The BOC has released a report [Financial System Review Dec 2011] that warns of the ‘growing vulnerability‘ resulting from ‘the rising indebtedness of Canadian households‘. Jesse has posted excerpts and commentary at Housing Analysis [Bank of Canada Blows the Alarm on Housing Again, 8 Dec 2011 (must read, all)].
Here’s jesse’s summary of the key points:
* Household balance sheets are likely to deteriorate further in coming months, and potentially years, with current controls in place.
* The Bank of Canada sees high house prices relative to incomes as unsustainable in the long run.
* OSFI is concerned about a disconnect between bank lending practices and long-term economic stability.
* Curbs on lending in terms of implementing risk management measures and countercyclical buffers on mortage loans are likely in the works.
* Usually announcements of further tightening of mortgage credit are announced in the first two months of the year to allow for proper implementation before the brunt of the peak of Canada’s spring selling season.
jesse concludes:
“If the Bank of Canada feels the need to lower interest rates in early 2012, this paper suggests that they are seriously considering additional curbs on mortgage lending to offset any additional monetary stimulus. This may mean, in particular overheated regional markets (like Vancouver’s), that OSFI will start enforcing measures more closely tied to regional price-income metrics. This means Vancouver homeowners may find credit availability tougher than other regions of the country.”
“This is an important report. I have been surmising that further curbs in mortgage lending are coming, but am still unsure what form they will take. It is still possible that curbs going forward will start delving into the low-ratio mortgage market — if prices do start falling banks who are lending on terms incompatible with government-backed mortgage insurance will create a significant liability for Her Majesty’s Government.”
The Vancouver RE speculative mania has been dependent on easy funding being available to locals, and we can’t see the market here tolerating any tightening very well. In fact, we’d anticipated that the bubble here would burst without any change in interest rates or mortgage rules, but simply out of a normal Ponzi-scheme stall. Any substantial tightening will precipitate and speed that outcome.
- vreaa
—-
While BOC warns, here in Vancouver, lending remains as loose as ever.
Remember this CTV piece from just last week?:
Linda Steele: At a combined income of $92K, Derek Atkinson and his wife could qualify for a $500K mortgage. [But Derek calculated it'd take them 5-6 years to save the necessary $25K down-payment.] This mortgage broker says the couple has several options:
Pauline Tonkin, Mortgage Broker: You have to have a minimum of 5% down to purchase a place. But you can borrow that… from an unsecured line of credit,.. you can have that gifted from a family member,.. you can take that from your RRSPs.
—
Male announcer: There are other options, but, of course, a lot of people really have their hearts set on owning their home..
Steele: Oh, I know… it’s like it’s a rite of passage.. that you’ve seen your parents do.. for sure. Here’s the deal, talk your options over with a mortgage broker, you might be surprised by what you can actually afford.
[The announcers' gesticulations demonstrate the welcome 'tangibility' of RE. -ed.]
—
- from video newscast, ctvbc.ca, 1 Dec 2011.
BOC – “The elevated debt loads of the household sector require continued vigilance”
Solution? More free money!
If they tighten credit in Vancouver then we’ll never be able to compete with the HAM and their gobs of money and we’ll just be overrun with savvy investors from China who don’t need a mortgage!
No, we won’t, because tightening of credit will cause prices to commence their long and gruesome downward path, and momentum-player off-shore buyers will avoid assets with falling prices like the plague… in fact, they may even add to the supply.
“long and gruesome downward path”
Sounds wonderful to me
Yes, credit restrictions in Vancouver without foreign ownership restrictions will speed the path toward Vancouver’s inevitable future as the Chinese Properties.
OMG the last pic is so funny:
“Giant… tracts of land.”
[hahaha. hadn't heard that referenced for some time. - ed.]
Huge… tracts of land
Hmmm… there’s a lot to be said for huge, ah, ‘tracts ‘o land’. But, generally speaking, I’ve always prefered the perkier, ‘sun-ripened’ parcels.
What I find most troublesome is the disconnect between Canadians’ perception of our supposed “conservative” borrowing habits and the reality of “gaming” the system to use a line of credit as a downpayment, to in fact, qualify for CMHC insurance with 0% down. But no, no… we don’t have “sub-prime” here.
