Category Archives: 05. Where do Buyers get the money?

First hand accounts of where buyers are getting the cash for their downpayments. Financed by Mom & Pop? Grow-ops? Four jobs? Offshore funds? Robbed a bank? Commodity trades? And so forth..

G&M – “Canada’s housing bubble about to burst, author says”

Hilliard MacBeth found his Canadian clients were “obsessed” with RE; he has written a book about the Canadian RE bubble & is calling for a 40%-50% price drop.
He also references “a very wise and astute money manager”, Jeremy Grantham.
Watch video here.

“Every single bubble bursts”.
G&M, 24 Sep 2014

Bank Of Canada Induced ‘Havoc’, Plus Bits & Pieces

“The governor of the Bank of Canada is sending a strong message to the markets: You do your job and we will do ours.
Stephen Poloz has been dogged by the perception that he has been attempting to “talk down the dollar” — essentially to help encourage business investment and expand export markets — as the economy struggles to regain its initial post-recession traction.
On Tuesday, Mr. Poloz attempted to set the markets straight, saying it is not up to his policymakers to determine currency levels. To do so, he said, would be to court economic “havoc.”

Financial Post, 16 Sep 2014

“Creating havoc with perversely subterranean interest rates, on the other hand, is completely within our mandate…”
– vreaa

“..new condos in [Toronto] and [Vancouver] routinely cost $700 a foot, while whole houses in the US average less than $100 for the same foot.”
– Just one of many reasons listed by Garth Turner in answer to the rhetorical question ‘How to tell when housing boom’s running on fumes?’, Greaterfool.ca, 14 Sept 2014

“British Columbia’s housing market is still red hot this year but declining affordability could slow it down by 2015, according to the Canadian Real Estate Association. …
The average price for a home is expected to rise by about six per cent in B.C. in 2014, but … the CREA is forecasting B.C.’s average real estate prices to rise by less than one per cent in 2015.”

Vancouver Sun, 15 Sep 2014

In Case You Thought Our Bubble Was Due To Special Local Factors…

“Johan and Alejandra are the kind of Swedes the IMF has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
“I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years.”

– from ‘Swedish household debt soars as poll nears’, CNBC, 24 Aug 2014

“In the capital the latest full-year figures show that the average wage is £39,920, while the average house price is about £400,000.
Prices are therefore 10 times greater than wages.
But in South Buckinghamshire, in towns like Amersham and Beaconsfield, the average home is worth 20 times as much as the annual local salary.
Outside the South East, the place where houses are least affordable is the Cotswolds, where they cost 19 times wages.
The countryside may be scenic, but that is little compensation when the average worker, putting a third of his or her salary into a mortgage, would need over 60 years to pay it off.” …
“”I shall be disappointed if I only get £550,000 for it,” says Mike Golding, as he shows me into a two-bedroom, first-floor flat he is selling. It has no garden, few proper windows, and no view to speak of.
But such prices are not excessive in Stow on the Wold, a pretty market town in the Cotswolds, where the undersupply of affordable housing is matched only by the oversupply of Barbour jackets, local organic brie and bow-windowed tea shops.
One such tea shop is run by Anna Wright and her mother.
She and her boyfriend have been looking for a house to buy, but, faced with prices like the above, they have given up looking in Stow.
“We have been priced out of the market,” she says.
“You are privileged to grow up in the Cotswolds, but there’s never an expectation of buying a house here,” she tells me.
A few doors down, 21-year-old shop worker Nicola O’Driscoll is in the same position.
She has been forced to look for a flat in Cheltenham, no less than 18 miles away.
“It’s really unfair. I feel like they don’t want youngsters to live around here. Because there’s no way they can,” she says.

– from ‘The 62 areas where houses are less affordable than London’, BBC, 18 Aug 2014

Too-cheap money has caused many speculative bubbles in housing, and perverted the relationship between income and housing prices. – vreaa

Interest Rates Held Far Lower Than Necessary Cause Speculative Bubbles

fig

“The Fed’s mode of operation has drastically changed over the past 12 years. Prior to 2002 the Fed would tighten monetary policy in reaction to outward signs of rising “price inflation” and loosen monetary policy in reaction to outward signs of falling “price inflation”, but beginning in 2002 the Fed became far more biased towards loose monetary policy. This bias is now so great that we are starting to wonder whether the Fed has become permanently loose.”

