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Friday, November 30, 2012

Realtyland - where prices don't fall, they 'flatline'



As November comes to a close, sales continue to lag despite some shrinking of the massive inventory that has built up since the start of the year.

And you can sense the desperation.

If the average home price had increased almost 6% since last year, the headlines would be screaming that prices continue to shoot upward.

But they're not shooting upward.  As the month comes to a close the average price is down 5.7% - so will headlines claim prices are falling?

Of course not.  In Realtyland prices aren't falling at all... they're 'flatlining'. Now 'flatlining' is a most interesting choice of words, don't you think?


But this is the spin as we see in the press today.
Housing market has 'flatlined'
The average home costs about 5.7 per cent less than 2011
Housing market has 'flatlined'

VANCOUVER (NEWS1130) - If you've been staying out of the housing market, waiting for a big drop, you might be in for a long wait.

Metro Vancouver's housing market is in a 'flatline' pattern, according to the numbers.

The Conference Board of Canada's latest look finds the average home costs less than last year, by about 5.7 per cent. Resales are up 3.9 per cent over the previous month but still down more than 20 per cent compared to last year.

Tsur Somerville of the Sauder School of Business says the signs don't show a collapsing market. "They're more suggestive of a leveling out, but looking at a period where the housing market is at a slower, calmer place."

Somerville says that should give people the chance to look around without major stress. 
"There's not a lot of pressure or worry that somehow if you miss a house now, that there won't be any next month, or prices will be out of your reach."

Somerville says it would take a major change in interest rates or an economic shock for the housing market to plunge dramatically.
As always, it's Tsur Somerville telling us those declining prices aren't declining prices (?) and if you're waiting to buy, don't... cause those declining prices (which aren't declining) won't keep declining.

Speaking of declining prices, earlier this week Observer had some new additions to the 30% below assessed value club for us on his blog Vancouver Price Drop.

In Abbotsford #1411-34909 Old Yale Rd is listed for 32% below assessed value:


In White Rock, #302-15342 20th Ave has dropped it's asking price to 32% below assessed value:


In Richmond, #204-3411 Springfield Drive is now 30% below assessment:


And in Pemberton, 7306 Clover Rd joins the 40% below assessment club:


Somerville says it would take a major change in interest rates or an economic shock for the housing market to plunge dramatically.

I guess that means the 30% and 40% below assessment club would become the 60% and 70% club at that point.

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Thursday, November 29, 2012

How do the Chinese view the Gold Market?



Great article yesterday by Jeff Clark of Casey Research titled: "How do the Chinese view the Gold Market".

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Have you ever wondered what the typical Chinese gold investor thinks about our Western ideas of gold? We read month after month about demand hitting record after record in their country – how do they view our buying habits?

Since 2007, China's demand for gold has risen 27% per year. Its share of global demand doubled in the same time frame, from 10% to 21%. And this occurred while prices were rising.

Americans are buying precious metals, no doubt. You'll see in a news item below that gold and silver ETF holdings just hit record levels. The US Mint believes that 2012 volumes will surpass those of 2011.

But let's put the differences into perspective. This chart shows how much gold various countries are buying relative to their respective GDPs (click on image to enlarge).


It's widely believed that the majority of the gold flowing into Hong Kong ends up in China, so its total is probably close to double what the chart reflects. Even if none of it went to China, coin and jewelry demand is 35 times greater than the US, based on GDP.

The contrast between how our two nations can buy bullion is striking…
  • In China, you can buy gold and silver at the bank. My teller looked at me oddly when I asked.
  • Bullion is available for purchase at Chinese post offices. I wonder how my local postman would respond if I asked for a tube of silver Eagles.
  • Mints are readily accessible to retail customers. Here, I can only order proof and commemorative products from the US Mint and am forced to go to an independent dealer.
  • A new product design is manufactured every year. This being the Year of the Dragon, many bullion products are emblazoned with dragons. You can still buy last year's rabbit, and next year it will be a snake. The US has two designs, the Eagle and Buffalo; the latter was introduced in 2006 and is available only in gold (if you see a silver Buffalo, it is a "Round" manufactured by a private mint, not the US Mint).
Some will point to cultural affinity to account for the differences. There's some truth to that, though this is a much greater factor in India. Even there, gold jewelry is not viewed as a decoration or an adornment; it's a store of value. It's financial insurance in a pretty bow. In India, gold can be used as collateral, regardless of its form. It's not just an investment that they're trying to make money from; it's more important than that.

But certainly the differences can't all be attributed to culture…

You've likely heard how government leaders in Beijing have been encouraging citizens to buy gold and silver. This would be akin to seeing your local Congressman or President Obama appearing on TV and imploring you to buy some gold and silver. (Utah made gold legal tender, but it was mostly a symbolic move.)

Chinese radio and TV spots, along with newspaper ads, talk about "safeguarding your wealth" and putting "at least 5% of your savings" in precious metals. I haven't seen this here except from dealers on cable TV. Can you imagine Ben Bernanke appearing in a commercial duringAmerican Idol, encouraging you to buy gold Eagles?

