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Monday, December 31, 2012

Goodbye 2012, Goodbye



As 2012 winds down and gives way to 2013, there is no commentary today.  

Instead, our sincerest wishes for a Happy and Prosperous New Year to all who come to this site today.

Thank you for visiting the blog throughout the year.  Thank you for your comments, your emails and sharing your thoughts.

Have a safe, memorable night and may 2013 find you all in good health.



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Sunday, December 30, 2012

You can almost smell the desperation - buyer's once again told prices will not be coming down


It was back in the middle of October that Tsur Somerville first admonished home buyers who were sitting on the sidelines waiting for housing prices to 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 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.
“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.
In that October post we profiled some Vancouver westside properties that have dropped their asking prices to between 10%-23%, with no buyers in sight.

The response of Somerville et al?  Prices are flat... there is no decline.

Two and half months later, with the market still suffering with the start of the Spring Market looming, Somerville is back with BCREA Chief Economist Cameron Muir to trumpet the same message: Vancouver real estate buyers waiting for a price collapse in 2013 could be in for a long wait.
While prospective sellers are waiting, the numbers indicate that prospective buyers are a bit shy as well. “The market right now is both slow and tentative. There are a lot of people out there being very tentative because they’re not really sure where things are going,” Somerville said. “I can’t say how many buyers are in the market — I want to differentiate between that and the prices they are willing to pay. Maybe there are people who are actually interested in buying, but they’re either waiting for prices to be at a certain point, or they’re making offers that aren’t being accepted. I can’t differentiate between those things.”
And this is the frustrating thing for the industry right now.  They know there is an incredible amount of pent up demand - demand that knows the market is overvalued and they are prepared to wait for it to come down.

Hence the message:
“To get prices to really tank, you’ve got to have something happen. Either you’ve got to have overbuilding, or you’ve got to have some big change in the world of finance, such as large movement in interest rates or a financial disruption, or you’ve got to have a real negative economic shock,” Somerville said. “You’ve got to have some combination of those, or one of those to make prices drop dramatically.”

Overbuilding of single-family homes in Metro Vancouver is difficult because land is so limited, Somerville said.
It was left to Muir to deliver the R/E message of import:
Cameron Muir, B.C. Real Estate Association chief economist, thinks if buyers are waiting, they could be waiting a long time.

“Three years ago we saw the largest financial crisis since the Great Depression and an ensuing global recession. If that’s wasn’t enough to trigger a correction in an asset bubble, I don’t know what is,” Muir said.

“The condo market in Vancouver has not been ‘hot’ since 2009, and perhaps even earlier than that. Prices on the condominium side have been relatively flat for three years, so that doesn’t signal any kind of asset bubble welling up,” Muir said. “There has also been little speculation in the marketplace over the past few years and home builders have been kept in check in terms of their total units in production.
You almost have to fall out of your chair with laughter here.
  • The condo market in Vancouver hasn't been hot since 2009? 
  • Little speculation in the market place? 
  • Home builders have been kept in check in terms of total units in production?
Riiight.

Wasn't it just last August that ScotiaBank declared the Vancouver market was in a full blown correction  and warned:
the risk of a more difficult adjustment will increase if builders do not soon begin to slow the pace of new construction.
Faithful readers will recall back in February 2012, Ozzie Jurock made reference to the exploding condo inventory on his Face Book page and described the spring/summer condo market as:
"a market that will have a lot of units for sale and more coming on stream."
In an OpEd piece in the Vancouver Sun, Jurock noted:
As of Feb. 29, 2012, there were 6,000-plus condos for sale through the Vancouver Real Estate Board - up 15% compared to the previous year.

At the same time, sales of used condos were down by 18%.

Add to this the fact that - according to MPC Intelligence - there are some 8,000 pre-sale condos being launched in the first six months of this year.
Ultimately Somerville and Muir are going for the soundbite... for the headline.  That's how you mould public opinion.

The problem is their target market - the buyer sitting on the sidelines - is not like Joe Q. Public who browses the media and pays half hearted attention to those headlines.

The buyer on the sidelines is keenly aware of the what is going on.

The buyer on the sidelines is keenly aware that prices have been coming down.

And the buyer on the sidelines is keenly aware Somerville and Muir are full of it.

Which is why they are not biting at those listings currently asking 25% below assessed value.

They are willing to wait.  And it's going to take more than Somerville and Muir berating them for waiting, to get them to buy.

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Saturday, December 29, 2012

Is a 70% collapse so hard to imagine?


As longtime followers of this blog know, our prognostication for the popping of the housing bubble in the Village on the Edge of the Rainforest is a decline on the order of 70%-85%.

