“The bank encouraged her to take the equity in her home to purchase another home. She bought a 2nd home at the peak.”

“I spoke to an older gentleman who bought his home in the 70′s and is now selling. He told me an interesting story of his ex-wife which may represent a lot of Vancouverites. She is unemployed. In 2009 she had 250k left on her mortgage on her primary home. The bank encouraged her to take the equity in her home to purchase another home. She bought a 2nd home at the peak.
How does she pay the mortgage on both properties? By sharing a room with her daughter and renting out rooms individually. Is this a risky scenario or what?! How many people are in her situation?”
- Anon at VREAA 17 Jun 2013 4:52pm

“Let’s remember how we got here” – Looser and Looser CMHC Limits

Let’s remember how we got here:

• Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years. CMHC also had limits on how much you could buy with their insurance.

• Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 25 years. There would be no price limit on what they would insure if 10% or more was put down.

• By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased.

• In March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured.

• In March 2006 you had 0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year. Interest only payments were allowed for 10 years.

• In November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years.

• Canadian banks ramped this up by allowing up to 7% cash back offers if you would take on a mortgage with them. You could basically get paid if you bought a house.

• Not only were the rules surrounding the granting of money loosened, but CMHC’s cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion today.

- this fine summary from ‘golden_boy’ at VCI 11 Jun 2013 7:40am

Don’t Worry, I’m Sure Somebody Will Sort This All Out – “Policymakers now know better and will be a lot more proactive in preventing a collapse.”

“Risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes. Many housing bears assume this overvaluation entails a hard landing but I’m not convinced it’s inevitable at the national level. One reason – which seems mostly overlooked in the debate – is that Canadian policymakers will be doing their utmost to avert such an outcome.

In a sense, Canada is fortunate to be facing the spectre of a housing bust after other countries have had theirs. Before 2008, it was generally believed house prices could never fall by much. Policymakers now know better and will be a lot more proactive in preventing a collapse.

Canadian policymakers do have the levers to affect outcomes. One is the regulatory framework for housing, which can be amended in various ways to reconfigure housing demand and supply to the extent required. Indeed, Finance Minister Jim Flaherty has tightened mortgage lending several times over the past two years to slow down price increases and give household incomes time to catch up.

Other regulatory changes include tagging Canadian banks with “too big to fail” provisions that require them to put aside more capital. Then there are the “bail-in” provisions that specify when a troubled bank will recapitalize by converting its senior unsecured debt and other liabilities into equity.

In addition to these pre-emptive steps, Canadian policymakers have no doubt given some thought to dealing with the risk that the soft landing could go off the rails. It’s hard to imagine they would allow the housing sector to destabilize the economy and financial system like it did in the U.S. and other countries.

Responses could range from cutting the Bank of Canada rate to relaxing regulatory restrictions on housing demand. Housing bears might complain about such measures but they would allow Canada to reposition back to a soft landing. That would be more preferable than inflicting the trauma that befell the countries hit with housing meltdowns.”

- from ‘Canada’s lucky to come late to the housing-crash party’, Larry MacDonald [a "retired economist"], G&M, 13 Jun 2013
—

A soft landing will not be engineered in the Vancouver RE market;
it is in the nature of spec bubbles that they burst, ending with a “bang and not a whimper”. Let’s hope that those in charge of Canada’s monetary policy and mortgage rates don’t do even more damage to sensible citizens by trying to avert the inevitable.
While we’re on the topic of “late to the party”, it is interesting to see the Globe and Mail’s Larry MacDonald, who up to now has gone to great lengths to reassure himself and everybody else that the RE market is not at risk [see, for instance, 'Housing bears need to relax and take the long view', G&M 1 April 2013], now stating that “risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes.” After all, prices have been outrageously high relative to incomes for many years now.
- vreaa

“Things have changed, we are not doing that type of mortgage. We are not interested at all.”

“I am currently interested in a piece of property in the burbs; a unique property which is why I would be willing to move on purchasing now at today’s prices. This is land, no house. I am eminently mortgagable… credit scores at almost 900, dual income, large amount of assets. Approached M-Cap, BMO, Enbridge, People Trust, CIBC, TD, and a couple of others for financing. Still waiting for 1 or 2 answers to come in.. but.. 5 institutions say “things have changed, we are not doing that type of mortgage, we are not interested at all” (without even inquiry into our situation). 3 institutions say “we would only consider a higher interest builders mortgage”. And by higher they really mean higher… Wow. Remains to be seen if financing can be had.”
- Burbs Boy at VCI 24 May 2013 4:51pm

Chat Thread

For those who have continued to chat here regardless.
Stay well, everybody.

Taking A Break

Hi All:
Priorities greater than even the Vancouver housing market have encroached upon vreaa, so we’ll be taking a break from daily posting for an indeterminate period. [This is not health related, so not to worry.]
This doesn’t mean we’ve change our minds about the trajectory of the Vancouver RE market — we still expect weakness and price drops ahead.
In the interim, we’d direct readers to the blogs below for good local RE discussion.
Keep well, all of you
regards
vreaa
—

Vancouver Condo Info

Whispers from the Village on the Edge of the Rainforest

—

“The mortgage company told me they were calling in my 40-year, 0-down mortgage. I have paid nearly sixty thousand dollars towards it, but, nearly five years in, I have yet to touch the principal.”

“There are few other words out there that carry the sense of shame and failure that “bankruptcy” and “foreclosure” do. They are words about having commitments that you couldn’t meet; they are words about loss.

They also carry judgment, don’t they? As though if you go bankrupt it must be because you went to a five-star resort with your lover, spent money you didn’t have on extravagant things. And foreclosure? Well, that’s just the little matter of losing your family home. Of sitting down in the living room and pulling your children close and saying, “We’re going to move, my loves, because Mama can’t pay the mortgage anymore.” Bow your head in shame.

So you can imagine how shredded I was about a month ago, when those words blew into my life, when the house of cards I had so carefully constructed over the last eight years came crashing down. I had constructed it after my marriage split up, when as a single mother-of-two, with a high school education and no work experience, I moved back to Canada, tried to find a job, found one, then bought a little home, and then got laid off, and started university full-time. All the while, I was eyeing nervously the fiasco of my finances and hoping like hell we were going to make it to solid ground. You can imagine that when the house of cards finally collapsed, I was devastated.

And I was shocked. Because in my mind, we had just made it to that solid ground. I got through university, I got a wonderful job. But then the tidal wave I’d been running from for the last eight years crashed over me still.

I had had a sense it might. It was the accumulation of all that time out of work, all that time in school, all those months in which I bought the groceries and school supplies on credit cards, all those late payments.

Seven times in the preceding two years I had approached the bank that held the lion’s share of my credit card debt and asked them to reduce the interest from 20 percent to something more manageable, something more like 10. I explained that I had been laid off, that I was now not only a single mom but a full-time student, living on student loans. I explained that I was trying my best to pay it off but I couldn’t even make a dent in it with interest that high. Seven times they turned me down. The last time I met with a bank officer, she told me to make all my payments on time for a year and then come back and she’d consider it. I shuffled off, head bowed.

And then the mortgage company told me they were calling the mortgage – a forty-year-mortgage with no money down, made back in the day when you could still do that. I have paid nearly sixty thousand dollars towards that mortgage. Nearly five years in, I have yet to touch the principal. Get a new lender, they told me or come up with the pay-out amount, the same amount of money I borrowed initially. Impossible. I cried.

For a week I walked around numb, as though everything I had been fighting for, so hard for so long, had just collapsed. Vanished. As though I had lost my children their home. I couldn’t believe, I told my boss, sobbing, that after all that effort, everything had all fallen apart in the end. I told her I had always been afraid I was going to die alone and be eaten by dogs and here I was – losing the house. I can’t believe, I said, I can’t believe it ended this way.
My boss held up her hand. “Hold on,” she said.”The dogs haven’t gotten you yet.”

And with that I entered into a long period of stillness, and when I emerged I went to a credit counseling place, where they took one look at all my debts and my non-existent assets and went straight to suggesting I declare bankruptcy. And then I went to a bankruptcy trustee who suggested exactly the same thing. He reviewed what that would mean for me.

“I have been paying a thousand dollars a month in credit card debt,” I said, “for more years than I can count, and I haven’t even made a dent in what I owe, never mind that I’ve paid the debt some four times over. And you’re telling me that I can pay less than that, a lot less than that, for 21 months – and then this is over?” He nodded. “Do you just make people happy all day long?” I sniffled through the tears. He said, “If it feels this good to you, you know it’s the right thing to do.”

I keep thinking I should have done this two years ago. But I kept going, kept borrowing, kept paying, kept trying, month after month. And I kept doing that for two reasons. For one, it’s the right thing to do, isn’t it? You borrow money, you pay it back. For two, there was shame. To admit defeat would be to admit failure, would be to announce to myself and the world that I couldn’t cut it.

