties or not, a quick check of the comment section on the excellent blog Vancouver Condo Info turns up an immediate example to reference (hat tip Teddybear).

Here is an example of a Vancouver condo from a lower price range.

This is #2905-438 Seymour Street in the downtown core of Vancouver (click images to enlarge): 



It's a 1 bedroom, 1 bathroom condo which is currently listed at $319,000.

The $319,000 asking price, btw, is a big reduction.  It was originally listed for $389,000 on August 20th, 2012.

Now for those that discount that a $70,000 asking price cut (detractors will tell you idiots can always ask wild prices, doesn't mean squat in the big picture), the real test comes when we look at the assessed value:


As you can see... this property is assessed at $376,000.

So in a so-called 'flat' period (according to Somerville), the owners of this property have cut their asking price to more than 15% below assessed value.

Toss in another 10% drop in value next year (again... according to Somerville) and you have a property that would come in at 25% below assessed value.

Muir wants to know what is going to happen in Vancouver to get people to sell for 75 cents on the dollar?

Perhaps he should give the folks at 498 Seymour Street a call and ask them?

I suspect it has something to do with the fact that the listing indicates that this is the first time this unit has been on the market since the original sale. 

The building was built in 1996. Since then we have seen a huge loosening of credit (which triggered our massive housing boom -see our post here).  As a result it's not hard to surmise we have a situation very similar to the Boomer Trigger - i.e. people can move on price, so they will - and in doing so they still get out with a healthy capital gain.

This is an element that both Muir and Somerville appear to completely ignore. Many of these people selling for below assessed value aren't taking 75 cents on the dollar for their original 'investment'. 

It's a factor could wind up having a profound effect in the coming year.

If anyone knows the original purchase price of this unit, it would be nice to compare that to the current asking price/current assessed value  - let us know.

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Thursday, October 25, 2012

The Evolution of Rationalization



We seem to have entered an interesting phase in the media coverage of our housing collapse.

Instead of denying there is even a bubble to burst in the first place, now the media is filled with economists and 'experts' who predict that prices will fall but by a moderate level that does not resemble the U.S. crash.

The latest to join the chorus (after Muir and Somerville yesterday) is CIBC deputy-chief economist Benjamin Tal.

Tal, however, takes it beyond accepting there will be some price declines and minimizing them. For Tal it's about ensuring slipping prices don't trigger a collapse in buyer/seller confidence.
"There is nothing to fear but fear itself... Panic is the worst thing that could happen because when that mentality sets in and people become irrational, it’s hard to forecast how low prices will go."
Tal, Muir and Somerville have one central worry: that Canadians are starting to talk themselves into a housing crash by creating a scenario in which every new statistic is interpreted in the most negative way with an eye on trying to constantly compare the Canadian housing market with what Americans experienced just before their housing prices plummeted by as much as 50% in some markets.

Which is why each and everyone of them keeps insisting/re-assuring that there will be no U.S. style crash in Canada.

Says Tal:
"When you see headlines screaming that Canadian household debt has reached a record level, an eerily similar spot to where Americans were before the market crashed there, it adds to concern. But the similarity ends with the headline-grabbing number. The quality of the debt is much different here."
Err... quality?

Tal maintains the people who have taken on more debt have a much higher credit score than the Americans who did the same prior to their market crash.

Ummm... But if Canadians are such a better risk than what do you make of a Bank of Montreal report that BMO came out with on Monday that noted that almost three-quarters of Canadian homeowners would feel a significant squeeze from even a small rise in interest rates?

The report basically says 73% of the people surveyed can’t afford their own homes. And a lot of them are already feeling the pinch.

A third of these people have already cut back on other spending so they can make the mortgage payment.

One in six has been forced to raid their savings to pay current costs.

This is at a time when interest rates are at historic lows, which means they can only go up. That they will rise, eventually, is inevitable. Yet 16% of the people in the survey said they might not be able to make their payments if rates rose by even a tenth.