Nothing brings more derisive emails than re-stating this prediction - even from those who already harbour a bearish outlook.

But is a 70% drop so outlandish?

Yesterday one of the properties we profiled was 2718 W. 24th Ave:




Built in 1988, this 5 bedroom, 3 bathroom house has changed hands three times since then.

In 1998 it sold for $455,000.  In 2004 it sold for $700,000.  In 2011 it was assessed at $1,864,000.

With no significant upgrades whatsoever, this property rose in 'value' from $700,000 in 2004 to $1,864,000 in 2011?  This is a perfect example of the bubble created by the CMHC polices outlined two days ago by the Globe and Mail Newspaper.

The Globe article outlines clearly, with comments from the former Bank of Canada Governor David Dodge, how CMHC policies inflated this housing bubble.

Every asset bubble in history - when it bursts - always over-corrects past the point when the bubble first started.

Below is real estate agent Larry Yatkowsky's average price chart from the start of December 2012 (click on image to enlarge):


Look at where prices were in 2004 (and some would argue that the bubble was already on it's way by then, having started several years before this).

Take a look at the uppermost graph - the stages that all asset bubbles go through.

If we to correct back to only 2004 prices, a mere 8 years ago, consider the impact on our housing market

(In 2004 the Vancouver average house price was around $520,000)

It means this house at 2718 W. 24th Ave would drop to $700,000... a 62.5% collapse in value from the 2011 assessment.

If the bubble correction overshoots 2004 prices, this house could easily shave 70% off of it's 2011 assessed value and drop to $560,000.

To eyes accustomed to housing bubble valuations, the mere idea that the 'worth' of this house could fall from $1,864,000 to $560,000 is just absurd.

But think about it.  This sort of drop only goes back to 2004.  When you look at the progression in panorama, it isn't hard to see how the bubble could burst in this fashion.

  • The policies that created the bubble are being reversed.  
  • The crack cocaine of easy credit that facilitated the dramatic rise is being removed.

Just remember one important thing. History shows that the unwinding of a bubble takes as long as the inflation of one.  It will take 8 years for values to fall like this... but fall they will.

And 70% will actually be a conservative number.

We are in for a painful ride.

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Friday, December 28, 2012

The Gamblers: Know when to hold. Know when to fold. And they're folding.


On December 23rd we talked about 5575 Elm Street, a Vancouver westside property that had seen it's asking price reduced by over 20% but was still listed over $400,000 above the assessed value of the property.

We mentioned that 2013 will be the year many begin to accept that the values established over the past year are not coming back and that to sell, homes will have to be listed below assessed value.  


Driving this new reality is that fact so many properties are already selling below assessed value. 

In November we told you about a westside house that had sold for 32% below assessed value. December hasn't seen a replication of this type of drop, but there have been numerous sales 5%-20% below assessed.

And when you have conditions where sales are down almost 30%, it shows you in which direction the market is heading.

Seeing the writing on the wall, more and more speculators getting out the market at a loss.

2171 S.W. Marine Drive is one of those properties:


Originally listed at $2,180,000, the house is assessed at $1,885,000. It just sold for $1,570,000 or -17% below assessed value. More significantly, the seller originally paid $1,700,000 in February 2011.  That's a loss of $130,000 (not including commissions and Property Transfer Tax or PTT) in only 22 months.

Then there is 1706 W. 59th Avenue:


The seller originally bought the house in August 2011 for $1,700,000.  It was listed for $1,790,000, it's assessed at $1,697,000 and it just sold for $1,600,000.

That's only -5% below assessed value but it's a loss of $100,000 (not including commissions and PTT) in only 16 months... and this seller' is counting his lucky stars he only lost that much.

There is 3721 W. 16th Ave:


They were asking $1,288,000, it is assessed at $1,200,000 and it just sold for $1,030,000 or -14% below assessed value.

How about 2718 W. 24th Ave:


Assessed at $1,864,000 it was on the market for $1,750,000 and recently sold for $1,580,000 or over -15% below assessed value. (A faithful reader advises this house sold in 1998 for $455,000, sold again in 2004 for $700,000.  With no changes to the house whatsoever, it has now sold for $1,580,000.)

Finally we bring you 4118 W. 13th Ave:


This house is assessed at $2,529,000.  The seller was originally asking $2,900,000 and accepted $2,308,000 earlier this month or -9% below assessed value.

As we go into 2013, homes on the westside of Vancouver are routinely selling for 5%-20% below assessed value.

In this environment, asking prices above assessed value are a non-starter. Is it any wonder speculators continue cut their losses and get out while they can?