———————————
“Pauline Tonkin, Mortgage Broker: You have to have a minimum of 5% down to purchase a place. But you can borrow that… from an unsecured line of credit,.. you can have that gifted from a family member,.. you can take that from your RRSPs.”
i think what you will see has already been previewed elsewhere. there isn’t the political will to get in front of this thing. it will blow up on its own and then there will be a clean up attempt via whatever measures are necessary (liquidity injections, nationalizing failed institutions, money printing, raising taxes, etc.) and a power grab by those most responsible. it would surprise me greatly to see pre-emptive measures employed – though that would be a small step in the right direction. example of pre-emptive measure, this would be as simple as ceasing the cmhc backing of mortgages it has no business doing on behalf of taxpayers in the first place.
I sent this report to a small sample of friends, which include owners and renters, they all say these reports are exaggerated and overblown.
Agree, The concept of “marginal buyer” is a travesty of common decency.
if you consider all: p/r, ltv, debt-equity, heloc atm, offshore factors, cmhc, home value to gdp, rain premium-bpoe, recourse loans, blah-blah-blah. dang! this vancouver bubble is world class!!! top 20 for sure, maybe top 10. only missing liar loans. maybe someone should grab a few bums and get them mortgages. but i think the fact that THIS JUST HAPPENED NEXT DOOR more than makes up the difference. that has got to put it in the top 5. it’s world class baby. that’s for sure now.
World class stupidity and greed indeed…
We are not missing liar loans. These are “stated income” mortgages for the “self-employed”. Perfect for drug money.
This couple has $90K+ income per year with 1 kid and they can’t save $5K a year? That’s their main problem right there, regardless of whether there is a housing bubble or not.
Yes, but with a little creativity (like responsibly borrowing the downpayment)they can get a $500k mortgage. Just a decade ago, they would buy a modest house on the West Side with it.
Vreaa, I know you’ve been arguing that foreign money has had limited influence over our real estate market and the ridiculous prices we are currently experiencing. Without hard facts, it’s hard to confirm whether this is true or not. However, we know that the Vancouver RE market has experienced, until recently, very similar trajectory to the one in Melbourne and Sidney.
I found this article on Zero Hedge today regarding China and here is what the author says:
“For a number of years, mainland Chinese buyers have accounted for nearly all new apartment sales in Melbourne and Sydney. On numbers I’ve seen, they have been investing between A$2 billion and $3 billion a year.
An increasing number of mainland Chinese are establishing permanent residency and sending their child(ren) to school and university in Australia. And Simon recently reported that from an offshore strategies conference in Shanghai that the room was packed full of Chinese people learning how to diversify abroad.” (http://www.zerohedge.com/news/guest-post-one-alarming-indicator-china)
If this guy is right, we can’t argue that Chinese buyers have had limited effect on the Australian RE market, especially in Melbourne and Sidney. If they indeed bought close to 100% of all the newly built condos, their influence on these markets has been actually huge.
And by analogy, it’s not hard to imagine how this foreign money has been influencing the Vancouver RE market as well, which I believe you are underestimating.
When I asked on this blog a few days ago why is it that, in Vancouver, RE has been appreciating much faster than anywhere else in Canada, especially over the past two years, nobody has been able to provide a convincing answer. If we only take the “Canadian factors” into account (CMHC, cheap money, etc.), the Vancouver market should have appreciated, in proportion, as much as anywhere else in Canada. The reality is that it didn’t, it grew out of proportion and diverged from the rest of the Canadian market.
I do believe that Vancouver has one specificity that most of the other Canadian cities don’t have, which is the large influx of Mainland Chinese money. In my opinion, that explains why, all things being equal, the Vancouver RE market is so distorted. I’m not arguing that the Mainland Chinese bought all the new condos in Vancouver, I believe this is not the case. I’m saying that the “spill-over effect” of this massive influx of foreign money is the principal contributing factor of the abnormal appreciation we have experienced here over the past few years.
If there is an effect, which is likely, it’s on property purchases, not on rents. The amount of capital injections required to keep property prices elevated are significant; taking a step back I’ve found it difficult to argue that it’s not just Mainland Chinese money that’s at play. By a longshot.
Oops, I mean I’ve found it difficult to argue that it’s just Mainland Chinese money at play.
“If there is an effect, which is likely, it’s on property purchases, not on rents.”