Now I feel like, hey. I accumulated that debt to take care of my family, and I am grateful for it. And I paid that credit card debt four times over. The bank is NOT getting ripped off here. They’ve done just fine by me. And my house? We loved our little house, it has been just lovely for us. And now it will be just lovely for some other family who needs a home. We’ll find another little house, or an apartment, and we will make it fine for us, too.

Eight years ago, I grabbed my kids and carried them through a whirlwind of challenge and uncertainty. I got us to solid ground. The tidal wave may have crashed over us, but all it did was wash away the wreckage of the past. We are on terra firma. And we are free.”

- from ‘Going Bankrupt’, by Kyla Hanington, The Sunday Edition, CBC Radio, 7 Apr 2013 [hat-tip 4SlicesOfCheese]

“They were talking about two couples they knew who had recently bought a lot and planned to each build a house on it and live as neighbours.”

“I was in a Starbucks in Kits today listening to two very Vancouver ladies talking RE. They were talking about two couples they knew who had recently bought a lot and planned to each build a house on it and live as neighbours. These ladies were concerned because one of the couples were heavy pot smokers. They wondered how the other couple would feel having clouds of dope smoke wafting in through the open windows on warm summer evenings. I just looked at my wife, who had been listening intently as well and whispered TWEB (This Will End Badly).”
- lexlimo at VREAA 4 April 2013 7:17 pm

Greater Vancouver Home Builders’ Association Annual First-Time Buyer Seminar Attendance Plummets

“The Greater Vancouver Home Builders’ Association presented its 19th annual free seminar for first-time homebuyers in Surrey on March 19. This event is the largest of its kind in North America, drawing aspiring homeowners from virtually all Metro Vancouver municipalities – and beyond.
Attendance over the years has averaged 800. One year, registrations were cut off three weeks before the event, as 900 eager people had already signed up. Last year, attendance dipped to a tad under 600.
This year, despite significant promotion and a top-notch panel of speakers, about 500 prospective first-time buyers registered. Moreover, an audience head count revealed less than 300 attendees.
Mind you, I believe a number of external factors contributed to the attendance drop – March break, heavy rain, traffic and a Canucks game. Also, it appears the wealth of information available at folks’ fingertips kept some of the registrants at home that night.”
- from ‘A world of advice’, Peter Simpson, The Vancouver Sun, 6 Apr 2013

Thanks to RG, who sent the above link to VREAA by e-mail, and who adds:
“The interesting bit is Mr. Simpson’s rationalization that the marked drop in attendance may be attributable to, “March break, heavy rain, traffic and a Canucks game” …
Seriously? … “rain” and “traffic” resulted in far less than half of the typical numbers of potential first-timers from seeking critical purchasing information? Wow.”

More Undisclosed RE Industry Insiders Publicized As Clients – “In 1995, Allan and Karin Hoegg were mortgage-free. But no more. Today their Vancouver home is a valuable source of income as they plan for full retirement.”

Allan and Karin Hoegg are pictured in their home in Vancouver, British Columbia on March 8, 2013 [image F.Post]

“In 1995, Allan and Karin Hoegg were mortgage-free. But no more: today their Vancouver home is a valuable source of income as they plan for full retirement.
Allan Hoegg says when their son and daughter-in-law wanted to buy a house, they took out a variable-rate mortgage so they could help them out. “We wanted to take advantage of the stability of the current rates.” To cover the mortgage payments, they rent out a suite in the home to students.
The couple also established a home line of credit that allows them to free up cash for investment purposes when they need it. “It gives you maximum flexibility and you can pay it any time you want without penalty,” he says. “It’s dead easy.”
Like many people planning their retirement, there’s a sentimental side to keeping their home, he says. But there are just as many practical reasons. In the Hoeggs’ case, selling to downsize would mean substantial commissions and moving costs. “Besides, real estate is a very good investment in Vancouver,” he says. “The longer we can stay here, the greater the possibility of no-tax capital gains.”

“For the most part, people want to stay in their homes, says Rob Regan-Pollock, senior mortgage consultant with Invis – Team Rob Regan-Pollock mortgage brokers in Vancouver. “The fact is they’re sitting on a big nest egg. So when they get near to retirement, they start asking how they can use that equity to help them in their retirement.”
There are plenty of options to consider, from applying for a line of credit or reverse mortgage to renting out your property to finance your monthly costs at another residence.
A line of credit is the most flexible option, Regan-Pollock says. “If for some reason you can’t meet your monthly expenses, a line of credit on your home can be a very good buffer. The interest rates are low — typically prime or prime plus one per cent, depending on the institution and your qualifications. It’s also quite sustainable, since your home will often appreciate in value more than the amount of debt being drawn down against it.”

- from ‘Home is where the retirement money is’, Denise Deveau, Financial Post, 13 Mar 2013

Comments from ‘Bo Xilai’ below the FP article, 27 Mar 2013:
“Denise, why didn’t you mention Allan Hoegg works for Invis – Team Rob Regan-Pollock mortgage brokers. Of course he’s going to use his house as an ATM… he’s just eating his own cooking. And at the same time you’re interviewing Rob Regan-Pollock as an “expert” in your piece. http://www.teamrrp.com/team/
More fake real estate stories using employees as plants.” …
“They used an employee of the “expert” interviewed without disclosure and, I would argue, in a deceitful manner to promote a strategy beneficial to the “expert’s” reputation and business interests.”

Allan Hoegg (top left) part of Team Rob Regan-Pollock mortgage brokers [image teamrrp.com]

[thanks to 'C', for sending news of the article and 'Bo Xilai's comments to vreaa via e-mail, 27 Mar 2013]
—

This article is interesting..
1. for the undisclosed insider publicized as client
2. for the journalist’s ineptitude or, alternatively, collaboration
3. for the retirees’ dependence on RE holdings for retirement funds
4. for the fact that such borrowings were used to purchase more RE
5. for the need for tenants in their ex-SFH to cover mortgage payments
6. for the assumption that Vancouver RE is “a very good investment”
7. for the assumption that prices will continue to rise.
- vreaa

For those readers unfamiliar with the recent high profile case of industry insiders masquerading as condo buyers, please see:
CTV TV News Featured ‘Condo Buyers’ Actually Marketers Of Very Same Condos!, VREAA 13 Mar 2013

UPDATE:
This article also headlined and discussed by Whisperer here:
‘Another media scandal from the real estate industry? News article appears to be contrived shill piece from PR company.’, 28 Mar 2013

“My buddy was looking to upgrade to a house in the Coquitlam area. With 200k extra for a home, that’s half of lifetime saving between him and his wife.”

“My buddy was looking to upgrade to a house in the Coquitlam area. Currently they own a apartment. Not sure if they even have than 10% down payment for a “used” single family home. The other day we were chatting and he mentioned how he wants to upgrade to all new appliances and do a bunch of renos when he buys a place. He said that I bought a house without a mortgage so I could upgrade all the fancy appliances at my place. Here is my thought: my place is in Surrey, which is 500k, for a single house. He wants to buy a house for 700k. His household income is not more than mine. If he is not overextending himself, he could easily do the upgrades. With 200k extra for a home, that’s half of lifetime saving between him and his wife. I guess no more trips and fancy toys.”
- from klin1022 at VREAA 18 Mar 2013 9:41am

Remember the good ol’ days when people used to think about an amount of money in terms of how long it would take to earn or save it?
- vreaa

“I was walking in the Fraser neighborhood yesterday, I noticed that the population, on average, seem to be composed of workers. I belong to the top 5 percent in terms of income. Nevertheless, I cannot afford any of the houses for sale in that neighbourhood.”

“As I was walking in the Fraser neighborhood yesterday, I noticed that the population, on average, seem to be composed of workers, and may be some middle class family, but I bet the average household income is below the province average. I was dressed in MEC [Mountain Equipment Co-op], I guess one could tell I did not belong to that neighborhood, and some people were giving us the strange look. Now, I belong to the top 5 percent in terms of income. Nevertheless, I cannot afford any of the houses for sale in that neighbourhood. Clear sign we are in a bubble? Are people renting the basement, the attic and taking two homestays? Are they packing 10 people per dwelling? Or are these neighbourhoods gentrifying overnight? I also noticed a huge disconnect between the new macmansions being built and the school next door. I do not mean to be disrespectful to those schools, I was myself brought up partly in an inner city and partly in a rural area where I was surrounded by very nice people. But PC aside, after talking with local educators, I do not wish to send my kids to most Fraser schools. So who are those mcmansions being built for?
- from Anonymous at VCI March 25th, 2013 at 8:30 am

“What’s the worst that can happen? You can’t pay your mortgage, so sell your house! No fear.”