No, what I hear from politicians about precious metals is nothing but the sound of crickets chirping, save Ron Paul. And the mainstream continues to claim gold is in a bubble. We've pointed it out before, but in case any of them are reading, there are two criteria for a bubble: first, a massive price increase, such as the gold price doubling in less than 7 weeks like it did in 1979-'80... which, of course, hasn't occurred in this bull market. (Yet.)

The second criterion is widespread participation on the part of the public. I don't hear celebrities and TV anchors bubbling on about the latest gold stocks. Most people I know outside Casey Research aren't talking about the great price they got on a silver Maple Leaf. Most investors I talk to say their friends, family, or co-workers aren't scrambling to snatch up gold Eagles. And the #1 reason we're not in a bubble is because Eva Longoria still hasn't asked me out on date – something she'd only do because I'm a gold analyst.

And with apologies to those of you who do know history, I think the Chinese have studied history a little better than many of us. The lessons are right in front of us, though I don't hear this kind of data very much on CNBC…
  • Morgan Stanley reports there is "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Total debt (public and private) in the US is 300%+ of GDP.
  • Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt is approaching 100% of GDP this year.
  • Peter Bernholz, a leading expert on hyperinflation, states emphatically that "hyperinflation is caused by government budget deficits." This year's US budget deficit will be about $1.3 trillion. It's expected to total $6 trillion during Obama's first four years in office.
What do we hear instead? That the country will drop into recession if current amounts of spending and outlay of benefits are reduced. I think it is quite the opposite; it will be worse if our leaders continue down this path of debt, deficit spending, and printing money.

What I'd love to see on CNBC is a spot with Doug Casey saying this: "Anyone who thinks they have any measure of financial security without owning any gold – especially in the post-2008 world – is either ignorant, naïve, foolish, or all three." I bet that'd get the airwaves buzzing.

It must seem strange to many Chinese that we continue to believe in our dollars, Treasuries, and bonds more than gold and silver. And it's not just China that would view our investing habits as peculiar. Indeed, as the above tables implies, our views on precious metals are in the minority.
My fear is that regardless of what form the fallout takes, many of my friends will be caught off guard. Probably many of yours, too. As the value of dollars continues to decay and inflation creeps closer and closer and then higher and higher, many investors will feel blindsided. Many Chinese citizens will not.

Given China's aggressive buying habits, my suspicion is that many of them will probably wonder why we didn't see what was happening all around us, why we didn't learn from history, and why we didn't better prepare.

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Wednesday, November 28, 2012

Wed Post #2: Lower total inventory doesn't mean improving market conditions



As we noted earlier today, yesterday was an interesting day in our Inventory watch on the side bar.

As the Inventory scroll states, "Inventory has probably now peaked for 2012 and we will see more and more listings pulled off the market in hopes the market will recover in the Spring. The main watch now is to see if we will have any days in the final two months where sales surpass the number of new listings for that day."

Yesterday almost achieved that historic first for 2012.  We came in with 114 new listings and 114 sales.

The broader story, however, is total inventory.

All month long inventory has been contracting. Some have fretted/rejoiced that this indicates the market is turning around.

Huh?

Consider that at the beginning of 2012, inventory sat at 10,671.  Current inventory is more than 65% above that level right now.

The fact of the matter is that inventory historically contracts in October and carries on through to January, when listings begin to surge again back into the market.

Larry Yatkowsky tackled this issue on his blog and created the graph you see above.

As you can see, inventory is currently sitting at incredibly lofty levels, equal to where it was at the heights of the peak summer season in 2011 and 2010.

That's right... the inventory on the market right now is at the same level as we would normally see during the busy summer season in other years. As Yatkowsky notes:
The current decline seems like a slow slide. At its current pace it is not moving quickly enough to realign this market’s active listings with previous years.
Exactly.

Despite the traditional listings decline as we head into winter, Inventory is still at extraordinarily high levels.

These conditions recently prompted Richmond real estate agent Arnold Shuchat to observe conditions at the end of November are such that:
In house sales, volume is down 68.5% relative to last year and the median price is down 3%.  
In townhouse sales, volume is down 74.6% relative to last year and the median price is down 9.6%.

In apartment sales, volume is down 58.7% relative to last year and the mdeian price is down 16.5%

A continued erosion of price support and diminishing volume of sales will provide terrific buying opportunities for home shoppers.
Inventory, although lower, is still massively high for this time of year.

And it's effect on the market remains the same.

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Wed Post #1: Sign of the times? Young Maple Ridge Realtor charged with robbery by RCMP



According to the Real Estate Board of Greater Vancouver (REBGV) there are over 11,000 real estate agents who "live and work in communities from Whistler to Maple Ridge to Tsawwassen and everywhere in between."

As the Lower Mainland enters it's first prolonged downturn over a decade (with monthly sales levels consistently hitting 15 year lows), one can only imagine how difficult it is for agents whose income is commission based.