Earlier this year pundits insisted Vancouver westside properties would hold their value. Then some told us the market would see a 5%-10% correction - at best while others were adamant that sellers would never sell for less than what their property was worth, let alone less than what they initially paid for it.

All of these claims were dead wrong.

All eyes are now firmly focused on the upcoming Spring market.

(hat tip timber2012 on RET)

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Thursday, December 27, 2012

Mainstream media begins examining what created our housing bubble


As 2012 winds down to a close, the cherry on top of this astonishing year comes with an excellent examination of what created the housing bubble by the Globe and Mail newspaper.

Titled CMHC: Ottawa’s $800-billion housing problem, the G&M notes home prices have doubled nationwide over the last decade, propelled by low rates and easy mortgage terms.

But as the U.S. experience proved, soaring property values can come with an ugly downside.

Yesterday the Globe and Mail started a series examining the foundation of Canada's historic real estate boom.  With the comments of the former Bank of Canada Governor, David Dodge, this is one of the most important articles of the year. It makes some significant points and basically outlines what this blog has been telling you for several years now.

Here is the article in full:

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CMBC: Ottawa's $800-Billion housing problem

TARA PERKINS, GRANT ROBERTSON
The Globe and Mail
Published Wednesday, Dec. 26 2012, 7:00 PM EST
Last updated Wednesday, Dec. 26 2012, 7:12 PM EST

The governor of the Bank of Canada was getting angry.