Hannah Sung, Globe&Mail: “According to the numbers Canadian’s are carrying more debt than ever; which seems like a worrisome place to be. So I decided to ask people: ‘What is your biggest financial fear?’.”

Man1: “That’d be my mortgage. Actually, I just lost my job, about a month ago. Believe me I’m really happy about it; I can go back to school. I really don’t want the fear to come in front of me. What’s the worst that can happen? You can’t pay your mortgage, so sell your home! No fear.”
—

Hannah Sung: “‘What is your biggest financial fear?’.”

Woman: “The stereotyped idea of graduating and living in your parent’s basement.”
—

Hannah Sung: “What is the best way to manage the stress of being in debt?”

Man2: [looking concerned] “Try to think positive. I just had a job interview.”

- from ‘The fears that grip Canadians as debts rise, housing prices fall and incomes stall’, Globe and Mail video, 9 Mar 2013

Spot The Speculators #100 – Couple In 20′s Desire Light Workload, Early Retirement And Free Money From Their RE ‘Investments’; Current RE:Networth 10:1

“In B.C. a couple we’ll call Max and Portia, 28 and 27, are trying to plan their financial future. They bring home a total of $6,880 a month from their high-tech jobs, but Portia wants to take sabbaticals to travel more and Max wants to try out a new career. They also want substantial investment income — $1,000 a month by their mid-30s. All that, plus early retirement well before 65.
What is standing in their way is not just the problem of earning enough money to do all that, but more than half a million dollars of debt
They have already made big career switches, Max from running a theatrical company for four years, Portia from several years in pharmacy management. Their jobs, their incomes and their present high rate of savings can build a solid retirement, though not necessarily an early one.
…
So far, Max and Portia have made a big bet on real estate. A $265,000 rental condo is their largest investment. It has a $228,775 mortgage with 26 years left on its amortization. Without capital repayment on the 25-year mortgage, interest alone is $410 a month. Condo fees and taxes add $277 for total carrying costs of $687. It generates $1,050 rent, so their total return is $363 a month or $4,356 a year. That’s a 12% return on their equity — not bad, but vulnerable to rising interest rates. If they have to roll over their 3.0% mortgage at 4.0%, which is still historically cheap, they will lose their margin of profit. No one doubts that interest rates will rise and a 1% jump is easily in the cards…
Rather than take all the risks that go with being landlords — such as vacancy, tenant damage, and the inevitable rise in interest rates — they could sell, harvest their about $23,000 of equity after 5% selling costs, and use the cash to pay off most of a $27,000 student loan outstanding at 4.5%. If they choose not to use the cash to pay off the loan, then, at $500 a month, it will be repaid in five years. Their home mortgage would still have 24½ years to run. …
If they choose jobs for fun … their ability to have a secure retirement will be at risk
Their reality at present is that debts are almost 90% of their assets. To support a $1,000 monthly investment income, they would have to have $400,000 capital generating a 3% return after inflation. They can’t do that in seven years with their present incomes and the need to pay down debt. Moreover, if Max changes jobs or Portia takes lots of time off for travel, sacrificing income and perhaps career advancement, their financial outlook would dim.
“It is not possible in any reasonable scenario, especially if they impair their incomes with sabbaticals or risky job switches,” Derek Moran [a financial advisor from Kelowna] says.

Summary of finances:

Income:
$6.9K per month

Assets: $606.7K Total
Home condo $298K
Rental condo: $265K
RRSPs: $23.7K
TFSA: $8.9K
Stock options: $4.5K
Cash: $6.6K

Liabilities: $544.4K Total
Home condo mortgage: $284.6K
Rental condo mortgage: $228.8K
Loans: $31K

- from ‘Is this couple’s financial vision an impossible dream?’, Andrew Allentuck, Financial Post, 8 Mar 2013 [hat-tip MC]
—

Networth: $62.3K
Percentage of Networth in RE: 973%
[For those readers who have semantic objections to their position being expressed in that fashion, think of the '973%' as an elegant way of saying that their net-worth is leveraged to RE prices by 9.73 to 1.]
So, if their RE holdings drop in market value by a touch over 10%, they lose their entire net-worth. In fact, we can say with close to certainty that, given current market conditions, their actual current net-worth is very likely less than zero, as they’d be unlikely to clear 90% of the quoted amounts on their properties if they tried to sell.
This couple represents self-delusion run amok.
They clearly see RE as a path to a light work-load and early retirement. Free money, in effect.
How many Vancouverites have built positions in RE based on similar fantasies?
Note how the sensible financial advisor (from Kelowna, and thus, we’d assume, no stranger to collapsing RE markets) advises them to sell their RE ‘investment’.
What will the effect on our markets be when all those speculators in a similar position try to get out of money losing RE, over the same few years?
—
This couple’s position is also particularly noteworthy in that it represents the local speculative activity that has been the major engine of our perverse bubble. Most would still argue that their actions are innocent; that they are simply trying to get ahead in current challenging economic circumstances. We’d argue that they are being greedy; and ask what the hell they were thinking buying a second, poor-cash-flow property with a household balance sheet like that. It is purchases such as these, people over-stretching to buy primary residences and/or ‘investment’ properties in the hope of future abnormally large price gains, that have relentlessly pushed up prices and formed the bedrock of the problems now facing Vancouver RE: A bubble based on cheap borrowing and over-leverage.
—
Speculative manias represent ephemeral fantasies, and they all, ultimately, have to be reconciled with reality.
—
- vreaa

New Convolution – “Bubble Fatigue”

“Canada’s housing market may still be cooling, but there are fears in some quarters that “bubble fatigue” will pump it back up heading into the spring season.
What economist Benjamin Tal means when he uses that phrase is that home buyers are skeptical about whether the residential real estate market is heading for a sharp price and sales drop.”
- from ‘Home sales slip further, but signs of traction emerge’, The Globe and Mail, 4 Mar 2013

Okay, so just to clarify: ‘Bubble fatigue’ is the process whereby a person who has concerns about the market being overheated gets tired of those concerns, and is thus freed up to buy. Correct?
The webs of intrigue that our minds spin! Not to mention the minds of economists.
“Bubble Fatigue” added to our Bubblexicon, naturally.
- vreaa

Vancouver Sun Profiles A First Time Buyer – “I just wanted to build equity and not pay rent.”

“Myles Wilcott, a single, 31-year-old general manager at Canadian Linen & Uniform Service, is among those who have met new financial requirements in order to buy a condo. He paid $412,000 for 705-square feet two-level loft in a 16-year old building in the Gastown district of Vancouver.

Wilcott had been looking at condos throughout the winter, waiting to find what he was looking for at a price he could afford.

By this spring, he had almost enough in his registered retirement savings plan to meet the minimum down payment set by the federal government. He had sufficient income to cover the monthly payments, even though new federal regulations meant he would be paying hundreds of dollars more each month than he would have been required to pay before the rule changes.

He was not concerned about reports of record high prices and talk of a possible crash in the real estate market. “A lot of people talk about getting into the market to make a quick buck,“ Wilcott said. “I just wanted to build equity and not pay rent.” …

Mr. Wilcott, who graduated from Simon Fraser University in business and human resources, said in an interview he had thought about buying a home a few years ago but did not qualify for a mortgage that was big enough to buy what he wanted.

He turned his attention to improving his credit rating, pursuing his career and putting aside some savings. “I was able to climb the ladder enough to the point where I qualified for a [25-year] mortgage.”

Mr. Wilcott started the home-buying process in December. The first step was to arrange for pre-approval for a mortgage. He had an agent to help him search in earnest for what he wanted – a loft-style condo in the downtown area. He looked at 12 different condos before finding what he was looking for.

He put down the minimum five per cent, which was about what he had saved in his tax-free registered retirement savings plan. A federal program called the homebuyers plan allows purchasers to use their RRSP as long as the money is paid back within 15 years.

His mortgage payments of $1,900 will be considerably higher than the rent of $1,200 he was paying before he bought the condo.

However it was his outstanding debts — not the monthly payments — that almost tripped up his mortgage application. Arrangements were finally confirmed at an acceptable rate with Vancity Savings Credit Union.

The whole process was a bit more stressful than he anticipated. The most difficult aspect of the purchase was evaluating the conflicting points of view he received on home buying. “I got too many people involved … there was such a wide array of opinions — buy now, don’t buy now; wait five years, don’t wait; don’t go into that neighbourhood, go over there.”

But once he met the qualifications and found what he wanted, he was ready to close the deal.”

