Monthly Archives: January 2012

CIBC, CMHC, Tap The Brakes (While On Black Ice, At 112mph)


“CIBC’s wholesale mortgage arm, FirstLine, quietly announced Tuesday that it will no longer accept new applications from “stated income” homebuyers who can’t prove they have the annual net income to qualify for home loans.
FirstLine also set a $1 million cap on what it will lend for a home purchase.
The major change in policy, which is bound to pique the interest of other major lenders, came on the same day it was revealed that the Canada Mortgage and Housing Corp. could be forced to cut back on the mortgages it insures.
The moves are seen as among the clearest indications yet that Canada’s hot housing market and record levels of household debt are a concern far beyond just the Ottawa offices of Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney. …
“The signs are there that everyone is worried, with the exception of BMO. It’s not like there is just one person saying there is a problem with the housing market,” said Jason Friesen, a mortgage consultant with the Callum Ross Team.
“It’s impossible to know, given all the doom and gloom in the rest of the world, what will happen over the next three months or the next six months, but lending institutions are looking for ways to protect themselves.”

‘Self-employed, new immigrants may find getting a mortgage tougher’, Toronto Star, 1 Feb 2012

The Canada Mortgage and Housing Corp. said Tuesday it “has recently received an unexpected level of requests for large amounts of CMHC portfolio insurance.”
“To ensure equitable access to portfolio insurance within CMHC’s annual limits, an allocation process is being established, which has caused some delays.”…
“The federal government, which ultimately must cover the Crown corporation’s mortgage guarantees, has imposed a $600-billion cap on how much liability the CMHC can take on.
Ottawa increased that from $450 billion in 2008, as the global financial crisis led banks to increase focus on their cash reserves.”

‘CMHC curbs mortgage insurance offerings to banks’, CBC, 31 Jan 2012
[hat-tip allen]

Our bubble/’balloon’ doesn’t need a ‘pin’ to prick it before it implodes, but any nudge could help it past its tipping point. -vreaa

“GDP contracting, but real estate agents still riding high before what’s expected to be a cooling market.”

“Canada’s economy stalled again in November [2011], for the second month in a row, but manufacturers continued to make strides. And real estate agents were still riding high before what’s expected to be a cooling market. …
With so much focus on the housing market of late, it’s worth noting that construction posted a decline of 0.3 per cent, but Canada’s home resale market was still going strong, with a 2.2-per-cent gain for real estate agents.”

– from ‘GDP lag: At least real estate agents are making money’, G&M, 31 Jan 2012 [hat-tip Jason]

“Incomes Haven’t Risen, But Housing Prices Have”


– part of an ‘infographic’ from The Globe and Mail, 18 Oct 2011

One of these provinces is not like the others… – ed.

Cooper Says “No” – “The national housing market is more like a balloon than a bubble. While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” [BMO]

“The Bank of Montreal poured cold water on the idea Canada’s housing market could be headed for a crash, suggesting that prices are only “moderately high across the country.”
“Expect the housing boom to cool rather than crash,” BMO’s chief economist Sherry Cooper and senior economist Sal Guatieri said in a report published Monday.
“While the housing boom is unlikely to continue unless mortgage rates drop much further, neither is it likely to bust.”
The bank says home values are indeed rising at a faster pace than they used to, but the signs are pointing to a soft landing where prices stabilize — not a hard correction where prices drop quickly by 20 per cent or more.
“In our view, the national housing market is more like a balloon than a bubble,” the bank said. “While bubbles always burst, a balloon often deflates slowly in the absence of a pin.” …
Average prices have grown more than twice as fast as family incomes since 2001, but BMO’s report argues there’s no reason to panic yet.
Nationally, home prices are 4.9 times higher than the average household income. A decade ago, that ratio was at 3.2.
Some cities are hotter than others. Vancouver’s ratio currently sits at 10 times higher than average household income, Toronto’s is at 6.7, Montreal’s is at 4.5 while Halifax is at 3.8. Those are all on the high side, but if the market cools, that will allow incomes to catch up and move the price-to-income ratio lower, the bank argues.” …
The bank does note, however, three risks to the outlook. A sudden hike in interest rates, a widespread Canadian recession, or an economic slowdown in Asia reducing the number of foreign buyers would all take the air out of Canada’s housing market.
“But barring one of these triggers, however, a dramatic correction is unlikely,” the bank said.