“The chart above comparing the Fed Funds Rate (FFR) target set by the Fed with the Future Inflation Gauge (FIG) clearly illustrates how the Fed has changed over the past two decades. Note that the Future Inflation Gauge is calculated monthly by the Economic Cycle Research Institute (ECRI) and should really be called the Future CPI Gauge, because it is designed to lead the CPI by about 11 months.”

“The chart shows that prior to 2002 the FFR tended to follow the FIG. After the FIG warned of rising “price pressures” the Fed would start hiking the FFR, and after the FIG started signaling reduced upward pressure on the CPI the Fed would start cutting the FFR. During 2002-2004, however, the Fed not only didn’t hike its targeted interest rate in response to a sharp increase in the FIG, it continued to cut the FFR. The Fed’s decision to maintain an ultra-loose stance during 2002-2004 was the fuel for the real estate investment bubble and set the stage for the collapse of 2007-2009 [in the US].” [editor's note: The Canadian RE market was bailed out by parallel rate cuts here -- before it had even crashed!]

“There was a lesson to be learned from what happened during 2002-2007, but the Fed apparently learned the wrong lesson. The lesson that should have been learned was: Don’t provide monetary fuel for bubble activities, because the eventual economic fallout will be devastating. Unfortunately, the lesson that was actually learned by the Fed was: An economic bust can be avoided forever by keeping monetary policy loose forever. The result is that the divergence between the FFR and the FIG that arose during the first half of the last decade is nothing compared to the divergence that is now in progress. Moreover, the near-zero FFR doesn’t do justice to the ‘looseness’ of the Fed’s current stance, in that 4+ years after the end of the last official recession the Fed is still pumping money as if the US were in the midst of a financial crisis.” …

“By ignoring investment bubbles and erring far more in favour of “inflation” than it has ever done in the past, the Fed is currently setting the stage for the mother-of-all economic busts.”

- from ‘Future ‘Inflation’ and Monetary Madness’, Steve Saville, 14 Oct 2013

Canadian markets are completely subservient to action in the US. (If you don’t believe this, watch any aspect of a Canadian market of any sort on a US market holiday. Flatline!)
Canadian interest rates were cut in lockstep with the US in late 2008, even though the RE market here sorely didn’t need the juicing. The BOC and the Min of Finance were, and are, at fault for dropping interest rates too far, and then holding them too low for too long.
If you want to see a graphic representation of the reason for our national RE bubble, look at the orange areas in chart below (a version of the one above). [BTW, the charts here are almost a year old.. the FIG is now back around 4, and the Fed Fund rate remains zero].
The policy is perverse, and the piper is yet to be paid.
– vreaa

fig c g

‘A decade ago 40% of all purchasers in the States were first-timers. Today is it 27%. In Canada the number exceeds 50%, and is rising.’

Josh sells real estate in urban Toronto. “Fourteen years now,” he says, “since I was 21. And in all that time, there’s been only one really crappy time – six years ago now.” …
Josh’s clients are mostly people his age – the sub-40 set. The average deal is around $800,000, he says, “but one in four, I’d say, range from one-two to one-four.” Of those spending more than a million, Josh figures the average mortgage is about 80% – taking into consideration CMHC insurance is no longer available for seven-figure deals.
“Used to be that a million-dollar mortgage was a big deal,” he adds. “Now I see them all the time.”
By the way, to carry $1,000,000 today with a variable-rate mortgage at just under prime is about $4,500 a month. With insurance and property tax, it’s a little over $5,000. The land transfer tax in Toronto on a $1.2 million so-so house needing serious renos in the north end is $40,200. So to close on that with 20% down would require cash of about $290,000, and then a million in financing. …
No wonder RBC came out with that report last week. The bank found people between 35 and 44 have far more debt than their parents did at the same age – and more leverage than any other group in society. Mortgage rates today may be 3% instead of the 14% they were in 1993, but the amount of debt has ballooned so dramatically that monthly payments eat up far more of disposable income.
As a result, people in this age group are more dependent on real estate than any in the past. Almost 100% of the increase in net worth for Josh’s cohort has come from housing appreciation, since they’re saving and investing virtually nothing outside of their walls.
While real estate augments, they win. When it declines, they’re screwed. …
[And] it’s worth understanding what happens to people like Josh’s clients once they have seen a disaster. In the US these days the appetite for house-buying is sinking with regularity among the young. A decade ago 40% of all purchasers in the States were first-timers. Today is it 27%. In Canada the number exceeds 50%, and is rising.
So either the American kids are wusses and might suffer, or the kids here are naïve and could implode.