- image and text from ‘First-time homebuyers adjust to federal changes; For those who can afford it, home ownership still a viable option’, Robert Matas, Vancouver Sun, 15 March 2013 [hat-tip OH YAH]
—

“$700 per month more outlay for accomodation plus condo fees, taxes, legals, move etcetera, etcetera (you all know the drill) and no mention that all his savings were wiped out during the purchase. Live and learn. Got to get on that ladder even if it only leads to a periscope.”
- Farmer, commenting on the above story, at VREAA 16 Mar 2013 3:22am

Agreed, we don’t think Myles really did the math on this.
He says “I just wanted to build equity and not pay rent”.
Even if he’s not fully conscious of it, he’s speculating on future RE price strength.
We’d bet the math shows that he wouldn’t “build equity” without that.
- vreaa

Vancouver RE Crash On Track

Expected weakness continues, sales remain low. Things are playing out as we’d anticipate. Very significant price drops to come (all in all, 50% to 66%, peak to trough). :

SALES ARE WEAK:
“The flicker of optimism that sparked in Canada’s housing market when January sales outpaced December’s has died out, erased by a notable drop in February.
Last month’s declines were significant enough to prompt the Canadian Real Estate Association (CREA) to cut its sales outlook for 2013 on Friday for the third time since last summer. …
“Vancouver remains the clear weak spot, with sales down a seasonally adjusted 9.8 per cent in February and 29.2 per cent in the past year,” Bank of Montreal economist Robert Kavcic wrote in a research note.But some feel that much of Vancouver’s weakness has played out.” [hahaha -ed.]
- from ‘Clouds gather over Canadian housing market’, Globe and Mail, 15 Mar 2013

SO ARE PRICES:
“The average MLS residential price in BC was $514,134 … down 8.1 per cent from a year ago.” – BCREA news release 14 Mar 2013

INVENTORY/LISTINGS ARE HIGH:
“I’m seeing big increases in New West, North Van, Burnaby SFH listings. Historical highs for this time of year. VW has stalled out; VE puttering along. Condos downtown nothing special on the inventory side. I don’t know what all that means except that our little crashlet is *not* a “Van has too many condos; it’s just condos; houses are safe from all this” thing. It is in fact inventory growth and sales declines are mostly a SFH thing, from what I see.” [price declines will effect all sub-sectors of the market. -ed.]
- VHB at VCI 15 Mar 2013 12:22pm

chart care of b5baxter at vancouverpeak.com

HOUSEHOLD DEBT CONTINUES TO GROW:
“The ratio of Canadian household debt to disposable income rose to another record last quarter, calling into question Bank of Canada Governor Mark Carney’s assertion that families are listening to his warnings about the risks of borrowing too much.
Credit-market debt such as mortgages rose to 165.0 percent of disposable income, compared with 164.7 percent in the prior three-month period, Statistics Canada said today in Ottawa.
In his previous two policy statements, Carney weakened language about the need to raise the central bank’s 1 percent policy interest rate, partly on evidence a housing boom was slowing and consumer debt burdens are stabilizing. Finance Minister Jim Flaherty tightened mortgage rules in July on concern some regional housing markets were overheating.
National net worth rose 1 percent to C$6.87 trillion ($6.73 trillion) in the fourth quarter, Statistics Canada said. On a per capita basis the increase was to C$195,900 from C$194,300.” [Watch the per capita net-worth plunge with RE prices over coming years. -ed]
- from ‘Canadian Household Debt-to-Income Ratio Rises to Record 165%’, Bloomberg, 15 Mar 2013

MEDIA STILL PUMPING:
“Global TV just ran two RE spots (within an hour of each other) on this morning’s news featuring Joannah Connolly, editor of the highly acclaimed BIV and holder of a BA in Eng Lit.
In segment one, she commented on the 0.1% rise in the Cdn new HPI (for Jan) and implied the housing market had “reversed a downtrend”. She also mentioned the Cdn$ and how “it rose five cents” yesterday. How sad. Colorful, animated bar graphs (a la CNBC) were used in the presentation to drive home the point that home prices are still way higher than they were in 2009. The year 2012 was conveniently omitted from graph #1 so as to mislead the public into believing the upward trajectory is still intact. graph #2 was equally laughable with price chg’s in Vanc, Vic, Wpg and Cda average all appearing to be gains with upward pointing bars.
In segment two, she talked about how hot the commercial RE was, that land was in limited supply and that investors were “snapping up anything and everything”.
- from bullwhip29 at VCI 15 Mar 2013 9:55am

..AND MASSAGING:
BTW, they changed the headline of the Tara Perkins article in the Globe from this…
“Real estate market outlook cools as home sales plunge”
To this…
“Clouds gather over Canadian housing market”
There….that’s better.”
- from kabloona at VCI 15 Mar 2013 11:01pm

REALTORS STILL PUTTING ON BRAVE FACES:
“BC home sales continued at a modest pace in February,” said Cameron Muir, BCREA Chief Economist. “Despite improved affordability, many potential buyers and sellers remain in a holding pattern. With pent up demand now becoming latent in the market, it’s not a matter of if, but when home sales rise above their current pace.”
- BCREA news release 14 Mar 2013
—

“I phoned ING and they said that they definitely were still issuing mortgages. What had changed is that they were no longer dealing with mortgage brokers.”

“Last week, I received a letter from a mortgage broker that I had used to secure a small mortgage from ING. She told me that ING would not be in the mortgage business any longer, so that she would be contacting me before the maturity date to find me a new lender. Very considerate. Today, I phoned ING and asked them about the situation. They said that mortgages were a huge part of their business and that they definitely were still issuing mortgages. What had changed is that they were no longer dealing with mortgage brokers. Surprise, surprise. The agent then proceeded to offer me an early renewal blended rate that was quite competitive.”
- from M, via e-mail, 28 Feb 2013

TD Bank: “Home prices will be essentially flat for the next decade” [Therefore Vancouver Prices Will Crash]

“A TD Bank research report is warning that Canada’s real estate bonanza has come to an end and predicts home prices will be essentially flat for the next decade. The TD report forecasts average house prices will move lower over the next few years before modestly rebounding after 2015. But even with the rebound, TD predicts that home price increases will only rise about two per cent annually — essentially keeping pace with inflation.”
- from ‘The value of your house may remain flat for 10 years: TD Bank’, CTV News, 11 Mar 2013 [link defunct at time of press] [hat-tip E.G.]

“Just to be clear, most observers expect a soft landing, rather than a U.S.-style crash. But, according to TD, don’t bet on prices appreciating to any great extent.
“The housing market is prone to cyclical ups and downs, and Canada is expected to embark on a gradual, modest, downward adjustment over the next three years,” the TD economists said.
“A string of lacklustre performances will mean that the annual rate of return for real estate in nominal terms will be roughly 2 per cent over the next decade,” they said in their report.
“In other words, real estate gains are set to match the pace of inflation.”
- from ‘Home prices to gain ‘measly’ 2% a year over next decade: TD’, G&M, 11 Mar 2013

“The report does not predict a collapse in house prices as some analysts have suggested. In fact, it sees prices rebounding after a few years of a correction to as high as eight per cent.
However, the longer term trend is for home price gains to average about two per cent over the next 10 years — flat once inflation is taken into account, says TD chief economist Craig Alexander.
“I do not think we have a housing bubble in Canada,” said Alexander. “We have had abnormal strength in the market during a period of low interest rates and when rates go up over the next three years, you will get a cooling and weaker prices, but not a permanent shock and not a sharp correction.”
- from ‘Vancouver house prices to will outpace national average, TD report says’, Vancouver Sun, 11 Mar 2013

The vast majority of buyers of Vancouver RE, for many years, have been speculators in that they have been buying with the expectation that prices would continue to rise at an abnormally high pace (for instance, 7% per annum, or even more).
Once it becomes clear that prices will not continue to behave like this, the massive central engine for demand will disappear. Buyers will not overextend to a ridiculous degree to chase prices that aren’t going anywhere. The fear of being “priced out forever” will no longer propel their behaviour; the greed that previously encouraged buyers to “jump on the RE train” will disappear.
This is why a speculative mania never, ever, ends with a flat market.
Once the speculative component of prices evaporate, prices will fall to those supported by fundamentals, far below. In Vancouver’s case, these levels are 50% to 66% off peak.
- vreaa

“I am a boomer. I am appalled at some of the financial situations that my contemporaries have gotten themselves into. I can’t stand it, it is all around me.”