– from ‘No housing crash coming in Canada, BMO says’, CBC, 30 Jan 2012
[hat-tips to Zerodown, HD, Potato, Don]
BMO report itself here: BMO 30 Jan 2012 pdf

What’s the difference between a balloon and a bubble?
It seems, from this report’s perspective, the only real difference is HOPE.
Hope that the bag of gas with a membranous cover will deflate slowly rather than implode. Otherwise, a balloon pretty much is a bubble. Both are, after all, largely made up of air.
We’d love to see the BMO math on the proposed ‘income catch up’. It simply isn’t going to happen. There is no way of price:income reconciliation other than via a dislocation, and, unlike BMO, we don’t think there is any need for a precipitating factor to start the implosion.


“There’s no reason to panic yet.”
Of course, by the time BMO warns you to panic, it’ll be obvious to everybody that it has indeed been a classic bubble.
This is all rear-view commentary, with a hefty dose of aforementioned hope. Pretty much useless to anybody attempting to make decisions concerning their own financial future.
Has anybody done an analysis of the predictive capacity of BMO Special reports over the last 12 years?
– vreaa

Bloomberg – “Canada’s Subprime Crisis Seen With U.S.-Styled Mortgages”

“Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.
“It just speaks to the general easing in lending standards, which has contributed to a booming housing market,” said David Madani, an economist in Toronto with Capital Economics, which estimates that Canadian housing prices may fall 25% over the next few years. “The problem is sort of baked in now, so I’m not sure there’s a way to prevent a weakening of the housing market.”


OSFI head Julie Dickson said in a Sept. 26 speech the agency is “very focused” on mortgages and home-equity lines of credit, which allow individuals to borrow against the equity in their homes. …
Home-equity credit lines without income verification have become “an increasingly popular option,” OSFI says in the analysis, adding that they “pose greater risk” than mortgages because the credit lines are offered at floating interest rates. …
OSFI officials assessed Canadian banks’ potential losses from defaults on home-equity lines of credit last year, the documents show. The results were blacked out under legal provisions that allow the government to withhold commercially sensitive information.

– excerpt from Bloomberg, via FP, 30 Jan 2012
[hat-tip to Makaya and Zerodown]

So, Canadian lending has perhaps been looser than previously celebrated. “Baked in” is the way we’ve previously described the coming implosion.
There is no way of deflating the bubble in an orderly fashion.
Those who propose such a hopeful outcome need to explain who they expect to be buying this year, next year, and the next. Which buyers do they propose now step forward, take out oversized mortgages to buy still extremely overpriced properties, to bail out the many, as the ‘balloon’ deflates in an orderly fashion? It simply isn’t going to play out like that.
– vreaa

The Gains Of Ownership – “Here’s our family real estate history in Vancouver. I essentially tripled (quadrupled?) my investment in around 10-12 years while providing a decent roof over our heads. Many of us are neither bulls nor bears. We’re trying to make the best choices for our families without a crystal ball to the future.”

“Here’s our family real estate history in Vancouver. I suspect we are not atypical.

HOUSE 1, Kits
1985 purchase price: $180K
Renovations, over 10 years: $150K
Mortgage & Taxes: $130K
Subtotal: $460K

Rental income (basement suite)over 14 years of ownership: $140K
Value of Occupancy over 14 years: $450K
Subtotal: $590K

Sale price after commission, 1999: $580K
What’s my profit: ?

HOUSE 2, Point Grey
1999 purchase price (land only): $450K
Building and landscaping cost: $450K
Mortgage & Taxes: $200K
Subtotal: $1.1M

Value of Occupancy over 12 years: $700K
(3 blocks from beach, water & mountain view)

Current value (based on recent sales in neighbourhood): $3.8M
What’s my (potential) profit: ?

I purchased both homes during a time when prices were flat or depressed. Definitely a buyers market which gave me some room to negotiate the purchase price.

These two homes have gone a long way to helping provide financial security for my family. Yes, a substantial part of our net worth is tied up in real estate, but how else could I essentially triple (quadruple?) my investment in around 10-12 years while providing a decent roof over our heads?

Our mutual funds have come in at around 6% the last 15 years in comparison.

Having said that, I don’t think I would be a buyer in this market. The numbers don’t make sense. And I’m often tempted to cash out and rent.