It was a sweltering afternoon in July, 2006, and David Dodge was meeting with executives at Canada Mortgage and Housing Corp. in Ottawa, in search of the answer to a pressing question: Why were they lowering their standards in such a reckless fashion?
As Canada’s largest mortgage insurer, federally-run CMHC is a gatekeeper to the housing market, influencing who gets to buy a home and who doesn’t. For decades it has sought to make it easier for people to enter the housing market, but it has also enforced some strict rules, requiring home buyers to make minimum down payments and pay off their mortgages in 25 years.
Now CMHC was abandoning its old ways. It was starting to allow more exotic kinds of mortgages, similar to what lenders were offering in the United States – 35-year loans, and loans on which the buyers had to pay only the interest at first, giving them low monthly payments at first but saddling them with more debt down the road.
To Mr. Dodge, these were irresponsible moves that would encourage some people to borrow too much or jump into the market before they were ready, creating new risks for the economy. “This is a mistake,” he told CMHC brass bluntly.
Lower mortgage standards were going to cause already-frothy house prices to inflate even more – an “excessive exuberance,” the governor called it – as buyers rushed in, borrowing greater amounts of money and purchasing bigger homes than they could otherwise afford.
“This is absolutely not the appropriate thing to do,” a frustrated Mr. Dodge told the meeting.
CMHC president Karen Kinsley defended the changes, arguing that the mortgage insurer wasn’t getting lax, and that borrowers would be as closely scrutinized as ever. But she had other concerns. For months, competitive pressure had been mounting on the Crown corporation to bring in more business.
Created in 1946 to help returning Second World War veterans find homes, CMHC had morphed over the years into a multibillion-dollar goliath that fuels bank lending and housing demand by insuring riskier mortgages, especially those in which the buyer has only a small down payment. Without that insurance, many more people would be shut out of the real estate market, unable to get a mortgage from a chartered bank.
It has also been a lucrative venture for the government. But that business was now being eroded as a result of the arrival of aggressive U.S. insurers into Canada.
The American companies were willing to do things CMHC had never done. Some were even backing “zero-down” mortgages in which the buyer borrowed every dollar needed to pay for the home.
It was a race to the bottom, and CMHC was playing along. “We didn’t lead it … As we lost market share, we would follow what the American companies were doing,” said former CMHC chairman Dino Chiesa. With money available and the economy booming, home buyers streamed into the market and prices soared.
Mr. Dodge’s warnings didn’t cause CMHC to change course. But later, convulsions in the U.S. economy would. The bursting of the American property bubble showed that a rapid rise in home prices and household debt, built on a foundation of low interest rates and easy mortgages, could be a toxic combination. When the boom ended, it left a legacy of failed banks, foreclosed homes, recession and government debt.
It is a path that Canada is trying to avoid after a period in which home prices have risen much faster than incomes – faster than any other decade since the 1950s. To afford those houses and condos, Canadians now hold nearly $1.2-trillion of mortgage debt, nearly three times what they had in 2000. Households have almost $1.65 in debt for every $1 in after-tax income, the highest since Statistics Canada began keeping the data in 1990.
And in the process, the federal government has been taking on bigger risks as well. The federal government now backstops some $800-billion in mortgages, mostly through CMHC, the equivalent of almost half of Canada’s annual economic output.
Those are the reasons that Finance Minister Jim Flaherty has been trying to halt the rise in debt and engineer a soft landing in the real estate market. A crash in home prices wouldn’t just cause untold financial pain for Canadian homeowners – it has the potential to expose the federal government to huge liabilities for their mortgages.
How we got to this place is not merely the story of a historic boom in real estate. It’s also the story of an institution that has grown into something it was never intended to be. 
The evolution of CMHC
CMHC was an idea of the postwar government of Mackenzie King, who saw a need for federal intervention to find a place to live for tens of thousands of soldiers who were coming home. It also built some of the first social-housing projects in Canada.
At the time, home ownership was out of reach for many Canadians, even those in the burgeoning middle class. Lenders usually required a down payment of about 50 per cent, and the mortgage business was not very competitive, dominated by a small number of trust companies and insurers.
In the mid-1950s, Ottawa moved to change that, opening the doors to banks to grant mortgages and asking CMHC to begin offering mortgage insurance. The insurance kicks in if the homeowner fails to make payments on the loan, compensating the lender for any losses.
The creation of a federal guarantee knocked down one of the major barriers to entry in the housing market. Now it was possible to buy a home with a down payment of just 10 per cent; lenders would advance the money, knowing they were protected by Ottawa from bad borrowers and falling property markets. Home ownership rates went up; by the early 1970s, about six in 10 Canadians lived in a house they owned.
Still, the system had its limits. One was on length: CMHC would only guarantee mortgages of 25 years or less, to encourage people to pay off their homes in a reasonable time.
The length of a mortgage has a major impact on its cost to the borrower. Consider two homeowners taking out an identical $400,000 mortgage, at 4 per cent interest, making monthly payments.
The first pays off the loan in 25 years, shelling out $231,000 in interest over that time. The other takes 30 years, in order to enjoy lower payments along the way. But that extra five years adds more than $53,000 to his interest bill.
Mortgage insurance is also expensive, and in the past, most home buyers tried hard to scrape together the minimum down payment needed to avoid it. (Since 2007, that minimum has been 20 per cent of the purchase price; before that, it was 25 per cent.) In 1992, just one in five mortgages was insured.
CMHC quietly served this slice of the home-buying public and was largely ignored by its political masters. Canadians are reliable when it comes to repaying their mortgages, so insurance claims were minimal, and the company made money for the government.