“I am a boomer. I am appalled at some of the financial situations that my contemporaries have gotten themselves into. They have borrowed against their homes while saying “that’s just a line of credit, the house is paid for”. They have counted on the run up in real estate without selling and now owe more on the house than when they bought it TWENTY years ago! When renewing their mortgages they roll in their latest credit card debt. Then they keep the amortization high so the payments are as low as possible. These people owe hundreds of thousands of dollars and now are having health issues, divorces, and want to retire. How can you do all that and not have a thought as to paying off your debt? Time is not on their side.
When the lender they started with is cautious and turns them down, they go elsewhere, get the loan and a promise of more if needed and then bad mouth their first lender. They never miss a chance to go somewhere warm for a month and love the casino and the lottery. Their cars are new, Friends, family, acquaintances, I can’t stand it, it is all around me.”
- camper at VREAA 8 Mar 2013 11:05am

… and then prices start to descend, and the whole debt expansion process goes into reverse (as is occurring just about… now). Ghastly implications for the individuals involved; not good for the group, either.
- vreaa

Lower Mainland Couple In Their 70′s; RE Makes Up 216% Of Net-Worth; Desire To Buy More – “My friend is getting worried about his parents’ financial situation.”

“I was talking to a friend earlier today, He’s getting worried about his parents’ financial situation…
Get this:
$2.6 million invested in real estate… all in the Lower Mainland.
$1.4 million of mortgage debt (54%). Dad is over 70, mom not much younger.
Imagine a collapse of 50% of the market in the LM. The entire family’s net worth would be wiped out. Really scary. The irony? They want to invest even more in real estate (because they lost so much money in mutual funds…).”
- Makaya at VREAA 6 March 2013 8:22am

We still believe that the (90 minus age)% guideline for maximum percentage of net-worth that should be in RE makes sense.
These guys should have less than 20% in RE, their actual number is 216%… and they want to increase it!
We’ve heard enough of these stories now to extrapolate that there are a significant number of people in this position. They are very vulnerable to price declines, and they make the market that much more vulnerable, too.
- vreaa

“Forty percent of homeowners over age 65 had mortgage debt in 2010, compared with just 18% as recently as 1992, Reuters reports.
The Investor Education Fund recently found that 24% of Canadian homeowners surveyed expect to have debt on their principal residence after they retire. Of those who expect to owe money on their homes when they retire, more than one-quarter said they don’t know how they will pay it off.”
- advoc8 at VREAA 6 Mar 2013 at 2:12pm, quoting from ‘How Baby Boomers are rewriting the rules of retirement’, Financial Post, 6 Mar 2013

Bank Of Canada’s New Euphemism For Contraction – “Constructive evolution of imbalances”

“With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required,” the Bank of Canada said Wednesday. …
“With a more constructive evolution of imbalances in the household sector, residential investment is expected to decline further from historically high levels,” the central bank said in its policy statement. “The bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.”
- from ‘Battle of housing bubble won, Carney focuses on economic growth’, Kevin Carmichael, The Globe and Mail, 6 Mar 2013

Somehow the Globe and Mail concludes that “concern about a housing bubble” has “deflated” and that the “battle of the housing bubble is won”.
We fail to follow the logic.
What is happening is that, as debt hits limits, the entire economy, overly dependent on debt spending, is slowing.
This is precisely what one would expect at this point in the cycle.
The housing bubble hasn’t even really begun to unwind yet, let alone any battle being “won”.
It is not at all surprising that there is no intention to raise interest rates.
As we have said before repeatedly, we don’t need rising interest rates for the bubble to implode; it will do so by collapsing under its own weight.
We look forward to the “constructive evolution of imbalances” that will come with 50% to 66% price drops in Vancouver.
Viva La Constructive Evolution Of Imbalances!
- vreaa

Canadian In Hong Kong Aims To Buy In Vancouver – “I plan to be another guy coming from Hong Kong buying your property and renting it out to you, even though I’m a white Canadian guy.”

“Let me share my story. I moved to Vancouver with my family when I was a teen from Eastern Canada. I went to UBC and graduated with a science degree. The jobs available to me were $12/h lab work on temporary contracts or sales at small supply companies, which at least had the potential for a career. How am I supposed to build up any substantial net worth $12/h? I opted for the latter; 100 applicants for every position. Needless to say, I did not make it to the 2nd round of interviews; a few interviewers asked to photograph me (kind of illegal) because it was hard to remember who’s resume belonged to whom.
I did some research and found work online that required my degree. I thought it’d be a side job until I found a “real” job. That ended up being a modest but living income. All of that money was from East Asia; not a dime from Canada.
Yesterday, I got a job offer in Hong Kong, and I’m going to take it. I’m going to make several times more here than I could in Vancouver. I’ll make incredible connections. Interestingly, although I’m not Chinese, many of my peers from UBC born in HK have returned for work because there’s simply more opportunity here. Yes HK is crazily expensive; it’s rents are easily double those of Vancouver! However, I can actually afford to live here without squeezing by. I’m going to be able to save a lot of money, which I hope to use towards a property in Vancouver. Ironically, I plan to be another guy coming from Hong Kong buying your property and renting it out to you, even though I’m a white Canadian guy.
I love Vancouver and do not want to settle down anywhere else. I see the huge appeal of living there from the perspective of Hong Kongers and Mainland Chinese. However, there’s just far fewer opportunities to grow in Vancouver; combine that with high costs, and you’ve got a losing combination. It’s good to end your career in Vancouver, not start it. I really feel Canadian employers treat young employees like trash in the name of economics and wonder why we jump ship at the next opportunity that comes along.”
- twelvis commenting on a reddit thread ‘Some Vancouver workers have been priced right out of the country’, 22 Feb 2013 [hat-tip proteus]

‘CMHC seeking to hide foreclosure information from home buyers’ – “CMHC just told us that pricing will stay strong and now they want to keep information about foreclosure secret. Where there is smoke there is fire.”

“Canada Mortgage and Housing Corp. has been asking realtors for months to keep consumers in the dark about whether the properties it sells are part of a foreclosure, according to a document obtained by The Financial Post.
The move, said to be part of CMHC national policy, upset Quebec realtors who refused to play ball, worried about an ethical breach. …
Some real estate industry insiders wonder whether the Crown corporation is simply being prudent, not letting potential buyers know a property is part of a distressed sell so they can put in a low-ball bid.
Others question whether the Crown corporation is just getting things in order in case home prices collapse and they are forced to sell properties that are backed by government insurance. …
“Look at what is going on right now in financial institutions and everybody is ratcheting up their loan-loss provisions,” said Ben Rabidoux, a Canadian analyst for California-based Hanson Advisors, a market research firm whose clients are institutional investors. “Everybody expects loan losses to rise. I can’t imagine CMHC is in the dark on that. My suspicion is they want to limit any loss on that hits their books.”
By limiting the information on whether a property is part of foreclosure, the Crown corporation would potentially avoid a situation in which a buyer knows it has to sell. In the United States, foreclosed properties have sold at huge discounts.
“CMHC is trying to get the better price,” said Don Lawby, chief executive of Century 21 Canada, who had not heard of the new policy. “You know something is repossessed, you low-ball the offer. You know you are not dealing with a homeowner but an investor.”
- from ‘CMHC seeking to hide foreclosure information from home buyers’, Financial Post, 27 Feb 2013
[hat-tip Reader #4]

“If the price of a house is good or someone is putting a low ball price and the seller is ok with that…I call it the market. CMHC just told us that pricing will stay strong and now they want to keep information about foreclosure secret….When you have smoke…fire is not very far…” – ‘luckyluc’, commenting on the above article at the FP site
—

Is it within the CMHC mandate to take active measures to hide information from the public?
Aside from that, the need for deception is massively telling – the market is at risk from normal price discovery processes, and the CMHC obviously now sees that.
- vreaa

Crazy Rubs Off – “At that time, strangely, I recognized this was expensive, but did not consider it absurd. My expectations had been subconsciously adjusted to account for the fantastic/abnormal circumstances.”

“Just started reading your blog, after a brief foray into the 1-bedroom condo market.
I’m 28, a professional, and earn a high 5 figure salary. I moved to the city 3 years ago.
My anecdote is viewing condos on Fraser, considerably south of broadway in a new building. The building is nice but the street and surrounding area looks awful, particularly at night. Grimy, damp, rundown. Nondescript small business with algae growing on vinyl awnings. Saw a series of small single bedrooms (350k) and one slightly larger single bedroom (375k). At that time, strangely, I recognized this was expensive, but not absurd. My expectations had been subconsciously adjusted to account for otherwise fantastic/ abnormal circumstances. Crazy rubs off.
I started reading more and I havn’t looked at ‘property’ since. I don’t intend to buy in this city at anywhere close to current asking price. I’ll move before I do. That’s not said in a righteous or defensive way, its just true. Two weeks after the viewing I was contacted by the real estate agent with an adjusted price list. 350k was reduced to ~340k, 375k was reduced to 350k.”
- Poorprofessional, via e-mail to VREAA, 21 Feb 2013

I have no doubt that we have all been ‘conditioned’ by the absurd prices.
Even the most ardent and insightful bear has been desensitized to the actual meaning of the large figures.
How long does it take a Canadian to save $400K?
- vreaa

Peter Ladner – “While sphincters are tightening in some parts of town over a softening in the real estate market, a lot of people are praying for prices to come down. Housing prices are around 10 times median income. Five times is “severely unaffordable”.”