Agree
“I’ve found it difficult to argue that it’s just Mainland Chinese money at play”
I should have written “foreign money” instead of “Chinese Money” even though I do believe that the main contributor for the influx of foreign money is mainland China.
“The amount of capital injections required to keep property prices elevated are significant”.
I would say to that “it depends”. How much foreign capital every year would be required to keep those inflated prices? $1 billion, $2 billion, $10 billion?
If it’s “just” $1b or $2b, it doesn’t seem to be impossible according to the numbers provided by the author of that article. The problem will come from the local money, which is probably running out.
The point of my comment was not about the sustainability of these prices, which I believe won’t stay there for too long, but about the influence of the foreign money on the current valuation of real estate in Vancouver, which I believe has been underestimated.
I can argue it’s on the order of $10BB. As a sanity check, how would you go about calculating a number?
“As a sanity check, how would you go about calculating a number?”
That’s a great question that is definitely not easy to answer. I wish I could and we would close that debate once and for all…
If I were a full time economist with all the data available, I think I would ask myself the following question:
- what is the effect of an incremental fixed amount of $$$ (let say $1 billion for the sake of this example) on the average property valuation of a fixed territory (let’s say Vancouver city)?
I guess this is no different than a classic supply/demand calculation exercise. Not easy for sure…
The method I used was to calculate the long term differential between price-income today and the long-term average.
Say take 600K average price at 9:1 with average 5:1 ratio, means $250K additional capital per dwelling, times 800K dwellings means $200BB marginal capitalization. At 20:1 we’re at $10BB additional servicing per year. Call me skeptical that’s sustainable, never mind China has its own sustainability problems as it is.
@ jesse, my question for you would be, for Vancouver West taken in isolation for example, does the price/rent ratio really matter?
As one of my colleague at work told me yesterday, the house next to hers was bought after a bidding war about a year ago. Since then, it’s been sitting empty, no sign of life. She’s getting worried because the house is increasingly becoming a fire hazard.
Don’t get me wrong, I’m not arguing that the prices are sustainable, they aren’t. The whole point I’m trying to make is that the market has overshoot way beyond where it would have if there hadn’t been this massive influx of foreign capital.
I also believe that once the bubble pops, the very same capital (or at least what’s left of it), will be the first to fly away from our shores, accelerating the downward spiral of prices here.
We’ll see. This market has been irrational for far too long for my taste…
“for Vancouver West taken in isolation for example, does the price/rent ratio really matter?”
Don’t know. The corollary argument is that those displaced from the westside are themselves displacing others, et cetera, this knock-on effect has spread region-wide and, perhaps, is mostly responsible for high regional prices.
I’m stating that from a broad perspective, if you think “HAM” is on the order of a couple of billions per year, that only accounts for about 20% of the price disconnect. The rest must come from other channels.
“Don’t know. The corollary argument is that those displaced from the westside are themselves displacing others, et cetera, this knock-on effect has spread region-wide and, perhaps, is mostly responsible for high regional prices.”
That’s exactly the point I made somewhere else in this thread.
I don’t know the level of foreign capital injection into the local real estate market. It’s impossible to know without hard data, but I would assume that $2billion/ year is in the order of magnitude. But I’m not sure there is a linear correlation between foreign capital investment and price appreciation. I believe this extra capital has a “multiplier effect” on price. What I mean is that limited capital influx has limited to no effect at all to prices. But it comes a point where additional influx of capital has a disproportionate effect on prices. The supply of housing is not elastic (as would say an economist) and the bidding wars we have experienced are just a result of this incremental influx of foreign capital trying to make its way in the market, driving prices up disproportionately.
As you said, there are probably other factors at play, but I think the big driver of price appreciation during the past 2 years has been a massive influx of foreign capital. Without hard data, I obviously can’t back up my claim. But I can’t find any other reason why prices in Vancouver have been so disconnected from reality, especially when comparing to Calgary and Edmonton for example.
@jesse / makaya. On this point I actually tend to agree with Jesse. I don’t think it’s simply the mainland chinese who are causing the entire rise. Markets never behave rationally, they always overshoot, in Vancouver’s case I think we have overshoot. I had previously given the 10% number, but that was my view about a year ago, in some areas the prices have gone up even further than that number, I would say about 15% is probably more accurate now.