Meanwhile, after an early-1990s correction in some regions, Canadian home prices began a long upward march. By the middle of the past decade, the country was in the middle of a virtuous circle. Higher home prices made a lot of consumers feel wealthier, fuelling consumer confidence, which in turn pushed up house prices even more. In 2006, the average price of a home in Canada had surpassed $250,000.
But prices were just about to really take off.
In 2006, the new Conservative government in Ottawa allowed CMHC to tinker with its tried-and-true formula. One of the key changes was in mortgage length: CMHC would insure mortgages 35 and 40 years in length.
The measures helped people like Sarah O’Brien, who bought her first home at the age of 26. She and her husband, Darryl Silva, purchased a condo three years ago in Etobicoke, on the western side of Toronto, with a down payment of just 5 per cent. Mortgage rates were low, which helped. But so did the bank’s willingness to give them a CMHC-insured 35-year mortgage. The longer amortization held their biweekly payments to about $700.
“We’re young to be getting into the real estate market, so if the monthly amounts were significantly higher, we probably wouldn’t have,” Ms. O’Brien said. “We probably would have waited.”
The arrival of buyers like Ms. O’Brien and Mr. Silva has changed the market, however. Home buyers have responded to low rates and easy mortgage rules “by bidding up the price of houses,” said bank analyst Peter Routledge at National Bank Financial. Since 2000, the price of houses across Canada has risen 127 per cent; they’ve gone up nearly 50 per cent since 2006.
“You can never really provide cheap housing,” argues Moin Yahya, associate professor of law at the University of Alberta. “All you can really do is provide cheap cash, which of course then drives up the price of housing. You’re only distorting the market.”
How much did the mortgage rule changes contribute to the steep rise in home prices? That’s not clear. Low rates and rising incomes have been significant factors, as has a perception that real estate is a more stable place to invest than, say, the stock market.
What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.
“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,” Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”
But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.
The market starts to unravel
As CMHC was making it easier than ever to get a mortgage in Canada, it was also profiting from the boom. Its profits soared, rising from $376-million in 2000 to $1.03-billion in 2006.
Its balance sheet swelled. In 1996, CMHC was the insurer on $131-billion worth of mortgages; a decade later, it had more than doubled, to $291-billion. (It has since almost doubled again, to $576-billion by the end of September.)
By 2006, the year Stephen Harper’s Conservatives took office, Department of Finance officials started to think about how to take some of that risk off the government’s books. They mooted the idea of privatization. CMHC was a large, healthy corporation, already competing with private sector rivals. It looked strong enough to go out on its own.
A source close to the CMHC told The Globe and Mail that the discussions were serious. Had the global economy stayed robust, it’s likely the Tories would have proceeded with selling the business.
That, of course, is not what happened.
By the summer of 2007, two things had become obvious. First, the U.S. real estate market was in trouble, with serious implications for its economy; second, problems in “subprime” mortgages – those given to riskier borrowers – were beginning to choke the credit markets.
Within a year, Fannie Mae and Freddie Mac – two U.S. financial institutions whose mandate, like CMHC’s, is to promote home ownership by greasing the wheels of the home lending market – were nearing collapse and Washington started planning their nationalization.
The risks of easy money were now clear, and Mr. Flaherty was forced to respond. In July, 2008, he announced that government-backed mortgage insurance would no longer be eligible on 40-year mortgages. The new maximum was 35, and a down payment of at least 5 per cent would be required. The rules were scheduled to kick in Oct. 15.
By the time that date arrived, though, bad mortgage debt had tipped the world into a full-blown financial crisis; a global recession soon followed. Oil prices plunged, Canada’s manufacturing sector seized up, and companies began laying off thousands of workers.
Ottawa had a few levers to try to cushion the drop. The real estate market was one of them. Mr. Flaherty and his mandarins realized that CMHC could play a useful role. By using its balance sheet, it could ensure that banks had the money so they would keep lending during the crisis.
So in early October – the week before his new mortgage rules took effect – Mr. Flaherty placed a call to a high-ranking CMHC official to deliver a command. The Crown corporation would need to start buying tens of billions of dollars in mortgages from Canada’s banks, giving those banks cash to make new loans.
Under those orders, CMHC bought $69-billion worth of mortgages. It was a strategic move by the government: The banks continued to lend, Canadians continued to borrow, and after a short downturn, housing prices began to snap back in early 2009, helping to lead the country out of recession.
Fears of a housing bubble
Ottawa’s plan worked – too well. By early 2010, home prices were rising so quickly that a number of bank CEOs had become concerned.
Mr. Flaherty asked officials in the Finance Department to get him more information on real estate speculation, according to 773 pages of government documents that were released to The Globe and Mail on Dec. 24, nearly seven months after they were requested under the Access to Information Act.
The minister’s officials responded with a memo marked ``Secret`` on Feb 5, 2010, which included a section on mortgage insurance products.
Most of the memo has been redacted, and it is unclear what influence the memo had on Mr. Flaherty’s next move. On Feb. 16, he announced new restrictions on CMHC insurance covering investment properties. He also cut the amount of equity that people were allowed to take out of their homes when refinancing.
The moves were made so quickly that Finance had yet to work out the details. In fact, the documents show that 10 days after Mr. Flaherty`s announcement, he received another memo that was labelled “secret” about how the changes would be implemented. “We plan to define an owner-occupied property as one where the borrower, or an immediate family member, occupies the premise,” it said.
Yet questions about the housing market persisted. In April, 2010, Mr. Flaherty’s department sent him an analysis of household debt, which noted that some analysts were raising concerns about a potential bubble.