“While sphincters are tightening in some parts of town over a softening in the real estate market, a lot of people are praying for prices to come down.
They are not impressed that we consistently place in the top three in the world’s unaffordable housing race. They include young wannabe homeowners, of course, but also private and public employers desperate to attract out-of-town skilled workers and senior executives or to retain valuable workers who insist on owning their own homes. Because our housing prices are around 10 times median income (with five times being “severely unaffordable”), the potential newcomers stay away and the valuable workers move away.
Businesses suffer. Families suffer. The city suffers. Homeowner debt piles up to ridiculous heights. The Bank of Canada has the jitters.”
- from ‘Fiscal reality continues to elude Vancouver real estate market’, Peter Ladner, Business In Vancouver, 12 Feb 2013

Everything Peter Ladner says here is true.
A large part of the answer to Vancouver’s dilemma is for housing prices to return to about 5 times local incomes, and that will not occur via a real increase in incomes. It’ll resolve with a 50%-plus drop in RE prices, precisely the kind of outcome to the speculative mania that we are anticipating.
- vreaa

“Canadians shouldn’t count on home prices to be their main source of wealth gains. Real wealth is built through innovation, and hard work. Not through some magical asset inflation.”

“The correction underway in Canadian house prices is likely to persist for another two years, warns Bank of Canada Governor Mark Carney.
“We’ve seen the adjustment in the housing market. We think there’s a bit more to come over the next couple of years,” Mr. Carney told CTV’s Question Period in an interview broadcast Sunday.
Mr. Carney said rapidly rising prices experienced in Canada over the past decade are “certainly not normal” and Canadians shouldn’t count on home prices to be their main source of wealth gains.
“Real wealth is built through innovation, and it’s gained through hard work,” Mr. Carney explained in an interview taped before this weekend’s G20 finance ministers and central bankers meeting in Moscow. “It’s not through some magical asset inflation.” …
Ottawa has tightened mortgage rules several times since 2008 to cool the market. But interest rates still remain at rock-bottom levels, as do borrowing costs.
Mr. Carney said the pace of debt accumulation has slowed to about 3 per cent a year from 10 per cent.”
- from ‘More adjustment to come in home prices: Carney’, G&M, 17 Feb 2013

Update – Westside Old Favourite Sells For Same Price As In Feb 2011

Here’s an update on a Westside SFH we’ve featured here before:

4411 W 11th; 4,696 sqft SFH; 63×121 lot (7,623 sqft; 0.175 acres)
(Old Timer; Backs onto alleyway behind 10th Avenue stores.)
Listed 9 Oct 2010 $2,980,000
Price change 6 Dec 2010 $2,890,000
Sold 15 Feb 2011 $2,830,000

Listed August 2012 with $3,180,000 ask price
Remained on market for rest of 2012, unsold

Relisted 24 Jan 2013 with $2,998,00 ask price
Sold 24 Jan 2013 $2,850,000

Anybody care to calculate carrying and transaction costs over the last 2 years?
We can’t verify this, but we are told that nobody has lived there over this period.
Will this property now be utilized as a residence, knocked down for a new build, or is it being purchased to sell again later at a hoped-for higher price?
- vreaa

—
This house was first featured at VREAA 6 Dec 2010 when we noted that, at an “Ask Price of $2,890,000″, “10% downpayment ($289K); 4% rate; 25yr amortization” would result in “Monthly mortgage payments: $13,681.79″
In a later post, 5 Jan 2010, we cited it as the kind of house that would sell for less than $1M in the coming trough.
This house was also featured representing our fair city in ‘Unashamed House Porn: Seattle Vs Vancouver’, VREAA, 11 Aug 2011.

CRTC Chairman Likens Cell-Phone Company Profiteering To Banks Promoting Excessive Mortgage Debt – “It reminds me a lot of when the banks are trying to get people to over-pay for housing, above what their salaries determine.”

“Mr. Jean-Pierre Blais [Chairman of the Canadian Radio-television and Telecommunications Commission] also questioned whether Telus was fully apprising consumers of their eligibility for a discounted rate: “Do you push that? It is fine to say it is on the website. Are you actually encouraging people to keep their devices? … Why do I get the feeling that that’s not what you want customers to do, to actually go out and maybe invest and keep the device? It reminds me a lot of when the car salesman wanted everybody to be on long-term leasing or banks right now that are trying to get people to over pay for housing above what their salaries should be – and therefore all kinds of regulators have to come in to control that market so that people don’t buy above their means.”
- image and text from ‘CRTC grills Telus on pricing’, The Globe and Mail, 12 Feb 2013 [hat-tip CM]

Housing and related concepts have become go-to metaphors; yet more clear evidence of the speculative mania. Also noteworthy in that it appears to have become common knowledge that shady stuff goes on in mortgage financing and that borrowers are overextended.
Not quite completely an example of a ‘pop culture’ reference, but filed under our ‘RE References In Popular Culture‘ category nonetheless.
- vreaa

Globe & Mail BC Promotion Labels Vancouver Condos ‘Unaffordable’

“This offer card from Globe & Mail for BC subscribers, was in our mailbox last week. Love that the generic Vancouver condo photo has the word ‘unaffordable’ on it. Obviously not so much advertising revenue from that sector for G&M lately Fun times!”
- JM, by e-mail to vreaa, 5 Feb 2013 [Thanks JM. -vreaa]

Financial Times – “The lack of buyers is sobering evidence that Canada’s housing boom, which began in 2000 and bounced back to life after the financial crisis of 2008-09, is now over.”

“The lack of buyers is sobering evidence that Canada’s housing boom, which began in 2000 and bounced back to life after the financial crisis of 2008-09, is now over.
Nervousness about the outlook for house prices, and the effect on the economy if they slump, is casting a pall over the last few months in office of Mark Carney, the Bank of Canada governor who will take over at the Bank of England on July 1.
Mr Carney, who will appear to face questions before the British parliament for the first time on Thursday, was courted by UK Prime Minister David Cameron’s government partly on the strength of Canada’s relatively strong performance compared with other large economies. Just as he is leaving, the shine is coming off that record.
Worries about Canada’s house prices and rising consumer debt prompted Moody’s, the rating agency, to cut the credit ratings of six of the largest Canadian banks last month.
…
Mr Carney deserves neither all the credit for Canada’s successes nor all the blame for its failures. The economy has been driven by forces beyond his control, particularly events in the US, and he has shared economic management with ministers and government agencies. The biggest changes in the housing market last year were the government’s moves to cut back the availability of mortgage insurance provided by the Canada Mortgage and Housing Corporation, a state-owned company.
Nevertheless, it was the decisions by the Bank of Canada under Mr Carney’s leadership to cut interest rates during the crisis and hold them down subsequently that enabled a surge in household debt and house prices. While American consumers were running down their debts, Canadians were adding to theirs, so that by the end of last year household debt was 165 per cent of income, in the same territory as the peak in the US at the start of the crisis.
House prices, meanwhile, rose 23 per cent in the three years to April 2012.”
- from ‘Canada housing cloud cast over Carney’, Financial Times, 6 Feb 2013

Yes, Canada’s housing boom is over.
The Financial Times makes the same observations about Mark Carney’s tenure that we discussed here (VREAA 26 Nov 2012) when his move to the Bank of England was first announced.
- vreaa

“They say the market will likely be down all year, so it looks like I will have to keep it at least till the end of the year.”

“Shortly before the market peaked I decided to sell my lower mainland home which I had owned for about 10 years. The time of the sale turned out to be good for me, for which I attribute about 90 % of the timing to pure situation luck. I am now looking to rent as I take a wait and see what will happen stance.
I stopped by and looked at a newer condo (< 6 months old) for rent in the SE False creek area tonight and had an interesting conversation with the landlord. She was a younger lady that appeared to be about 30 years old. The condo was in a messy state after the last renter left in what looks like a hurry, with clothes and personal items scattered about the place. She was busy trying to clean it up.
One of the first questions she asked me with a frustrated look was “how soon are you able to move in?” Subtext – She really didn’t sound like she was able to afford to have the place sit for even part of a month.
Her next question was “how long are you looking to stay?” To which I asked “why are you looking to sell it later?” She responded “no, not now. They say the market will likely be down all year, so I it looks like I will have to keep it at least till the end of the year.” Subtext – Could she have bought this condo looking to flip it and make a profit? Now things have changed and is she stuck being an unwilling landlord until the market improves?
Of course this is all purely speculation on my part, but she definitely didn’t look thrilled with the prospect of having to be a landlord until prices picked up and she could sell the place.”
- What goes up… at VREAA 4 Feb 2013 7:26pm

Imagine how sellers-in-the-wings, waiting to relist when the market ‘strengthens’, will react when it becomes apparent to them that the downturn will be substantial, and deep. Falling prices will beget falling prices. This is one of the many reasons we can’t see the decline being all over at 25%-off.
- vreaa

Rick Mercer On Housing – ‘Flaherty’s Mixtures’ – “My hand sort of looks like a house” ; “When your property market isn’t erratic enough.”