I think the couple billion dollars a year in chinese spending is somewhat accurate. That would be about 2 million per investor immigrant times 1000 and some of them are leveraged so they borrow some to make it work. But the issue is also that there is a ton of locals who are part of this market too. I personally think that the split is 40 / 60, 40% due to HAM and 60% due to local factors.
But the point that I disagree is that I think HAM will only increase and won’t decrease. It’s a rolling effect, the more chinese immigration we have, the more we will attract. I have talked extensively with some investor immigrants and they have mentioned that vancouver was referred to them by their rich friends as the number 1 destination for investor immigration. Like I said before, the main advantage of Vanocuver is incredibly easy integration into society. Richmond behaves like asia, there is no real difference. In chinese circles, they say that the rich comes to Vancouver to spend their money, the talented goes to Toronto to make their money.
Especially with the premier’s new economic policy and closer ties to China. I fear the day when we are advertised greatly in chinese circles, right now it’s simply word of mouth, not much advertising has gone in for Vancouver, but if I start to see real ads in beijing then we are in trouble.
The thing about China is that no other countries’ elite, including India’s, wants to get out of the country as badly as China. We do not have a prior example of this, usually the richest wants to stay in their home country. In China’s case, they all want to get out or send their kids out with their money. So cities like Melbourne, Sydney, Vancouver, all get immense wealth.
@Makaya and @Julian, I think in terms of leverage factor affecting region-wide prices, I don’t know if much research has been done on the effects but it is looking like any wealth effect is imaginary — i.e. not translating to real incomes. (For engineering nerds this has double, but apropos, meaning.)
There is some interesting theory on the so-called “choke price” where a scarce good in a low-inflation environment will project the price in an indeterminate point in the future at current market price. That is, given that people will hold goods for future value and inflation is low, the current price will be the future price.
I think there is an argument that in specific markets in Vancouver this future value projection/magnification is at play, and a similar effect occurs with precious metals. The difference with housing is that there are holding costs in terms of depreciation and taxes. Many will offset this by renting at a parasitic rate to stave off these ongoing costs, hence the abysmal price-rent ratio for many properties.
Note that if future values change due to various external influences — cash squeezes, wealth redistributions, etc. — the choke price subsides and once again assets become earnings-driven.
Julian:
this situation happened before
elites loyal to the American-installed Shah in Iran circa 1979 fled the Iranian Revolution and many monied families settled in North and West Vancouver.
the reality is that chinese elites represent the communisty party, a brutal totalitarian plutocracy that rules over the fates of a billion and a half souls with an iron fist and an artificially low exchange rate.
two points – your ‘ease’ of integration into Canadian society is not true. the reality is that vancouver is not a very representational slice of canadian demographics (or Canadian culture) at all. it is an anomoly and a bubble.
what we have is a new-monied enclave that some would argue, given their connections/politics/nationalism are actually not here in Canada to benefit or contribute to Canada, but rather to, as you mentioned, park cash and hide their embezzled slush fund money.
non-plussed, to say the least.
what we need are australia/florida style anti-land banking legislation and jesse’s property tax hikes on foreign flippers/speculators.
but that would probably crash this market – wouldnt want that, now would we..
@keeper, yes that is true that Vancouver does not represent Canadian society, that is actually one of its attractive points to these people. It’s much easier for them to integrate into a pseudo western / eastern world. Look, I believe that people when they immigrate to a new place should merge into the new culture. But apparently not these people if you have ever been to richmond. Vancouver offers them a way to live a similar life to when they were in China but enjoy all of our benefits. All it costs them is a few hundred thousand in the cost of investment immigration which to most of them is chump change.
I don’t mind Jesse’s foreign tax scheme on land flipping, but as Jesse correctly points out, it doesn’t neccessarily work as it’s hard to describe what is foreign here. Do you want to consider a landed immigrant foreign? He / she is a canadian resident in status.
Iranian Shah exodus lasted two years, this exodus of chinese elite will last for decades and Chna is a much much bigger country. It has already started for about five to six years now and show no signs of abating. Until you have true democracy in China which is not probably for another twenty years, you will see this mass exodus of the elite’s famiilies abroad.