“While the broad conclusion of this presentation is that there is no clear evidence that a housing bubble exists this is not to suggest that a housing bubble could not develop overtime [sic] in Canada,” the internal memo said.
The economic risks associated with a bubble were significant, the memo said. “A house is most likely to be the single most important asset that Canadian consumers own. Housing is also the largest asset class in the economy. Changes in home prices, therefore, affect directly the wealth position of consumers and impact their spending patterns.”
The mortgage insurance ‘sandbox’
Mr. Flaherty’s swipe at CMHC did little to dampen enthusiasm for real estate. Vancouver`s runaway housing market, which saw prices rise by 19 per cent in the year leading up to April, 2010, was poised for further increases and had economists worrying that the situation was out of control.
By December of that year, Finance Department policy makers were plotting further changes to the mortgage insurance “sandbox,” as they now called it, according to internal documents obtained by The Globe. They wrote a memo seeking a decision from Mr. Flaherty on possible new rules, under the subject line ``Sandbox Options: Housing Finance Changes.”
The next moves came in January, 2011. Thirty-five year mortgages like Sarah O’Brien’s were banned from the sandbox. The government further reduced the amount of equity that could be taken out, and said it would no longer guarantee insurance on home equity lines of credit.
In normal times, those steps might have been enough to cool the market. But as Europe tumbled into a severe economic and political crisis in 2010 and 2011 and the global economic recovery got weaker, interest rates stayed low, making mortgages cheap.
Canada`s banks added to that problem by getting caught up in a mortgage price war. Even so, Mr. Flaherty took no action.
Then, this past June, he and central bank governor Mark Carney flew off to G20 meetings in Los Cabos, Mexico.
By that point, Mr. Flaherty had already been contemplating yet another tightening of mortgage rules for at least a month, according to the documents obtained by The Globe. The Mexico summit reinforced one crucial point for the two men: The euro zone disaster will take years to repair. That meant central bankers like Mr. Carney would be unable to raise interest rates for fear of discouraging business activity.
But those same historically low rates were stoking the housing market. So Mr. Flaherty and Mr. Carney plotted one more move on mortgage insurance, a topic they stewed over on the six-hour flight home from Mexico.
The surprise announcement came the morning of June 21. The government cut the maximum length of an insured mortgage back to 25 years, effectively ending much of the experimentation of the past six years. CMHC would only back mortgages on homes bought for less than $1-million, and refinancing rules were changed for a third time.
Only a few years earlier, in the depths of the crisis, government policy encouraged consumers to borrow. Now the message has changed. First-time buyers are particularly affected by the new regime. People such as Ms. O’Brien and Ms. Egerton, who benefited from the easing of government policies before, would no longer be able to buy homes on those same terms today.
CMHC’s future role
Six months after Mr. Flaherty’s latest crackdown, the “excessive exuberance” that once defined Canada’s housing market has disappeared.
Home prices have not fallen much, but sales activity has, particularly in Greater Vancouver. Some who earn their living in the real estate business now blame the government for overcompensating in response to the heated housing market, and that Ottawa should not have meddled a fourth time in CMHC’s rules.
But it will take much longer to answer the really big questions. Has the government managed to engineer a healthy correction in home prices – or something much worse? If prices do fall sharply, what will that mean for CMHC and its competitors, who now backstop nearly three out of four mortgages?
CMHC, which dominates the market by a wide margin, had about $286-billion of insurance outstanding, as of the end of 2011, on mortgages where the homeowner had a down payment of less than 20 per cent. It has a large cushion to absorb potential losses, but how steep would those losses be if the property market were to suffer a hard landing? “What’s immediately at risk in the event of a significant downturn is the capital of CMHC, which is about $12-billion, so once they blow through that, then they start turning to the public purse,” says Finn Poschmann, vice-president of research at the C.D. Howe Institute.
“To blow through that, you need unemployment that stays high for a little while and a significant increase in the number of mortgage defaults. That’s not farfetched – it has happened before. We like to think that it won’t happen, and that we’re better at managing those risks, but good things happen and bad things happen and they’re very difficult to predict.”
Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.
Whatever happens in the housing market, former central bank governor David Dodge thinks there’s a bigger issue at stake. The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years.
Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations.
“There are different ways one can go at that, but you don’t want it all in the hands of the Minister of Finance. Because generally, the pressures on the Minister of Finance are to do the wrong thing,” he said.
Mr. Dodge also believes that the mortgage insurance system places too much emphasis on keeping banks healthy by protecting them from mortgage losses, rather than keeping the economy healthy by ensuring that housing supply is in line with demand.
Looking back on that angry meeting with CMHC executives in 2006, and with the benefit of seeing what has happened to the housing market, he stands by his criticism. “I have no reason to revise what I said at the time at all. I think [loosening the rules] was a mistake,” Mr. Dodge said.
Even some former CMHC insiders are now calling for a radical rethinking of what the institution does.
Gary Mooney, a former director on CMHC’s board, says “it is now time for root and branch reform,” including “an honest evaluation of CMHC’s relationship with our major financial institutions.” Private competitors – of which there are currently only two – could play a bigger role in providing mortgage insurance, he suggests.
Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks. In a recent interview with The Globe, he said he wants Ottawa to look at privatizing CMHC in the next five to 10 years. Proponents of that idea say one of the main benefits would be to reduce the taxpayer’s exposure to mortgages – and to a housing slump.
But Mr. Dodge argues that’s not really the case. Ottawa is already in too deep.
“The system as a whole is too big to fail,” he says.
“And when something is too big to fail, the government will come in.”