In fact it was just last month that we profiled this article in the Singtao Chinese newspaper telling us about the hard times agents were facing:
Greater Vancouver realtors are now forced to quit and find new jobs  
Mr Shen, a newly minted realtor since 2011 had been working for a year without reaching a single sale. He had just quit RE and is training to be an electrician... 
When interviewed by SingTao, Mr Shen said he had a university degree in business administration. Upon seeing the hot RE market in early 2011, he paid $5000 for a realtor prep-course and obtained his realtor license. 
Ever since he’s working as a realtor. He’s been busy every weekend showing houses, one client even had him show 10 units. 
He had a total of 20 clients in the first half year, but no sale. 
Mr Shen said, in the current housing downturn, even seasoned realtors are having a hard time. 
Another realtor, Mr Sun of Macdonald realty, said that in 2011 he averaged 2 sales per month, this year some months even went without a single sale. 
Many realtors are leasing expensive cars, paying expensive fuel, hosting networking dinners – averaging $2000 per month of overhead. Without sufficient sales numbers, many realtors cannot survive.
Perhaps it was this need to 'survive' that possibly drove a real estate agent from Maple Ridge's Royal LePage Brookside to crime.

As noted yesterday in the Maple Ridge Times, one of two men arrested for armed robbery was a real estate agent in Maple Ridge, and he has since lost his licence as charges have now been laid.
Police announced Friday that two local young men, including one who was a local realtor, are facing a series of charges in connection with pharmacy robberies.

Police have recommended charges against Ryan Olson, 27, and 29-year-old Luke Ash for robberies at a Langley Pharmasave, Blueridge Pharmacy in Abbotsford, twice at Surlang Pharmacy in Surrey, and The Chemist in Maple Ridge. The heists took place from Aug. 21 to Oct. 12.

Ash was a realtor in Maple Ridge for Royal LePage Brookside, but is no longer licenced.

"Royal LePage - Brookside surrendered Ash's licence on Nov. 22," said Tyler Davies, spokesperson for the Real Estate Council of British Columbia.

"Luke always presented himself as a very likeable and pleasant young man. This is a shock to all of us in our real estate industry," said Bob Quinnell, Royal LePage - Brookside's general manager.

"When we heard of this situation we immediately notified the Real Estate Council of BC, who oversees our licensing system. The council requested that we send Luke's licence to them immediately," said Quinnell, adding that it is "important to note that police checks are taken of anyone prior to obtaining a real estate licence."

Ash was originally licensed in July 2011, according to Davies.
On another note, yesterday was an interesting day in our Inventory watch on the side bar.

As the scroll states, "Inventory has probably now peaked for 2012 and we will see more and more listings pulled off the market in hopes the market will recover in the Spring. The main watch now is to see if we will have any days in the final two months where sales surpass the number of new listings for that day."

Yesterday almost achieved that historic first time for 2012 as we came in with 114 new listings and 114 sales.

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Tuesday, November 27, 2012

How low will they go? Westside speculators still looking to bail - UPDATED


Post updated with original purchase price


This forlorn looking specimen of a single family house is located at 3955 Blenheim Street in Vancouver.

Situated near the corner of Blenheim and West 23rd, this was one of those prime candidates last year for a HAM flip on Vancouver's desirable westside.

Sitting in the Dunbar school catchment (with Lord Byng Secondary and Lord Kitchener Elementary just around the corner) it had all the elements a speculator could want including a slow speed school zone area,  wide asphalt back lane and a large lot perfect to build a 4000 sqft mansion with a lane-way house.


When it was originally snapped up in 2009, the speculators who bought it up were focused on renovating the house.

But when the market started to turn this year, they tried to bail on their investment.

You may recall we profiled their efforts back on March 1, 2012. The focus of our attention was a February 22nd craigslist ad (click on image to enlarge):


The speckers outline what they have done to the property so far:
Already spent $500,000 for the works. Will need about $250,000 interior works for your personal choices of flooring, kitchen and MBR bathrooms fixture, paint and partition layout, sprinkler & sewage upgrade. Permit with floor area 3497 sf plus bonus open space 400 sf of crawl space 3'11" high in the basement. Roof top has some winter water view with a flat roof in drawing for a potential roof top deck.
And the incentive is laid out for you to take this off their hands:
Quick $2.1m price for handyman or contractor who can do some finishing works and resell it easily for $2.6m-2.8m and up once completed.
So why are they selling?
Reason to sell - my partner and I have different tracks for our train of thoughts now.
Fast forward almost 10 months and the property still languishes on the market.  As VREAA noted today, they have bypassed the craigslist route and opted for a realtor to professionally sell the property.

But instead of $2,100,000, their asking prices has now dropped to $1,599,000.


Their focus has also shifted from finding someone who might be interested in finishing the reno, to seeking a developer who will tear it all down and build a new mansion (i.e: someone catering to HAM).

If nothing else you have the primary reason potential buyers aren't buying right now.  A $600,000 drop in asking price in 10 months?  Who wants to catch this kind of falling knife?

It shows you how real estate is massively overprice right now.  The speculative frenzy we've been through is nothing short of astonishing.

One of the contributors to the comments section (hat tip Eric Langhjelm) advises that this property was purchased for $1,180,000 in 2009. If the speculators who bought it have indeed already sunk $500,000 into the property in improvements, these speckers are already in a loss position particularly when you factor in transaction costs and interest on any money borrowed to finance the deal.

You have to imagine that if anyone wants to buy it for lot value, prospective buyers aren't going to give a damn that these speckers have already sunk $500,000 into the house.  I would be surprised if they could even fetch their original purchase price for the lot right now.