– from Generations, by Garth Turner, greaterfool.ca, 10 Aug 2014

Our bubble is national, and will end as all bubbles do, with implosion.
Vancouver has the biggest bubble and the least non-RE support; it will suffer the most.
As one recent online article succinctly stated: “You can’t taper a Ponzi scheme”.
– vreaa

‘Canada’s moment as an economic standout is over.’

“Canadian employers created barely any jobs in July, surprising forecasters and reinforcing the Bank of Canada’s decision to keep interest rates low.
Statistics Canada’s monthly tally of hiring and firing produced a net gain of 200 positions last month, as a 60,000 increase in part-time jobs marginally outweighed a 59,700 plunge in full-time positions. …
“There is little job growth in Canada and the degree of slack in the labour market remains elevated,” David Watt, chief economist at HSBC’s Canadian unit, advised clients in a note.
Canada’s moment as a standout among the world’s richer economies is over. The country weathered the financial crisis relatively well and gross domestic product and employment rebounded to pre-recession levels faster than most of its peers. Economic growth now is coming much harder. For the better part of the year, Canada has tended to follow monthly gains in hiring with offsetting declines in the weeks that follow. …
The labour participation rate, which measures the percentage of the population either working or seeking work, dropped to 65.9 per cent, the lowest since October 2001. Employment in goods-producing industries has shrunk by 56,000 positions this year, reducing the headcount to its lowest since January 2012, according National Bank Financial. …
Canada’s economy is need of a jolt that just isn’t coming.
The Bank of Canada has signaled its readiness to leave its benchmark lending rate unchanged at 1 per cent for a considerable period, yet it is wary of cutting borrowing costs because that could prompt highly indebted households to take on more credit.”

– from ‘Surprisingly negative jobs report supports low-rate stance’, G&M, 8 Aug 2014

Canada’s housing price bubble has been the result of 12+ years of too-cheap money rather than growth in real economic fundamentals. At some point prices will reconcile with fundamentals. – vreaa

‘The Extra Breadwinner In The Family’ – ‘Does your house make more than you?’

Another nation, but just as relevant (and equally unsustainable) here in Vancouver. – vreaa
[Remember the Vancouver dentist who reportedly said that he "made more on the sale of that house than he made in his entire career"? (VREAA, 21 Aug 2011)]

“With house prices growing faster than incomes in many parts of the UK, is your house making more money than you do?
Thanks to an extra breadwinner in the family, Rebecca Fletcher, her husband and two daughters are living the good life in a rural cottage deep in the Hampshire countryside.
The extra breadwinner is their old family home – a three-bedroom, terraced house in south-west London which Mrs Fletcher, a primary school teacher, and her husband, a London solicitor, bought in 2007.
They paid £450,000 – right at the top of the house price boom of the last decade.
When house prices fell after the 2008 banking bust, they feared financial disaster.
“We thought, ‘Are we ever going to be able to move out of this house – are we ever going to recoup the money we’ve spent on it?'” says Mrs Fletcher.
Their fears proved unfounded.
In 2009, prices in south-west London started rising, and went on rising. By the time they sold their former home last August, the price was £655,000.
According to calculations done for the BBC by Lloyds Bank, in the 12 months before the sale, Mrs Fletcher’s London home had increased in price by about £100,000 – more than she and her husband’s earnings put together.”
– from ‘Does your house make more than you?’, Michael Robinson, BBC, 1 Aug 2014