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Wednesday, December 26, 2012

Boxing Day

Ahh... Boxing Day evening.

Every year, for your faithful scribe, the pre-Christmas rush gives way to the post-Christmas wind-down.

Not being too enamoured with frenzy of the Boxing Week sales, this period between Christmas and New Year's is leisure time for me.

But news stories today are filled with reports of the post-Christmas commercial frenzy... and with the tremendous success of those sales.

Christmas and Hanukkah celebrations represent more than one-third of annual sales for retailers. It is the reason why we are bombarded with relentless advertisements for all that glitters from Halloween until New Year's.

And it has grown.

In what seems like a horrendous, natural progression, the ad blitz seemed to pass right through Christmas this year.

In year's past it seemed we would at least get a reprieve Christmas Eve until Christmas night.

No longer.

The on-line revolution now means 'Boxing Day' sales stated as early as 8:00pm Christmas Eve, the consumption orgy now never-ending.

Curiously, an interesting statistic is coming out.

You may recall the media trumpeting how the shopping orgy known as Black Friday (the day after American Thanksgiving) was a success and a great kick-off to the holiday shopping season.

The fanaticism and fervor of this year’s Black Friday did not disappoint. There was hair tugging at the Wii U display in Target, a shooting outside of Wal-Mart and long lines as consumers nationwide waited to bust down the doors the day after Thanksgiving.

But while Black Friday did not disappoint, the even bigger success story here is that of Cyber Monday’s explosive sales growth in light of a quickly evolving retail landscape. This analysis puts together the numbers behind both major sales dates, comparing traditional versus online shopping, to find 3 key takeaways:
  • Black Friday 2012 outperformed the past 5 years in stock market performance, while Cyber Monday 2012 was likely the busiest ecommerce day in history;
  • Traditional shoppers became more tech savvy consumers this year both online and in stores, with in-person shoppers using both apps and smartphones to try to secure better deals;  
  • Online shopping exploded on both Black Friday and Cyber Monday, seeing higher conversion rates this year.
But was it as successful as first reported?

Seems the holiday shopping season was actually a huge bust as the Globe and Mail reports that U.S. retailers recorded the worst holiday season since 2008.
The 2012 holiday season may have been the worst for retailers since the financial crisis, with sales growth far below expectations, forcing many to offer massive post-Christmas discounts in hopes of shedding excess inventory.
It's almost as if the media regurgitates retail hype in hopes of building consumer confidence to encourage economic spending.

Sound familiar?

It's the exact complaint many bearish blogs have about the cosy relationship between media and the real estate industry.

You almost expect some PR rep or economist working for the local Chamber of Commerce to come out and correct those negative news stories with an analysis that says: "sales aren't below expectations... they're just flatlining."

In Canada, our Black Friday is the Boxing Day sale.

As we watch the news tonight about the huge the success experienced by cramped stores across the nation today... I wonder what retail reports several weeks from now will tell us?

With record levels of personal debt in Canada, will the orgy prove not to be quite the success being portrayed in the media tonight?

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Tuesday, December 25, 2012

Merry Christmas


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Perhaps the happiest and most joyous times of my life have come around Christmas time and on Christmas morning/day.

Christmas Eve, a day of anticipation, last-minute preparations, or perhaps both was followed by the magic of Christmas Day!

I adored dragging out the ornaments - antique and new - to turn a beautiful tree into a splendid one. With the Nativity scene and all the packages under the tree, it was the focus of our living room until New Year's Day.

Earlier this week I hung my wreath on the door in memory of my family's traditions and today I will awake to repeat the traditions of my lifetime.

I hope you have a wonderful Christmas. Even if you don't celebrate Christmas as a religious holiday, it's such a festive time of year - a national holiday, a day of dinners with family and friends, a day of recollections.

Regardless of your beliefs and traditions, I hope you allow me to wish you the happiest of times.

May you all have a very, Merry Christmas.




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Monday, December 24, 2012

Twas the night before Christmas



To all who come to this blog today I wish for you the happiest of holidays. Thank you for dropping by to indulge my thoughts, my viewpoints, my ramblings.

Holiday cheer to all the realtors, bloggers, R/E watchers and interested parties in precious metals and economic policy.

I enjoy this blog and I enjoy the emails/comments you send and post. If you pop by today, take a moment to leave a comment. I would love to hear from you.

To those who so diligently send me links, thoughts and comments, it is greatly appreciated despite the fact I may not necessary respond personally to each one.

Happy Christmas to all... the best of the season to you and your families... And to all a good night.

"Trim every blessed needle on the blessed Christmas tree. Christmas comes tomorrow. Trim you, trim me."



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Sunday, December 23, 2012

A Festivus for the Restuvus




Happy Festivus everyone!

Wanted to take a moment an hilight a post made yesterday over on VREAA.