It's crystal clear now that our market is unwinding.

At $1,599,000... this property is still massively overpriced.

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Monday, November 26, 2012

Horseshoe Bay Property Assessment: A preview of what's to come?



As everyone spends the day talking about the big news that Bank of Canada Governor Mark Carney is leaving the BOC to assume the top spot at the Bank of England, let's turn our attention to property assessments for a moment.

As faithful readers know, we have spent a considerable amount of time profiling local properties which are falling in value below their 2011 assessed levels. In Richmond virtually all properties that are selling, are doing so below assessed value - and significantly at that.

And shortly the new assessments will come out for 2012.

Since they will be based on the HPI and calculated based on values in July 2012, the expectation is that assesments will not change very much - certainly they won't reflect the drops we have seen since summer.

But what about 2013?

Certainly if trends continue, the drops will be significant.  How will that impact municipalities dependant on property tax income?

Perhaps we are seeing a preview of that in West Vancouver right now.

In a news item that didn't get much attention, the Vancouver Sun recently had a piece about how the assessed value of Horseshoe Bay Ferry terminal has been slashed from $47 million to $20.
The District of West Vancouver is heading to court to fight a recent decision that slashed the assessed value of BC Ferries’ Horseshoe Bay ferry terminal to just $20 from more than $47 million.

The decision, made after BC Ferries argued the property was worthless because it’s restricted to use as a ferry terminal, could set a precedent for other assessing terminals such as Tsawwassen, Swartz Bay or Departure Bay.
The Horseshoe Bay dispute revolves around two parcels of land at the ferry terminal leased from the province, which had been valued at a total of $47.7 million.

Prior assessments had put the land value at about $44.15 million in 2011 and $45.6 million in 2010.

But this year, BC Ferries decided to appeal its assessment.

The BC Assessment Board's ruling to change the assessed value was largely based on a Newfoundland Supreme Court Case that pitted the town of Gander against the Gander International Airport. In that case, a parcel of land was found to have no value except as part of the airport. In that case, the appeal board ruled the port property could only be valued according to the restricted use imposed by the lease from the federal government.

Hence the change at Horseshoe Bay.

The take away that is important here (beyond the impact that the decision could have at other limited use facilities) is on realizing the amount of revenue loss faced by the City of West Vancouver in property taxes by just one property that has dropped significantly in 'assessed value.'
The decision essentially strips the municipality of about $250,000 of anticipated property taxes in 2013, meaning a possible two-per-cent increase in property taxes for homeowners.

“It’s a significant loss of revenue,” said Smith. The board’s decision is retroactive, meaning the district will be required to repay approximately $750,000 in property taxes it collected on the parcels going back to 2010.
Think about that. One single property in West Vancouver drops in value and it costs the municipality $250,000 in property taxes next year. While no one is suggesting all properties would drop 99% in value, imagine if the entire City sees every single property drop 10%, 20%, 30% or more in value?

According to BC Assessment, $6.2 billion in property taxes is collected across the entire province of British Columbia based on these valuations.

Any drop will impact municipalities profoundly.

Right now in Richmond, virtually every single property is selling below assessed value.  Some real estate agents are advising sellers to list a minimum of 10-15% below assessed value if they expect anyone to even look at their house.  We have profiled a number of homes that have sold for between 25%-34% below assessed value.

The impact has the potential to cost municipalities hundreds of millions of dollars.

For those that think a collapse in the housing bubble won't effect every single one of us, think again.

There are some very rocky times ahead.

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Sunday, November 25, 2012

Blindness: We didn't crash in 2008, why would we now?



Yesterday we mentioned that one of the most interesting side shows in the public arena right now is in watching the frustration develop by the real estate industry as they watch their ability to manage their message in the media slip away.

For years they have easily massaged and manipulated the mainstream message about real estate,  but that ability seems to be slipping away as the mainstream media finally begins to highlight the conditions around our housing bubble.

That frustration was brought in a post by the Chief Economist of the British Columbia Real Estate Association (Cameron Muir) who is “now convinced that we will never hear the end of housing bubble speak.”

Muir's comments come from an article in BC Homes titled, "Speaking in Circles: Time to burst the bubble speak."

Real estate agent Larry Yatkowsky also picked up on Muir's diatribe and gave us a fuller version.

Muir, as we all know, has spent the better part of the year countering bubble fears by arguing that if we hadn't seen the market collapse after the Great Financial Crisis in 2008, we would we now?  Where is the big financial shock that will push us over the edge?  Why all the fears our bubble is bursting?
"The premise is now as firmly entrenched in popular consciousness as carbon emissions and TMZ. It has taken the form of idolatry in the blogosphere, where any countervailing narrative is demonized. It has catapulted university dropouts into media darlings because of a hackneyed webpage and an opinion. It has been tarted up by so-called experts who predict impending doom year after year, despite being completely wrong every time."
It seems ongoing events have struck a nerve in the reserved and rational nature of BC's Pumper-in-chief.