So much for Canadian debt being of a higher quality.

Another key factor that Tal insists is ignored in the current housing bubble discussion is how much of our Canadian mortgage debt is locked in for longer terms and not subject to the vagaries of rising rates.

Tal says 70% to 80% of Americans were in variable products at the peak while the Canadian figure is 29% (Tal cites the latest survey from the Canadian Association of Mortgage Professionals for this statistic).

Umm... just a quick question here.  When you say only 29% of Canadians are in variable products... does that mean we don't count a mortgage that resets to a different interest rate after five years?

I mean, aren't ALL Canadians in variable products when you consider this factor?  How many Canadians have 30 year locked in mortgages like in the United States?

Blink... blink.

Sorry Tal... I know I'm afraid.

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Wednesday, October 24, 2012

After insisting prices would remain flat, Tsur Somerville concedes prices could drop 10% next year




Was it only last month, on September 5th, 2012, that everyone's favourite industry shill Tsur Somerville was trotted out to declare prices would not come down!:
Tsur Somerville, who holds a real estate foundation professorship at the University of B.C., expects prices to stay flat for a while “because our prices are high relative to what people think they should be,” Somerville said. “Our price adjustment will come from prices being flat for awhile and letting income catch up to where prices are.”
If fact it was just after this, on September 14th, 2012 that Somerville came out and tried to halt all concerns and worries about a possible collapsing of prices by infamously declaring you can't burst a bubble that isn't there.
If there was a large number of unsold units coming onto the market or a huge change in the economic environment, Somerville said, “that would really cause prices to tank.” 
“Most people don’t have to sell their house,” he said. “You bought it for $200,000. The price is now $150,000. Unless you have to, why would you sell it?” 
For prices to go down ­significantly, contended Somerville, “You need people who have to sell, either because the economy has collapsed and they don’t have any income or developers have built a whole bunch of units that are unsold and the bank is screaming at them or foreclosing or something like that.”
None of those conditions appears imminent. 
Somerville said it would take “some negative shock,” such as an ­economic meltdown or mortgage interest rates jumping from four per cent to nine or 10 per cent, to trigger lower prices.
So no lower prices then?

What a difference a month makes.

Yesterday the Vancouver Province headlined Somerville's latest comments by trumpeting Vancouver home prices could drop by 10% next year.

Prices could drop?

So much for remaining flat.  As noted in the Province article:
“As home sales continue to plummet in Vancouver, it wouldn’t be surprising to see 10-per-cent price declines next year." That’s the view of University of B.C. real-estate economist Tsur Somerville, who was asked to respond to new market forecasts released by the B.C. Real Estate Association.
So what is this forecast from the BCREA that has changed Somerville's outlook?
On Tuesday, BCREA chief economist Cameron Muir said tighter mortgage rules implemented by Ottawa this summer triggered a 20.5-per-cent drop in Vancouver home sales, in a market that was already softening. The plunge in sales will cause a six-per-cent price decline in Vancouver’s average home price, Muir said, to $734,000. The association sees sales rebounding by 13.7 per cent in 2013, but predicts prices will slide by another two per cent, to $720,000.
So prices will slide but sales will rebound?  

Hmm... sounds like another prediction to be revised at a later date to me.

The best quote from the article is this one:
These declines should be seen in the context of unrealistic gains in 2011, Muir said.
Say wha????

Unrealistic gains in 2011. Quick... search those BCREA monthly market reports. Does anyone recall the BCREA proclaiming "unrealistic market gains" at any time in 2011?

But don't worry, homeowners, Somerville hasn't abandoned the flat prices theory.  You assets might fall 10% in value next year, but:
"(Somerville) expects prices to be more or less flat in 2014."
As for Cameron Muir, he wants to disuade all those bargain hunters sitting on the sidelines:
Right now, buyers seem content to sit on the sidelines in Vancouver, but people expecting to win massive discounts a few years down the road will be disappointed, Muir says. “We don’t see a recession on the horizon, and we don’t see interest rates going up any time soon, so what kind of financial calamity is going to happen in Vancouver to get people to sell for 75 cents on the dollar?” Muir asked.
I dunno... the same 'calamity' that already has them selling for 23% below assessed value in Vancouver  and 25% below assessed value in Richmond?