Subtitle: ’6 Months Ago’
He: I’m starting to think that buying this house was a very shrewd move.
She: I know.. look how much house prices are up
He: Well, believe me, I know the housing market and..(reads newspaper) whoooa!..(coughing fit)
She: I’ll go and get Flaherty’s Mixture!
Announcer: Flaherty’s Mixture is an acrid blend of Higher Down Payments and Shorter Mortgage Terms that cools off a feverish housing market
He: (drinks mixture) oh my gawd!
She: Tastes like a hockey bag.. but it works!

Subtitle: ’6 Months Later’
She: Housing prices are down..
He: Down a little?
She: Seventeen percent!
He: (coughing fit; pounds chest)
She: I’ll get Flaherty’s Other Mixture!
Announcer: Flaherty’s Other Mixture is a blend of No Money Down and 40 Year Terms that caused the market to overheat in the first place.
He: (drinks other mixture) Hmmm.. tastes like crantinis.. let’s buy ten more houses!
She: They should put warning labels on these things..
He: My hand sort of looks like a house… (drinks again)
She: You shouldn’t mix Flaherty’s Mixtures!
He: Solarium is a funny word!
(both drink)
Announcer: Flaherty’s Mixture and Flaherty’s Other Mixture. When your property market isn’t erratic enough.

- from Rick Mercer Report, 29 Jan 2013
—

Transcribed here for the record.
Many a true word… Spot on regarding the effects of Flaherty’s changes.
Also, noteworthy for making light of the seriousness of the beginning of the downturn; implying just another wrinkle in the ‘erratic’ market.
- vreaa

For other ‘RE References In Popular Culture’, see here.

“Almost one-half of Home Buyers Plan participants paid less than the full required repayment amount in tax year 2011.”

“Almost 1.8 million Canadians participate in the Home Buyers Plan (HBP), according to the latest available numbers from CRA but here’s the interesting part…
We’ve long operated under the assumption (based on past StatsCan research and CRA data) that 25-35% of people don’t make the annual repayments required by the plan. It turns out those numbers are a bit shy.
CRA told us last Wednesday that almost one-half of HBP participants (47%) “paid less than the full required repayment amount in tax year 2011.” (2011 is the latest data available.
That means almost 1 in 2 HBP users paid income tax on the RRSP money they borrowed and didn’t repay on time. (The amount of any repayment shortfall is considered taxable income, and tax is assessed on this amount at the individual filer’s marginal tax rate.)
That’s not to mention the tax-deferred investment gains they’re forgoing by not leaving the down payment funds in their RRSP. This lost growth directly impacts their income in retirement.
Such is the price that many young buyers are paying to own a home sooner. Is it worth it?”
- Rob McLister at Canadian Mortgage Trends, 5 Feb 2013

“Our unhealthy obsession with home ownership is never more clearly seen than it is in a well-used federal government program called the Home Buyers’ Plan.
The HBP allows first-time homebuyers to withdraw up to $25,000 from a registered retirement savings plan to help cover a down payment. Somehow, we’ve decided that houses come before retirement savings. That’s a mistake and it needs to be corrected by winding down the HBP.
Prepare for hysteria if this is ever seriously discussed by the federal government. “There’d be a deafening outcry from the real estate industry, mortgage industry, first-time buyers, and many politicians,” Robert McLister, editor of the Canadian Mortgage Trends blog and a mortgage planner, told me in an e-mail. “First-timers have already taken the brunt of recent rule changes, so canning the HBP would be viewed as war against young homeowners.”
This is true, and here’s why. The idea that everyone should own a house is a foundational and uncontested financial principle here in this country. The massive rise in house prices since the mid-1980s has convinced almost everyone that there’s not only a social and economic benefit in promoting home ownership, but also a financial one for owners.
If you’re buying in some cities at current prices, that latter point is debatable. …
Through the HBP, the federal government is telling us that buying a house is important enough to scoop down-payment money out of your retirement savings. Why is Ottawa handing out bad financial advice?”
- Rob Carrick at The Globe and Mail, 4 Feb 2013
—

The spec mania in RE has been fuelled by those who have overextended themselves, using any means available, to buy properties at preposterous price levels, in the certain belief that prices can only ascend further.
There is now evidence from numerous quarters of debt limits being reached.
- vreaa

—
Postscript:

From the comment section at the G&M:

“Wrong on this one RC.
- best decision ever for us, able to purchase our first house several years earlier
- have steadily paid back the HBP so the money is not out of service forever
- house steadily appreciated faster than our RRSP by several hundred thousand $”
- Big Dan 5 Feb 2013 6:03am

Yeah, looks great on the way up, don’t it? – ed.

Moody’s Downgrades Canadian Banks – “High levels of consumer indebtedness and elevated housing prices leave banks more vulnerable”

“Moody’s Investors Service has downgraded the long-term credit ratings of six Canadian banks, including Toronto-Dominion, Bank of Nova Scotia, Bank of Montreal and CIBC. National Bank and Desjardins were also downgraded. The ratings agency lowered each of its ratings one notch, citing high levels of consumer debt and high home prices as threats to the Canadian economy.
“High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces,” David Beattie, vice-president at Moody’s said in a note.
Canadian consumer debt has risen to a record-high 165 per cent of disposable income in the third quarter of 2012, up from 137 per cent in mid-2007. Bank of Canada governor Mark Carney has repeatedly warned about these levels, but they remain stubbornly high.”
- from ‘Moody’s downgrades 6 Canadian banks’, CBC, 28 Jan 2013 [hat-tip Bally]

You Bought It, Congratulations – “They spent Sunday going to open houses in and around their Kits hood in Van, then fell in love with a place listed just under a million.”

“Jason and Maria are young thirtysomethings who, like most, lust for a house. Four weeks ago they did something they instantly regretted, which this time had nothing to do with blue berries or udder cream.

Per usual, they spent Sunday going to open houses in and around their Kits hood in Van, then fell in love with a place listed just under a million. Of course they couldn’t really afford it, but that never stopped coursing hormones. By the next night they’d contacted the listing agent, drafted an offer and submitted it. The deposit was $15,000 – part of a downpayment they figured would be $50,000 – and they handed over a cheque when the realtor asked for one. Make it certified, he suggested, since it shows you’re serious. They did.

A day later they’d done some heavy budgeting, gone to the bank to visit their loans officer and, most seriously, emailed me [Garth Turner]. “Maria really, really wants this house,” Jason explained, “but after thinking about this and doing the numbers, we’re a little scared. Do you think we should just walk away and, like you say on the blog [greaterfool.ca], wait a year?”

Of course you should walk, silly hormonal, self-destructive, irrational people, I said, letting my feminine side show through. Just tell the agent to stop payment on the deposit cheque before it’s cashed and before the vendors have a chance to sign back.

Unknown to me, the sellers immediately accepted the deal, and the deposit cheque had been certified. So when Jason called the agent – less than 24 hours after signing the offer, thinking that he could back out during a “cooling off’ period – as is the case in BC and other provinces with condos (usually seven days to exit) – he was shocked. “You bought it,” he was told. “Congratulations.”

And they did. Closing’s in seven weeks. They’re freaking.”

- as told by Garth Turner, at greaterfool.ca, 27 Jan 2013

‘Saskatoon Housing Bubble’ Reviews Vancouver RE Fundamentals – “Boom Bubble and Bust”

Kevin at saskatoonhousing bubble has posted the first of a two part review of the Vancouver RE market:
‘The Vancouver Real Estate Market: Booms Bubbles and Busts’ (saskatoonhousingbubble, 25 Jan 2013).
Take a look at the entire article at the site.
Here we repost two of the charts:

Thanks for the analysis and the post, Kevin.
Vancouver RE is at about twice the price it should be, based on fundamentals such as rental yield and incomes. – vreaa

“I was told that it costs the developer an average of $1,000 a month to keep each completed unsold unit in the development. Ouch!”