Clearly Muir is feeling the frustration:
"Now, I’m not wearing tinted glasses. Housing markets go up and they go down. However, my point is that sharp and significant declines in home prices are usually created by massive economic shocks, like the 21 per cent mortgage rates and recession of 1982. Yes, there can be short term speculative bubbles that float back to earth after the circus leaves town, but home prices in Vancouver, for example, have been incongruous with other Canadian markets for decades."
For Muir, it all boils down to the litmus test of 2008:
"The big test was 2008. That was the year of the doom sayers, when the largest financial crisis since the Great Depression besieged us and the collateral damage hurled us into a global recession, one from which we still haven’t fully recovered. The airwaves were all a buzz with end of the world prophets and those predicting home prices would be chopped in half, at least. It was going to be the big one! The housing market had gone through a significant inflationary period leading up to 2008. Unlike today, speculation was clearly evident. Accusations abounded that Vancouver was overvalued, unsustainable and frothy. One financial institution even had a publication called Housing Bubble Watch, now defunct, in which Vancouver was always the straw man.

So what happened? Home prices fell 15 per cent from peak to trough, but that was short-lived. Indeed, once the clouds of uncertainty dissipated only a few months later, buyers came back in droves.

The most dramatic turnaround ever recorded occurred in Vancouver during 2009, when the year began with 1980s level consumer demand and ended with sales tracking near record levels. Prices came right back to where they were before the crisis, and have stayed there, for the most part, for the past three years. If such a severe financial crisis and global recession couldn’t trigger a meltdown of the housing market or pop any asset balloon, what could?"
Of course we all know that the only thing that allowed up to escape the implosion of the 2008 Financial crisis was the ongoing injection of the crack cocaine of easy credit as CMHC cap was forced upward from $100 Billion in 2006 to $600 Billion in 2012.

Should we increase it another six fold over the next six years?  Should we go from $600 Billion today to $3.6 Trillion in 2018?

This is the blindness of a long term speculative mania. When even seasoned, rational real estate agents become blind to the conditions of the ever growing bubble.
"The main misconception about housing markets is that they behave like the stock market. They don’t. Bad news can drive stocks lower in a matter of seconds, whereas homes are relatively illiquid; they take a long time to sell and have higher closing costs. In addition, owner-occupiers typically don’t speculate with the family home. In times of hardship, the home is typically the last thing to go. Instead, they hold off on other expenditures like lattes, movie tickets, new TVs and vacations."
But our Canadian market is filled with speculative mania.  In Toronto it is estimated that 90-95% of all condo presales were to speculative investors.  In Vancouver the epidemic of pre-sale condo and single family home flipping is almost as extreme. It won't be the panic sale of the 'family home' that triggers any collapse.
"In a market that has a well-diversified economy and expanding population, fire sales are extremely uncommon. Unless there is household financial catastrophe on a large scale, potential home sellers simply wait until market conditions improve."
Our's is a well-diversified economy? Does our market have incomes that support these valuations?  Can we count on money from other markets (where incomes can support those valuations) endlessly coming into our hamlet for that support?
"I write this piece as home sales in Vancouver and many other markets stagnate and homes prices tread water (see the Canadian Real Estate Association’s Multiple Listing Service® Home Price Index for an accurate reading). I have no doubt that the voices of impending doom will soon renew their bellicose refrain. Perhaps their tea leaves will be right this time and the market will indeed collapse, leaving homes selling for 50 cents on the dollar. I’d put my money on that refrain continuing for a long time to come."
Presumably Muir wants to "put his money on that refrain" (from the bears that the market will collapse) because the bubble won't burst and bears have to keep saying it it will.

But the issue isn't the voices of impending doom.

Bears cannot blow down the housing bubble no matter how much they are demonized. The Federal Government won't change policy because of the clamouring of the blogosphere.

The issue is the mounds of debt.  And it seems we may have truly achieved that mythical level of tulip bulb blindness to the real issue.

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Saturday, November 24, 2012

Sat Post #2: The battle for public support: the real estate industry vs the Federal Government



Two days ago we talked about the latest offensive by CAAMP against the changes made this year by the Federal Government to the rules around mortgages.

One of the first impacts can be seen here in the Vancouver Sun as reporter Shelley Fralic regurgitates the CAAMP news release and asks: "What, exactly, is wrong with a 35-year mortgage?: Government as babysitter is pricing many, especially first-time buyers, out of the market"

Besides the excellent response from the Huffington Post we profiled in the post two days ago, we simply refer back to the excellent article the Post came out with back in the first week of November: "Canada Housing Slump: Flaherty's New Mortgage Rules A Scapegoat For A Much Bigger Problem"
This summer, Prime Minister Stephen Harper and Finance Minister Jim Flaherty took a regulatory hammer to Canada’s housing markets, causing condo sales to plummet in Toronto, and sinking Vancouver house prices by jaw-dropping margins.

Or so the finance and real estate industries would have you believe.

To hear Canada’s banks, industry groups and even the Conference Board tell it, the slowdown that descended on many Canadian housing markets over the summer is the fault of the strict new mortgage rules Flaherty put into place this past June.

"To the surprise of no one, following the introduction of the most recent rule changes, sales activity ratcheted down," said Gregory Klump, chief economist at the Canadian Real Estate Association, in announcing a 15.1-per-cent year-on-year decline in home sales for September.

The Toronto Real Estate Board chimed in: “Some households have put their home purchase plans on hold in response to the higher cost of home ownership brought about by the recent changes to mortgage lending guidelines.”