Just a thought.

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Tuesday, October 23, 2012

Richmond real estate agent gives us "the facts"



Diligent readers of this blog know what the real estate situation is like in Richmond right now... it's abysmal.

The latest monthly update from real estate agent James Wong leaves no doubt: a real estate downturn is in motion and that values are going to keep dropping. Dropping dramatically for that matter, to the point where owning a home makes fiscal sense again.

And that's one hell of a drop.

Richmond detached home sales have all but evaporated and most homes are selling below assessed value, some as much as 25% below assessed value... with no end in sight to plunging prices.

Buyers, it seems, are staying away in droves; afraid of catching a falling knife.

But have no fear, says another Richmond agent. Meet Owen Bigland.

Bigland wants to encourage to you to buy in Richmond. He wants you to learn from Warren Buffet and "be greedy when others are fearful and be fearful when others are greedy".

(mind you... I'm not aware of Buffet buying in Richmond right now so I say do EXACTLY what Buffet is doing in Richmond, but I digress)

Bigland, you see, has been very busy these past six weeks, so busy he hasn't had time to get a haircut...  yes, he tells us this (no offense Owen, we don't care).

Bigland informs us up front; October 2012 has been part of one of the slowest summer's on record for real estate sales.

(actually bloggers will tell you October has been a little busier than expected, but hey - this is Owen's story and he hasn't sold squat this month.  Perspective, I guess)

Bigland's brokerage, MacDonald Realty Westnar (which Owen claims is one of the biggest in the Lower Mainland with 175 agents), has had the slowest summer in over a decade.

Bigland has a number of listings he's getting little or no phone calls on, others that are getting a lot of viewings on, but buyers are
"hesitant and scared and... there's just so much news out there right now... there's just no urgency right now.  They (buyers) just figure, lets wait and see, I think prices are still going to be coming down a bit... and we'll play accordingly."
Gee Owen... sounds like buyers are playing it quite smart to me.  Do you disagree?

Of course he does (no commissions coming in, I guess).  Owen wants to share his insights but presumably he doesn't want to come right out and say "buy now you cheap bastards", so Bigland tells us he:
"won't sugarcoat it, won't put my spin on it, I just tell the facts" 
Oh?... another James Wong in the making? Ok Owen... tell us the facts:
"Ok... here's one more where I'm just going to tell the facts. And I tell ya what I had happen in September and the sales that I did. I know I'm going to get some flack, people are going to make some comments on my youtube page here, telling me you sound like a typical realtor, you sound like what they teach you in real estate school, it's always a good time to buy, and it's always a good time to sell. There's a lot of negative people out there, for sure. I've got news for you, I don't really care. I'm not really interested in doing business with negative people, I've got plenty of clients that trust me, uhhh, they know I'm going to do a good job for them, they know I take my job seriously. So here we go with it."
Blink! Blink!

Ok... fact #1. Sales suck right now and Owen just spent two minutes telling us he is, in fact, your typical realtor.

Do go on:
"In September I had two substantial sales, these were million dollar plus sales, one approaching close to two million dollars. Now these buyers, these two buyers, have a lot of things in common. And I thought I'd share it with you because maybe we can learn something from this."
Err... that there are still idiots out there with more credit than brains which puts commissions in your pocket?

Incredibly all this self-absorbed blathering takes up the first half of Bigland's 5 minute video clip. Bigland then tells you a tale where two older rich guys, who were hesitant to buy, pulled the trigger and bought. They bought because... wait for it... it's always a good time to buy and if they waited they might have lost the opportunity.

(Surprise! I think we call that 'buy now or be priced out forever')

Ummm... thanks Owen. Glad we got the 'facts' straight.