However, I’ve been thinking this for a good 10 years now. I could still live to regret my decision not to sell, but at this point my worst decision was selling our place in Kits. The place next door sold for over $1.8M in 2010.”

“We have been with one of the top investment firms in Canada (PHN) for over 20 years and our returns are in the 6% range. Half that for our kids RESPs the last 12 years.

Making investments with the benefit of hindsight is easy. It’s not so easy when the future is unknown/uncertain. That’s why I’m torn between staying the course and cashing out — like a lot of us probably are.”

“Just to be clear, I think I’ve been darn lucky rather than smart to have gotten into real estate when I did. And yes, I can’t imagine that returns over the next 25 years are going to be anywhere as good, or even positive.

The problem for many of us is that the alternatives are not that attractive either.
I’ve seen the stock market go down as much as 50% not that long ago. What’s the difference if you lose 50% of your house value or 50% of your investments?

Handing your money over to someone, no matter how reputable, to invest for you is risky. Just as home ownership is risky. Just as buying gold is risky.

Up until a few years ago, investing in real estate made some sense to me. However, I think it’s highly unlikely that the returns of the past 25 years are going to be replicated again anytime soon. I can’t imagine how current prices can be sustained at least in the medium term. However, I’m not convinced there are a lot of viable alternatives for many people.

Many of us are neither bulls nor bears. We’re trying to make the best choices for our families without a crystal ball to the future.”

- kautious at VREAA 30 Jan 2012 9:45am and onwards.

[Some posters have already added intelligent commentary to this anecdote on yesterday's thread. Headlined here for the chronological record. Thanks, 'kautious'. - vreaa]

Artificially low interest rates encourage speculation in whatever appears to be the current ‘hot’ sector.
In kautious’ case, we are seeing the same forces that have driven buyers into the local RE market keeping him in the market.
If he had to sell, his profits would be tax free.
14% per annum, compounded, over the last 12 years. *
Only a very small percentage of investors have beaten that performance in other sectors.
* Past performance not reflective of likely future performance.
– vreaa

The Costs Of Ownership – “Here are the economics of my renting since arriving and how this would have compared to buying.” – Renter Ahead $200K Over 5 Years

ZRH2YVR is a regular poster who recently revealed that they will be leaving Vancouver for a job to Switzerland. Their story was headlined 28 Jan 2012.

On that thread, ZRH2YVR added this useful analysis [VREAA 29 Jan 2012]:
“Here are the economics of my renting since arriving and how this would have compared to buying. You know real estate always go up so this renting thing must have been a real bust.
Property info – 1400 sq ft unobstructed 270% view of English Bay south down granville street and up and around to the mountains east approx to My. Seymour. New building 2007.
Rent paid from move in to June 2012: $196,000
This is a true consumption cost and was well within our means.
Value of property in 2007 on move-in – approx 1.4M.
Value today – estimated – 1.4-1.5M . Let’s say 1.5M just to be conservative.
Cost of ownership – Assume 100% leverage and ignore investment opportunity cost.
Interest rate – Let’s sat 5% even though in 2007, it may have been more.
Strata and property taxes amount to approx $1050-1100 per month.
So – Cost of ownership over this period is $395,000. But wait – the property went up in value right? !!! Well
Purchase cost would have been approx $1,430,000 with all up front costs.
Selling at 1.5M and subtracting costs would net say- $1,450,000 – so there is a gain of $20,000. Fantastic . . . Offset this against the cost of ownership of $395,000 – that gives you net $375,000 (ignore taxes). Compare this to cost of renting of $196,000 – we are up approx $200,000 – Believe me we notice this!!!
So – – For all you property virgins out there – the numbers above may be outside your normal range but divide this by 3 for a $500K property and you will be in about the same place – – up by $60,000 over 5 years. I would never buy in the current market.
Now the funny thing is that in order for us to have broken even, the purchase price would have been close to $600K initially -and that is over 50% fall from where we are. Good luck to all of you. A house is a place to live first – invest second and anyone who is investing right now is completely out of their mind. You would have much more fun going to Vegas for a month – and would probably be better off.”

Notice how often different methods of calculating the fundamental values of different properties come up with a “over 50%-off” conclusion.
Add bad sentiment on the downside and you can see one source of our 50%-66%-off estimate.
– vreaa