The industry has good reason to maintain this narrative. For one, it makes it seem like falling sales volumes and prices are all "part of the plan," nothing to worry about. (Not true.) And it also deflects uncomfortable questions about the role of real estate developers, agents, banks and industry groups in creating the inflated house prices Canada has seen in recent years.

The media are happy to go along with it, because it offers a neat and simple explanation for why Canada's decade-long housing boom is coming to a halt. The only problem is, this isn’t what’s happening.
Hmmm... someone get these guys a blog, they'd fit right in with us.
First the background: Flaherty tightened the rules for mortgages for the fourth time in as many years this past June, reducing the maximum length of a mortgage insured by the CMHC to 25 years from 30, effectively making that the maximum amortization period for most Canadians who take out mortgages. He also reduced the maximum amount you can borrow against the value of your house to 80 per cent from 85 per cent. These changes, like the previous ones, were aimed at ensuring that Canada's rising home prices weren't due to irresponsible lending and borrowing.

The be sure, this will have a cooling effect on the housing market. There are prospective home buyers who just can’t afford the extra $140 per month, on average, that the shorter mortgage periods represent. Some homebuyers have just been priced out of the market. But can that alone explain the 70-per-cent drop in condo sales in Toronto, or the nine-per-cent drop in house prices in Vancouver?

Highly unlikely.

TD Bank forecast the impact of the mortgage rule changes on the housing market and found it would amount to a three per cent decrease in house prices - far less than what Vancouver, for one, has already seen. Not to mention, we’ve had three previous rounds of mortgage rule tightening since 2008, and none of them tipped the market downward. Clearly, something else is happening here.
The industry would argue that the last changes were the straw that broke the camel's back and the cumulative effect is at fault, but do go on:
The housing market’s fundamentals aren’t looking good. Standing in the way is that pesky basic law of economics — supply and demand. In some Canadian markets, those two things have become entirely detached from one another.

As the CEOs of both BMO and RBC have attested, Canada’s real estate market is simply overbuilt -- particularly in Toronto, where condo construction has grown so thoroughly out of hand that there are now twice as many high-rises going up there as there are in New York City.

And more, much more, construction is being planned.

In Vancouver, where residential construction has been somewhat more restrained than in Toronto in recent years, the supply-demand disconnect is reflected in prices, which have flown so high that Vancouver has nearly as many houses listed for sale over $1 million as sell in the entire United States in a month. The city's housing costs ranked as the second least affordable in the world, after Hong Kong, in a recent survey.

Across the country, house prices are now 35 per cent higher relative to income than has been the long-term trend through history, Bank of Canada Governor Mark Carney noted earlier this year.



Simply put, prices are too high. Canadians aren't earning enough to justify these price levels. And closely linked to this is the elephant in the room: debt.
And of course this is what the battle is all about: the real estate industry wants the government to endlessly feed the ponzi with cheap, easy credit backstopped by the taxpayer's of Canada. As we have noted numerous times, the amount CMHC insures has gone from under $100 Billion in 2006 to almost $600 Billion today.  Right there is the source of the housing bubble in Canada.
It has never been cheaper to take on debt in Canada. With a global financial crisis busting out all around, the Bank of Canada dropped its base interest rate to one per cent in January, 2009, and it has stayed at or below that level for nearly four years now.

Some economists argue this is an excessively expansionary policy that has overheated Canada’s housing market. (Plenty of others would say that, given the damage taking place in other parts of the economy, those low rates were necessary.)

All this has had an alarming effect on household balance sheets. StatsCan recently revised its measurement of household debt to make it more in line with international norms, and found the debt-to-income ratio hovering at a record 163.4 per cent, higher than the level the U.S. had when its housing market began a years-long decline half a decade ago.

That offers more of a clue to why Canada’s housing market has peaked and appears to be on a downward trajectory. It’s basic mathematics writ small in the finances of households across the country — there’s just no more breathing room to borrow more money.

Add to that the phenomenon of foreign investors bailing on condos, at least in Toronto, and you have a pretty perfect storm for a housing slowdown.

And, if anything, the adjustments to the mortgage rules were too little, too late.

What should happen in a market like this is a re-balancing — or a correction, if you prefer. Whatever the terminology, house prices have to come down relative to incomes. Then and only then can they return to healthy, stable levels of growth.

Our finance minister agrees with this.

“It’s better to have some softening in the market rather than have sudden movement,” Flaherty said this summer, talking about the new mortgage rules.

But can “softening” be achieved at this point? Or has the housing market become so out of balance that there’s simply no way to avoid a hard landing? That, of course, is the big question these days.
Interestingly, as CAAMP argues how the mortgage changes are harming the economy - and by extension jobs - there is an article out in the United States that is taking the data and showing us: "How Too Much Household Debt Buried The Job Market."

One of the most interesting side shows is in watching the frustration that is now clearly being felt by the real estate industry when it comes to their growing inability to manage their message in the media.

For the past 10 years they have had free reign to massage public perception.

They still have some pull, as the Fralic column in the Vancouver Sun demonstrates.  But they are being overwhelmed on the whole.

More on this tomorrow.

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Sat Post #1: Fool me once....