Not that I want to appear negative, but these aren't 'facts' and despite your update - I have a feeling you'll have lots of time for that haircut now.

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Monday, October 22, 2012

Mon Post #2: Remember that Telus Garden 'sell-out'?



Do we have another entry for the Liar, Liar contest?

Faithful readers will recall that back on April Fools Day (was it a hint?), the media trumpeted the news that the downtown Telus Garden development had sold out.

That was followed up with our favourite car-cam real estate agent, Ian Watt, telling everyone and all that the 'sell-out' was pure poppycock.


The issue of units in a condo offering going to real estate agents before they are made available to the general public is a topic we have discussed before, and the fact Watt insisted that Telus Garden had units for sale even after claiming a sell-out certainly adds fuel to this belief.

And when you see a Craigslist ad like this one, you certainly have to question the 'sell out' claims (click on image to enlarge):


FIVE Penthouse units available for sale?  FIVE???

Telus Gardens won't be completed until 2015 and a mere 7 months after the supposed sell-out five of the Penthouses appear for sale by one real estate agent.

Uh-huh.

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Mon Post#1: It's not a price cut... it's an incentive.



So are prices going down in real estate or are vendor's simply offering "incentives" when they lower their prices?

We have shown you how houses in Richmond are selling 25% below assessed value right now in the former HAM hotspot.

And homes in Vancouver are being spotted with asking prices 23% below assessed value as well.

So with buyers afraid of catching a falling knife, how do you market in this enviornment?

Apparently you start by changing 'price cut' to 'incentive', as we see in this Craigslist ad for the Altitude Tower 1 up on Burnaby Mountain at Simon Fraser University (hat tip 'Patiently Waiting' on VCI).

As you can see by this Craigslist ad where, when the real estate agent's VIP client discount is added (presumably perusing Craigslist makes you a VIP client), the price cuts... err 'incentives' come in as much as 20% off the original asking price (click on image to enlarge):


So now we have 20% off in Burnaby.

For the billions they spend on marketing, why don't retailers like Walmart use the term 'incentive' when they cut their prices? 

Would it be because that strategy simply doesn't work?

At Walmart, 5% cut off their prices are trumpeted as a 'rollback'.

20% off? Discounts for "my VIP clients." Sounds like we're entering the domain of crazy Eddie, doesn't it?


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Saturday, October 20, 2012

How far could prices drop if the bubble truly bursts?



In our last post we provided a brief history of the changes to the mortgage rules over the past 13 years.  

The moral of the post being that houses haven't risen in value the past decade... access to credit has been increased and THAT has driven up the value of houses.

Withdraw the access to credit... and the housing boom will turn to bust.

It reminds me of cars and the tricks car sales people employ to sell expensive cars to buyers.

A car sales friend once told me that the customers who got the best deals on buying a car almost always focused on the selling price of the car, and not on monthly payments.

Why?

Often people will go into a car dealership and look at a car but decide it is too expensive for them.

A salesman asks how much you are willing to pay each month, and you throw out a number—say, $450. He asks how much more you could afford—just getting a feel for you. You tack on another 50 bucks. In your mind, you were theorizing, but to the salesman, you just committed to a $500 minimum monthly payment.

Even if you balk at the $500 minimum monthly payment, the salesperson will ask you what he has to get that monthly payment down to so that he can make the sale.

You tell him the monthly payment has to come down to $440 a month so you’ll be able to meet other monthly obligations.

When the salesperson tells you he can get it down to $460, you are disappointed. You tell him that you won’t make the deal at this price, that the payment had to be reduced to $440 or less, or you’ll take you business elsewhere.

After hearing your ultimatum, the salesperson asks: “If I can get your payment down to $440 per month do we have a deal and you drive this car home today?”

The salesperson now has you right where he wants you.

First, you really want this new car. Second, you are  focused on monthly payments instead of the selling price and terms of the loan.

Why is this bad for you?

Let’s watch what happens next.