This is 5575 Elm Street on Vancouver's west side:


This 5 bedroom, 6 full bathroom, 1 half bathroom, 5,101 sq ft single family home sits on an 8,114 sq ft lot and is described as such:
The perfect "10" Kerrisdale custom-built home by Loukas Designs with over 5000 sq ft luxury home. Large 50' x 162' lot. East-facing front to greet the morning sun. 10' to 11' ceiling all over, gourmet kitchen with carrera marble countertops, Sub-Zero fridges, Miele D/W, Thermador stainless steel stove, French doors open to huge west-facing gas-heated covered patio w/ built-in BBQ overlooks the blue swimming pool & hot tub. Total of 5 bedrooms, 6 baths, a media room & exercise room. Bsmt offers suite potential for nanny or the in-laws. H/W floors throughout, radiant heat, built-in surround music system and 3 car garage. The fenced backyard is a kid's heaven. Priced to sell.
On July 27th, 2012 it was listed for $4,880,000.

On December 9th, 2012 it's asking price was reduced to $3,990,000 and advertised as 'priced to sell.'




Priced to sell?  Hardly. It's assessed value is $3,545,000.


As VREAA notes, at 20% off it's original asking price it is still overpriced - particularly in a market where single family homes are now selling at below assessed value.

But it gives you an example of how much further our market has to go.

The first signpost along the path of reckoning in 2013 will be Chinese New Year.  This has sort-of become the orgy period of excessive property over-bidding in our market - until last year.

There will be many holding out with expectations that HAM (Hot Asian Money) will be returning in 2013 (we will discuss this more in a future post).

It it doesn't, the sellers will seriously re-evaluate things.

According to a contributor at VREAA (hat tip Canadian Watchdog), this home sold on May 31, 2010 for $3,079,000.  It is an example of our speculative frenzy that this purchaser could turn around and ask for $4,880,000 a mere 2.5 years later (an increase of 58%).

I would love to know what this home sold for in 2006 when it was originally built (if anyone knows, please advise and this post will be updated).

I sincerely believe even those with a bearish view of the market will be shocked to see how far values fall to eyes accustomed to 2011/2012 prices.

2013 will be the year many begin to accept that the values established over the past year are not coming back and that to sell, homes will have to be listed below assessed value.  As Global TV noted, the price increases of the last decade are long gone.

We will keep our eyes on this property as the New Year moves along.

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Saturday, December 22, 2012

Confidential government documents reveal concerns about mortgage lending in Canada



The Globe and Mail newspaper has an article today titled: Confidential government documents reveal concerns about mortgage lending in Canada
Since 1996, the use of automated computer systems by banks to determine how much should be lent in a mortgage or home refinancing has flourished in Canada. For banks these computer models were cheaper and faster than conducting a full appraisal. However documents showing discussions between Canada’s banking regulator and the financial and real estate sectors show serious concerns about the accuracy of these automated systems, and an over-reliance on them by banks. This adds risk to the housing market.

The documents, marked Protected – For Internal Purposes Only, were obtained by The Globe and Mail through Access to Information during an investigation into lending practices in the housing sector over the past decade. Below are excerpts, along with an explanation of what is being said. All names of the parties speaking have been blacked out by the federal government. Only comments from Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), are identified.
The full documents can be seen by following the Globe and Mail link above. Below are the key sections and the notes made by the Globe and Mail about those excerpts (click on images to enlarge):




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Thursday, December 20, 2012

"The price increases of the last decade are long gone."




You've got to wonder just how significant the shifting mindset amongst the public is regarding real estate when even Global TV is now openly saying the following:
"... there hasn't been a crash, thankfully, but Ottawa and the Bank of Canada are desperate to raise interest rates once the economy improves. Economists are expecting the rates to start inching upwards by late 2014 - meaning the price increases of the last decade are long gone."
Kinda kills the whole campaign to get people to buy the current dip, doesn't it?

Of course the same talking heads who want you to buy the current dip also want to insist there is no dip - prices are just flat and will remain flat (real estate never goes down, don't you know?).

Meanwhile Cameron Muir wants you to know that:
Last year’s figures must be taken “with a grain of salt,” Muir said because the prices were inflated by a large number of luxury homes for sale in West Vancouver, Richmond and Vancouver’s West End.
Really?

In all the breathless monthly reports we saw last year from the BCREA, does anyone recall being told to take those figures with "a grain of salt?"

Muir also wants you to know that:
"The federal government’s decision to reduce the maximum amortization period for a government-insured mortgage to 25 years from 30 years also affected home sales.

That could add up to $160 on the monthly payment of a $350,000 house.

That no doubt has squeezed some potential buyers out of the market."
So buyers are extending themselves so thin that an extra $160 a month collapsed the real estate market?

If so, imagine what a few interest rate points might do?

(hat tip to LM and GreenhornRET)

On another note, isn't the world supposed to end tomorrow?


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