Yesterday we told you how the OFSI set up a twitter account.  We even profiled their 2nd tweet:
OSFI has authorized CMHC to commence web-based social-networking campaign to booster public image.


We noted that this comment seemed odd because CMHC had been on twitter since July 2011. Turns out there was a good reason this comment seemed out of place.

As one contributor to our comments section noted, a closer inspection of the OFSI logo was in order:



Umm... "Office of Starfleet Intelligence?"

The Twitter homepage for the account states they are:
Official Twitter page of OSFI. Bureau de L'étoile de la Flotte de Renseignement 
Ottawa, Ontario
Clever.  Because "Bureau de L'étoile de la Flotte de Renseignement"  is french for 'The Office of Star Fleet Intelligence'.

LOL

The real CMHC did launch a new twitter account titled @CMHC_ca, which you can see here:


But the @OFSI_ca account, which was set up a mere hours after the CMHC account, is that of an individual portraying themselves as a civilian watchdog.

It doesn't detract from the media campaign we profiled yesterday by CAAMP (the Canadian Association of Accredited Mortgage Professionals), but the OFSI did not create a twitter account in response.

Ya gotta admire the creativity of the faux twitter account tho... made me laugh.

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Friday, November 23, 2012

The battle over the mortgage changes heats up



Wikipedia defines the OFSI (the Office of the Superintendent of Financial Institutions) as an independent agency of the Government of Canada reporting to the Minister of Finance created "to contribute to public confidence in the Canadian financial system".

Seems with all the backlash about recent changes to the regulations surrounding the mortgage industry, the OFSI feels it is in need of some public confidence themselves.

Yesterday the OFSI set up a twitter account.  Their 2nd tweet?
OSFI has authorized CMHC to commence web-based social-networking campaign to booster public image.


Which seems odd because while the OFSI joined twitter yesterday, CMHC has been on twitter since July 2011.  Mind you the sum total of their twitter contribution so far has been only 2 tweets:


The backlash in question, in case you have missed it, is coming from the mortgage broker industry, as the Huffington Post noted a few days ago.

The press coverage comes as CAAMP (the Canadian Association of Accredited Mortgage Professionals)  issued a report declaring that “the changes to mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy.”

As the Huffington Post notes:
Ever since Canada’s housing market began swooning earlier this year, mortgage brokers, bankers and real estate agents have been busy telling us that the federal government is to blame, thanks to its tightening of mortgage lending rules this past June.

Never mind the evidence that the most overheated markets were already cooling by the time the mortgage rules were announced; never mind the rather extreme “coincidence” that our housing market began to slide just as we reached household debt levels similar to those seen in the U.S. and U.K. when their housing markets crashed. No; the real problem, according to the industry, is Finance Minister Jim Flaherty’s reduction of government-insured mortgage amortization periods from 30 years to 25.
The CAAMP report presents data to suggest the new rules have priced some percentage of prospective homebuyers out of the market.

According to CAAMP's estimates, if the new mortgage rules had been in place in 2010, 11 per cent of the high-ratio mortgages approved that year wouldn’t have been. A high-ratio mortgage is one where the buyer has put down less than 20% as a down payment.

CAAMP argues that this will impact employment as the construction sector struggles.

And that's the heart of the offensive.  CAAMP argues real estate has become such a significant part of the economy and as real estate goes, so goes the economy... so, federal government, don't stick with the changes you have made to mortgages.

But as the Huffington Post notes:
[CAAMP's] warning about the economic dangers of an overheated housing market could just as easily be an argument for Flaherty’s mortgage rule changes as they are an argument against them. If the economy stands to be devastated by a housing slowdown, then the best thing to do is to stop the overheating as soon as possible — or face an ever larger crash. This is what the mortgage rule changes were meant to accomplish.

And the effect of the mortgage rule changes is really no more than what one would expect to see with a fairly small hike in interest rates.

Right now, a 25-year mortgage at three per cent interest on a $350,000 house (the average price in Canada right now) would cost you $1,656 per month, according to TD Bank’s rate calculator. If the rate went up to four per cent, the payment would jump nearly $200 per month, to $1,847.

According to estimates, the new mortgage rules would jump housing payments on average by $140, due to the shorter repayment periods. In other words, the new mortgage rules have less of an impact on affordability than a one-per-cent interest rate hike.

This is what the real estate industry is freaking out about and blaming Flaherty for — the equivalent of a small hike in interest rates.
The hypocrisy in CAAMP's arguments are gleefully exploited by the Post:
And yet Dunning’s report asserts that “Canadian mortgage borrowers and lenders have been prudent and there is very substantial room to absorb higher interest rates.”

Really? Really?! Our household debt burden is now 163 per cent of household income, a record high and a higher level, slightly, than what the U.S. and U.K. saw before their housing market collapsed.

So how is it that Canadians have room for more debt, when the same debt levels in the U.S. and Britain proved to be unsustainable?

The truth is, Canadians don’t have room for more debt. And the contradictory argument that they can handle higher interest rates but not tougher mortgage rules is proof that the blame-the-mortgage-rules argument doesn’t hold water.

Our housing market isn’t experiencing what Dunning calls a “policy-induced housing slowdown.” It’s experiencing fatigue from excessively high debt levels, and a long run-up in prices, combined with general weakness in the job market and unimpressive wage gains.