@keeper, oh btw, I was wrong that there was a recent example of this. HK immigration was rampant before 97 but died down after that. HK is but one city of many in China, so, you can imagine the effects of the whole country. What I am really trying to do is make the readers understand why they are coming here and not elsewhere as some people have asked why not other places, there are specific advantages that Vancouver has to this specific demographic that does not exist for people in the West.
“the communisty party, a brutal totalitarian plutocracy”… KeeperOfTheDerp…
For a moment there, I had the most frightening vision of Christy Clarke in a Mao jacket…
Apropos to my prior [spoiler alert: not for the faint 'o heart!]…
[SuperHeroes4Salmon Blog] – Christy Clark’s Chinese & Indian Takeaway
http://tinyurl.com/cnrhhtj
[Youtube] – Christy Clark in China
http://tinyurl.com/cxlunm4
lolympics also dumped a bunch of money into the community – which can get levered up by the banking system. so, if you’re thinking external factors, which is bigger asian buying or lolympics? even then, someone still has to take that bait and sign up for mortgages in order to have price/income ratios so far out of whack.
those partaking be the world class nutters … it’s tough bizarro world competition but van is right up there with the best of the best
How many mainland Chinese are in Kelowna?
“•Markets in Western Canada saw the biggest jump in price appreciation. Calgary’s prices rose 189 per cent, Kelowna posted 179 per cent, Saskatoon had 137 per cent, Winnipeg had 118 per cent and Victoria posted 114 per cent price appreciation between 1997 and 2007. ”
http://edmonton.ctv.ca/servlet/an/local/CTVNews/20080221/housing_growth_AM_080221?hub=EdmontonBin
Look at the same numbers between 2007 and 2011 and explain the difference…
You can find the charts here:
http://www.theeconomicanalyst.com/content/house-prices-and-rents-why-they-should-track-each-other-and-why-it-should-concern-us-they-ha
you could argue winnipeg and regina charts are qualitatitively similar to van. there aren’t a lot of mainland chinese or olympics there.
That’s correct, but two differences can be noted though:
- Their starting point (average home price in 1992) was lower than in Vancouver (not sure how much)
- They have experienced a commodity boom that we didn’t really in Vancouver
i grew and live in van for 25 yrs. if you think there is an important external element to housing prices, i’d agree with you. it has always been there that i know of. many affluent residents did not acquire their wealth locally and they chose to live in van because it is a nice place. but getting the right price is all powerful. like you, anyone that has spent some time elsewhere (especially like where it is really world class nice), sees immediately all of this bpoe koolaid is pure, pure propaganda heaped upon the unsuspecting in order to pick their pockets. it’s a pretty sinister little sell too – “look bud, you’ve lived all this time here in this fab place and now the world has found out and wants to come too. and you don’t have a piece of it? wtf is wrong with you?!” – sells to the ego and paranoia at the same time. outsiders will always come and be an important factor, but in the long run only at the right price.
@Makaya: “:Look at the same numbers between 2007 and 2011 and explain the difference…”
Maybe some ”enterpreneur money” found its way to Vancouver ? http://tinyurl.com/82n72cq
I think it’s clear that real estate speculators from Mainland China are only buying in specific areas of Metro Vancouver. This influx of foreign money could explain those neighborhoods, but not the region as a whole.
That’s what I call the “spill-over effect”. The capital they bring has an effect on the entire region. Not that the Mainland Chinese are starting to buy properties in Port Moody, by the people they bought from have to go and live somewhere else in the Lower Mainland.
Yes, there is a spill over effect but I see it primarily as ordinary middle class people playing along by taking on outsized debt obligations. The entire metro area is in bubble territory and, even though there has been a strong influx of foreign money, it does not explain why Pt Moody, Maple Ridge, Delta, Aldergrove and Chilliwack are seeing price appreciation way beyond what fundamentals would suggest.
” it does not explain why Pt Moody, Maple Ridge, Delta, Aldergrove and Chilliwack are seeing price appreciation way beyond what fundamentals would suggest”
I agree with you, these areas are still way out of whack in terms of valuation, and the question is, what is the factor that allows these valuations to remain?
If you look beyond the lower mainland, prices are starting the get hit really hard. Sunshine Coast, Squamish, Okanagan for example are in free fall. I’ve posted the numbers for the Shuswap region on VCI a couple of days ago. YOY, for attached and condos, they are at -20%! For Residential, they are at -8%.