Incredibly, the dealership comes back with a monthly payment of $440 per month. This is exactly what you wanted. A reasonable person sees a drop of $60 per month in the payment structure (from $500 to $450) and does a little math to see how much is saved.

The length of the car loan is 48 months (four years) so your saving's should be: $60/month x 48 months = $2,880.

However, you are only concerned with his monthly payment.

You didn’t notice that the dealership reduced your payment to $440 per month by extending the term of the loan from 48 to 72 months instead of lowering the selling price of the car.

So instead of paying: $500/month x 48 months = $24,000 total cost of the vehicle you are instead paying: $440/month x 72 months = $31,680 total cost of the vehicle

The difference between the two is: $7,680.

The dealership was able to lower your payments but now you are paying $31,680.

And for many buyers this works because it's all about the monthly payment.

15 years ago car payments were spread - at most - over four years.  Now you can get 84 or 96 month car loans... loans that simply facilitate ridiculous increases in car prices.

In many ways this is what has happened to houses.  Let's take a look at a very simplistic example.

A young couple has their heart set on their dream house, but it's too expensive.

They go see a mortgage broker and, with the assistance of the federal government's mortgage rule changes to "make houses more affordable" the leverage effect of reducing the down payment from 10% to 5% and an amortization of 25 years moved to 40 years all has the same effect as the car dealer's shell game.

Toss in emergency level interest rates and instead of the 20 year historical average of a five year mortgage @ 8.25%, you have an interest rate of 2.99%.

So if couple can afford up to $3,000 in monthly payments to a mortgage in 1995 (10% down, 25 amortization, 8.25% interest rate) they are looking at a home worth $370,000 with a down payment of $37,000.

In 2010 (with a 7% cash back mortgage, 35 year amortization) they are looking at being able to now afford a $780,000 house without putting down a penny.  And if you toss an additional $54,600 which they receive with their 7% cash back mortgage (which they could now add to they buying power) - and you see they can afford a $834,600 home.

And since other couples had access to that same easy money; it basically triggered bidding wars to obtain that very same1995 $370,000 house.

And this is how a $370,000 house in 1995 can sell for $834,600 in 2010.

Now before you jump all over these numbers, this is a very simplistic analysis. But it shows you basic fashion how the true value of houses never went up... it was the access to credit that increased, which in turn fuelled rising prices.

In 2012, however, that access to credit is being turned off. 

And what goes up will just as quickly come down.

How significant could the drop be?

They say all bubbles created by excess credit burst and return - at minimum - to the values in place when the bubble started to inflate (and often overshoot that return).

Let's look at realtor Larry Yatkowsky's last average price graph to get an idea of where we started (click on image to enlarge):



You pick where the bubble appears to form.

Some say it was in 2003 (average price $400,000), others will argue it was in the mid-1990's when interest rates started to be dropped to 'stimulate' the economy (average price $300,000).

If you now connect the dots to see how our real estate bubble was created (by excess credit), and If understand that all bubbles created by excess credit burst and return - at minimum - to the values in place when the bubble started to inflate (and often overshoot that correction)... you can now appreciate how significant the looming downturn might truly be.

For those who haven't seen it before... an excellent primer on asset bubbles by Chris Martenson.


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Friday, October 19, 2012

Will the Real Estate market recover like it did in 2009?

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Last night I was having a discussion with a co-worker about the current real estate market downturn.

He wanted my opinion on whether or not we might see a market rebound like we saw in 2009? Naturally I told him I don't believe the market will rebound this time.  

I took him through the logic.

Between August 2008 and March 2009, the average home price fell by 8.5% according to the Teranet-National Bank House Price Index. The decline was sparked by the 2008 financial crisis. But by November 2009, the market had already recovered.

What allowed things to recover?

A large part of the reason for the quick rebound was massive government intervention.

The Bank of Canada moved fast to slash interest rates to unprecedented lows, allowing banks to continue lending to businesses and consumers.