Yet it seems the industry will continue to maintain that the blame for the housing market slowdown lies not with the irrational exuberance of a housing bubble, but with the entirely rational efforts to fix it.
You can be sure this battle is only getting started. 

Which is why the OFSI is taking to social media as part of it's counter-offensive.

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Thursday, November 22, 2012

Did we say -40% below assessed value? Correction... it's now -50% below assessed value.




Located at 1371 Foster Street, Unit #306 was for sale last week with an asking price -47% below it's $228,200 assessed value (last week's asking price $119,000).


Well the asking price has been cut again.

Now it's down to $109,900, a stunning -52% below assessed value with no buyer in site.

As we noted last week, this building has an upcoming strata repair assessment of $63,000 that will be levied against owners. But notwithstanding this, we have seen condo units with large levies before that have sold.

The fact it's not moving is a reflection of the current market, a Lower Mainland market that now has it's first entry in 50% BELOW assessed value club.

(hat tip Observer and Vancouver Price Drop)


Meanwhile on the -30% front

Speaking of the current market, Observer notes we have two more entries in the -30% below assessed value category.

The first is 32913 14TH Ave in Mission which clocks in with an asking price -33% below assessed value:


And the second is #125- 3411 Springfield Dr. in Richmond which now has an asking price -32% below assessed value:




Like rats on a sinking ship, speculators bailing on the west side of Vancouver

Finally Observer shares another fascinating stat which I couldn't resist highlighting.

The west side of Vancouver has long been held as the epicentre of our stunning housing bubble and the  bastion of HAM (Hot Asian Money). Because of this speculators have been buying houses to flip like it was the one day shoe sale at Army/Navy.

But in what is another sign the bubble is bursting in the Lower Mainland, Observer notes that over 20% of listed homes in Shaughnessy right now were purchased just one year ago (this is not including new builds, so the figure is actually higher).

These are speculators desperate to get out and cut their losses.

Profiled is this listing at 1029 Devonshire Crescent, Vancouver:


This home last sold on June 25, 2011 for $2,499,888 .

The current list price is $2,380,000 (assessed value is $2,401,000)

IF the house sold for list price, there would be $125,238 in transaction costs and a $119,888 loss on the sale for a total loss of  $245,126.

So this specker is looking at a quarter million loss and no buyer in sight.

Guess you gotta know when to hold... and know when to fold.

And the speculators on the west side are folding, big time.



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Wednesday, November 21, 2012

1997... how far removed are we?



The reaction to yesterdays post was interesting. A flood of contributions to the comment section (by this blog's standards) and a flood of email comments.

The attraction?  A single family house on the westside of Vancouver has sold for more than 30% below assessed value.

Is this continuing evidence that the housing bubble here is finally bursting?

Let's remember 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.
  • Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 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. 
  • In 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.
  • In 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.
  • In 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.
  • Not only were the rules surrounding the granting of money loosened, but CMHC's cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion today.
Right there, in all those details, is where all the money originated to fund our housing bubble.

Incomes haven't grown to permit the rise in housing prices, debt has.

How much has changed since 1999?

Yesterday our friends over at VREAA offered us this intriguing reminder:


The house pictured above is 4549 West 12th Avenue on the westside of Vancouver.

In March of 1997 this house sold for $457,500.

Yep... $457,500.

Today the assessed 'value' of that house is $1,782,000.

Debt, and the crack cocaine of easy money is what has inflated it's value. 

Throughout history, all booms created by excessive credit have burst and returned to the the levels from which they started (and often have overshot those levels as the bubble collapses).

From 10% down and 25 year amortizations (with limitations of what they would insure) to 0% down and 40 year amortizations with no limits... it isn't rocket science to trace how this bubble was blown.

As the credit taps are turned off, who is genuinely caught off guard as the bubble contracts? Perhaps only the ignorant and the wilfully blind.

It doesn't take the incredible vision of a prescient oracle to see where we are or what is coming. It's common sense.  It's history replicating itself: all booms created by excess credit bust when that credit is withdrawn.

How long before we return to 10% down and 25 year amortizations?  We're almost there now. And with the $600 Billion CMHC cap looming, are greater restrictions so hard to foresee? Particularly with the Federal Government committed to a "soft deflating" of the bubble?

For those who objectively view our housing bubble, it isn't hard to see where we are going.

As the bubble unwinds, as credit is withdrawn, values will return to where they were before this bubble began (accounting for inflation).

Make no mistake... one example is not proof of the collapse.  But it wasn't that long ago people were insisting we would only ever see prices come down 10%, 15% TOPS.

Now we see regular examples of 25% off and evidence of 30%+ drops are appearing.

As incredible as it seems to eyes conditioned to 2011 prices,  4549 West 12th's 'value' is really around $600,000.  And it will return to that level, and most likely lower.

$600,000 would be a drop of about 67%.

When you consider that the unwinding is only just starting, and that we are already seeing examples of 30%+ drops, is a 67% drop still so hard to believe?

More significantly, if you can now appreciate that it might happen, is selling now and getting 35% off assessed value so bad when you consider what is coming?

We do live in interesting times.

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