The only reason, in my opinion, why PM, MR, Delta, etc. are able to remain at these valuation and not experiencing the same pain is because of the spill-over effect of what’s happening in Vancouver.
Nobody would move from Vancouver West Side to Squamish or Sechelt. But somebody would move from West Side to Burnaby, which person would move to port Moody, which person would move to Maple Ridge, etc. The massive influx of foreign capital has an effect on the Lower Mainland, but not beyond that.
Assessement value(AV) of properties is another reason for which prices are being kept high .Of course AV are set by municipalities .Who benefits from this situation?Realtors ,in strong alliance with municipalities,which are in strong alliance with developpers.That is why prices in towns like Langley,Coquitlam,Port Moody,Maple Ridge or Chilliwack are kept high artificially.
One metric one can look at might be long completion dates (2 months or so). Often it takes time to get money out of China and into the local market. Surely this kind of statistic is available?
Makaya -> Thanks for the thought provoking post and for the discussion, all.
We agree it’d be excellent to somehow have reliable data on all of this. Very hard to analyses, more so to plan, without clear information about what’s actually going on. This is why folks like Sandy Garossino make some sense… at the very least they are asking for accurate data to start the discussion.
West Vancouver 5 years from now?
“…an ingrained misconception that still permeates the market like believing the world is flat is that foreclosures only happen to poor people. Nothing can be further from the truth and in places like California foreclosures are hitting every single market. Even the infamous Beverly Hills is filled with foreclosures except these are well buried in the shadow inventory.”
http://www.doctorhousingbubble.com/beverly-hills-real-estate-loan-balances-shadow-inventory-in-great-detail-luxury-housing-markets-in-trouble/
It looks like people there still thinks it’s too expensive! From the comment section:
“A 20% drop doesn’t seem like nearly enough for either West LA or SF – I go back and forth, and parts of LA seem like they’re halfway back to earth but in SF, it’s still very bubblicious”
From what I’ve seen more affluent areas of CA have not experienced price drops anywhere close to those highlighted in Case-Shiller data. Make no mistake, parts of the US are doing quite well. “Hot money” is at play down there too, as are low mortgage rates.
@Jeff Murdock — you implied I could — and I’ll quote Hamlet here (didn’t end well) — “unfold a tale/to harrow up thy soul” about renting in Vancouver. I can’t resist! Come listen my pals and you shall hear/Of the latest on rental housing here. Two anecdotes from the last few days. (I know some of you don’t believe in anecdotal evidence. Being a writer, I believe in it more than I believe in statistics.) Warning: perhaps inappropriate humour below. As I mentioned in earlier posts, I had ooked for rental housing here for 3 months this summer. Finally thought I’d found someplace decent. Well, in the last 5 weeks there have been two sewer backups that flooded the basement. Turns out that there were sewer backups last year here too (thank you for that info, previous tenants). Funny thing is, I’d specifically asked the property manager if the house had ever had “water problems.” She’d said no. Nothing much had been done about these backups until this latest one, upon which I called City Hall (#311) and didn’t try to use my “inside voice.” That actually got the City out here, and after at first blaming the problem on indolent plumbers, they had to admit that there’s a rotted City pipe that’s actually part of the problem. But the City said it’s not a priority to fix it because it hasn’t “collapsed” yet. So I guess I can look forward to greeting Mr. Floatie in my basement sometime again in the near future. (Those of you who don’t know who Mr. Floatie is, he’s a revered figure in the BC capital.)
Renter Anecdote #2 just from this evening: Responsible young couple arrives in Vancouver. Hears that Balfour Properties manages good buildings. They interview at a building near Broadway and Macdonald (west side). They think it’ll be great. Then they happen to run into a tenant who tells them that two doors down there was a meth-lab explosion where somebody died. They decided to keep looking and they’ve landed in a building that’s badly managed and has — wait for it — water problems.
What I don’t get sometimes about Vancouver, on the continuum of human civilization, is how architects and builders here have still not figured out how to defeat the (world-class) precipitation.
Okay, enough silliness. My next post: I’ve heard back from Stephen Harper about my concerns about the Vancouver mania! Stay tuned for some hilarious advice.