The federal government established a $125-billion program to buy mortgages it had already insured from banks and financial institutions, providing even more liquidity. Ultimately the Fed's bought mortgages worth a stunning $69.4 billion.

The Bank of Canada and the Federal Government did this because they were gambling that what was happening was your garden variety severe recession.

Normally these recessions last 3-5 years.

But this isn't a normal recession.  We still do not fully appreciate the breadth and depth of what is going on. What we are experiencing is a one-in a multigenerational crisis, one that will probably last up to 15 years.

The Federal Government and the Bank of Canada have started to recognize this.  Mark Carney has sounded warnings and alarms so often over the past year that some have begun to tune him out as you would the infamous little boy who alway cried wolf.

But the time has come for more than just warnings. And the government is scrambling to de-engineer what they started.

Demographia, an urban planning research firm and consultancy in the U.S., argues that prices become unaffordable when they exceed three times income. Canadians seized on the government intervention from 2008 and have managed to increase the country’s household debt to personal disposable income ratio to a record high of 163%.

Carney and Flaherty know this cannot continue.  The economy is not about to recover adequately anytime soon which means incomes cannot rise to deal with the record high debt.

And that debt is of massive concern.  Because of that concern, there will be no intervention by the federal government this time around.

So what will happen?

First off, you have to understand house prices are at the level they are because of government policy - not because they are 'worth' these values.

The housing market in a precarious position: we have a massive gap between prices and incomes, worsening affordability, and an indebted nation of homeowners unable to withstand economic shocks.

The federal government has no choice but to continue undoing  the mortgage changes that facilitated the boom. To avoid it would be extremely irresponsible... and they won't change course.

Most Canadians simply do not appreciate just how artificial our housing boom is and what this change in thinking by the government means for house values.

This is a boom that has been created by the artificial stimulus of excess credit. And the altering of the access to that artificial stimulus is going to have profound effects.

Consider how we got here:
  • Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years.  CMHC also had limits on how much you could buy with their insurance.
  • CMHC then lowered the down payment to 5% down with price limits depending on the area. Amortizations were 25 years. There would be no price limit on what they would insure if 10% or more was put down.
  • By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased. 
  • March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured.
  • March 2006 you had  0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year.  Interest only payments were allowed for 10 years.
  • November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years. 
  • Canadian banks ramped this up by allowing up to 7% cash back offers is you would take on a mortgage with them.  You could basically get paid if you bought a house.
All of these were exacerbated by the emergency actions taken during the financial crisis.

As we mentioned earlier, the Bank of Canada moved fast to slash interest rates to unprecedented lows, allowing banks to continue lending to businesses and consumers. The federal government established a $125-billion program to buy mortgages it had already insured from banks and financial institutions, providing even more liquidity. Ultimately the Fed's bought mortgages worth a stunning $69.4 billion.

CMHC had their lending cap increased.  CMHC went from $100 Billion in insured mortgages in 2006 to $600 Billion in 2012.

We have reached the upper limits on how current incomes can be levered into higher and higher debt loads. Worse... the limits are being reversed denying many access to the ability to take on those upper level debt loads.

More significantly... there is less room to manoeuvre on other policy tools.

The overnight rate is now 1% compared to 3% in August 2008. Cutting rates to stimulate the market is hardly an option. Banks have less flexibility, too. A five-year fixed rate mortgage is roughly 3.8% today, down from 5.7% in late 2008.

Finally the argument that that foreign investors, predominantly wealthy Chinese citizens, are buying property here because Canada is a safe haven in a turbulent global economy and that this will defend the strength of the housing market is being shown not to be the salvation many once thought it was.

The credit spigot that has allowed so many Canadians to buy homes at boom levels is being turned off. 

Sales activity has slowed down and prices responded by initially plateauing and now they are beginning to fall.

There will be no intervention this time around.  This isn't 2008/2009 all over again.

The fact of the matter is that all booms created by excess credit go bust. Ours is a classic excess credit boom.

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