“A few anecdotes from today’s trip to Surrey:
-prices on brand new townhouses are (and I quote the sales personnel) “not set in stone. Not anymore” Also “there’s room to move there” as well as “the days of pre-sales are gone”. Offers are welcome – low ball offers are expected.
-I was told that it costs the developer an average of $1,000 a month to keep each completed unsold unit in the development. Ouch! So private sellers can supposedly just hold off and take their places off the market “for now” – developers… not so much.
-majority of units that I saw today are now priced ~5% below the original prices that were announced last fall. Plus, like I said “there’s room to move”
- vanpire at VCI January 19th, 2013 at 7:22 pm

Spot The Speculator #96 – “In 2008, when I was 28 years old, I had saved $70,000, enough for a 20% down payment on a triplex in Toronto. I moved into one unit and the rent from the other two units paid for the mortgage and utilities.”

“I’ve always been very focused in my life. I was born a triplet and knew from an early age my parents wouldn’t be able to pay for many extras, or for postsecondary education for all of us. But I was determined to go to university and to buy a home of my own. So in high school I started working as a waitress for 20 hours a week. During the summers I took as many shifts as possible, often working seven days straight. I was a workaholic and should have cut back because my grades were suffering, but I persevered.”

“I earned enough to pay for tuition by living at home with my parents and commuting to York University. It wasn’t easy. I didn’t have a car so I used buses to make the two-hour journey to York and back each day. At one point I considered buying a car but was shocked when my dad showed me how expensive it was. I kept commuting every day for four years. Believe me, it was really depressing. I would get home every night and it was cold and dark, and I was tired. But I knew I was saving for my big goal of owning an investment property, which kept me going.”

“After graduating with an English degree in 2006, I had no student debt and $20,000 in savings from my waitressing job. Then I got a lucky break-I landed a job as an administrative assistant, paying $32,000 a year in downtown Toronto. In 2008, when I was 28 years old, I had saved $70,000, enough for a 20% down payment on a triplex in Little Italy. I moved into one unit and the rent from the other two units paid for the mortgage and utilities. Last year, I got married and my husband moved into the apartment with me. I’ve never doubted the triplex was one of the best financial decisions I’ve ever made.”

“The key for me was tracking my spending in a journal to see exactly where every penny was going so I knew where I could cut back and add to my savings. Most years I saved 70% of my earned income, which I used to pay for university and for the down payment on the triplex. By living at home a little longer than most people I was able to really beef up my down payment. That’s made me truly independent a lot more quickly than many of my friends who are still mired in debt.”

“Now my goal is to pay off the mortgage on the property as quickly as possible. I’ve done some renos over the years and I’m putting $500 a month extra on my mortgage to pay it off faster. The triplex’s value has also gone up. I bought it for $350,000 and it’s worth $450,000 today.”

- Angie Oliveira, 32, Toronto, as featured in ‘How to become a landlord’, Julie Cazzin, MoneySense 16 Jan 2013 [hat-tip proteus, who sent this link by e-mail and added "Saving 20k waitressing is a heroic accomplishment."]
—

Angie has an admirably proactive savings habit. Because of this ability, she will quite likely do fine in the long run, but we suspect this will end up occurring despite her RE investment, not because of it.
Yes, she is describing a ‘cash-flow positive’ property (something unavailable in our city in 2008), but we’d like to see more of the math before being sure about that. Also, there is downside risk of increased mortgage rates, downward pressure on rents (TO condo glut), and unexpected expenses.
She bought a few years prior to the peak of a multigenerational bubble in real estate. If property prices drop 33% from the peak, she’ll likely still be able to maintain her ownership, but she will, on paper, have lost her profits and her downpayment. This is something we’d imagine would be particularly painful for her, given the hard work it has taken for her to accumulate her savings gains.
In that regard, it is interesting to note that it took her many years of extreme saving to accumulate $70K, but her RE purchase then rose in value by $100K from 2008 to 2012. In fact, she ‘made’ more on paper in RE than she did in entire income those 4 years, when taxation is taken into account. This is a good example of how RE price rises through the speculative mania have perverted the way in which people consider the relative value of real estate, money, work and saving; and how homes have become financial instruments as much as places of shelter.
- vreaa

G&M Likens Housing To Income Trusts – “The blowback if housing falls hard will be worse because homes are widely believed to be a special kind of asset that benefits the entire population.”

“If the slowdown in the housing market worsens, Mr. Flaherty will be blamed as he was after effectively killing income trusts in a surprise announcement made on Halloween night in 2006. The Minister, and his government, will be accused of being bad economic managers if the housing sector falters. But what people will really be saying is: “How dare you, Mr. Flaherty?”
People are funny about financial assets that soar in value, be they income trusts or houses. They see them as being special in some way, a phenomenon of nature that should be left untouched so as to allow folks to make some serious money.
But assets that soar in value are the ones we need to worry about most. Everything in finance is cyclical, which means there are ups and downs. The more an asset rises in price, the more vulnerable it is to a nasty pullback that causes damage both to individuals and the economy.
Mr. Flaherty moved to cool the overheated housing market last summer by capping the maximum amortization period at 25 years for people with down payments of less than 20 per cent. The impact of this move so far has been negative, but not alarmingly so. House sales were off 17.4 per cent in December on a year-over-year basis, but prices were up 1.6 per cent, on average.
…
Mr. Flaherty snuffed out trusts by announcing the government would start taxing them in 2011. In response, most trusts converted into dividend-paying corporations that pay far less cash than they used to. The complaining from investors about the demise of trusts was long and loud, although it never seemed to hurt the Conservatives in an election.
The blowback if housing falls hard will be worse because homes are widely believed to be a special kind of asset that benefits the entire population. It’s an easy impression to come away with after watching the rules shift over the years for home-buying down payments.
Decades ago, buyers had to put down a minimum 10 per cent and amortize over 25 years at most. The minimum down payment briefly fell to zero a few years ago and now it’s 5 per cent. Amortization periods expanded to as much as 40 years for a time, before being reeled back.
…
Housing’s stature has been further inflated by its cultural and economic importance. Multiple TV channels celebrate housing, and a fair chunk of the retail industry is directly home related (think of HomeSense, Home Depot, Home Outfitters, Home Hardware, Sears Home and the like). Also, housing-related spending accounts for close to 20 per cent of economic output. What’s good for housing is thought to be good for all of us.
Mostly, though, housing is thought to be special because of its value as an investment over the past couple of decades. As mentioned in a recent column (online at tgam.ca/Dlfb), housing prices nationally have risen about 5.6 per cent annually since 1980.
After five years of up and down stock markets, Canadians have become very possessive about their gains in housing. If housing prices plunge, they’ll be looking for someone to blame. That would be Mr. Flaherty, even if he was just doing his job.”
…
- from ‘First income trusts, now housing? Careful, Mr. Flaherty’, Rob Carrick, The Globe and Mail, 16 Jan 2013.
—

We like the way that this article emphasizes the ‘special’ place that housing has achieved through the 10 year national housing bubble. Nowhere more special than in our own Vancouver, of course.
A few thoughts:
1. Flaherty’s mortgage rule changes in 2012 were simply a slight tightening of restrictions that he himself had allowed to become far too loose in prior years.
2. When Flaherty announced the income trust rule changes in 2006, he exempted one class of income trust – those in real estate!
3. In trying to quantify the difference between the effects of changing the tax laws of income trusts, and tightening mortgage rules, it would be good to know how many Canadian’s had how much of their net-worth in income trusts in 2006. (Can any readers direct us to such data?) My hunch is that, even though that move was significant (and caused a massive brouhaha), it doesn’t come anywhere close to the magnitude of significance of mortgage tightening. Over 70% of Canadians own their homes; a large percentage have the majority of their net-worth in their homes; a significant percentage have their net-worth highly leveraged to the market value of their homes. In addition there are innumerable knock-on economic effects of a falling housing market.
The unwinding of the RE spec mania will completely eclipse memories of the 2006 income trust tax changes.
- vreaa

“I have homes in Canada and the US. I have a paper loss in Florida but still have a home.”

“I have homes in Canada and the US. Here in Florida there was a massive “correction” which led to total bankruptcy of a lot of people, huge losses by banks and a huge mess. I am not too sympathetic with people who borrow over their heads but Canada is far better off as it is than here. Fortunately both my houses were bought with cash I actually worked for and saved so I have a paper loss in Florida but still have a home. Others are not so lucky.”
- Skitty commenting at G&M, January 12, 2013 10:45 AM

This individual is not leveraged, and it seems they will be able to sit tight through any price fluctuation, if they wish.
But we know there are Canadians who have used HELOCs against their Canadian properties to buy US RE, and we wonder how many will be pushed to the brink by the very large price drops we anticipate in Canadian RE.
- vreaa

House Price And Family Income Growth

- chart care of Kevin at saskatoonhousingbubble, 15 Jan 2013. [Thank you Kevin.]

A nation-wide bubble in home prices, driven by cheap financing and local speculators.
- vreaa

“I personally know of a friend who was offered the moon from the bank to buy a home in October. This month the same bank is reconsidering the mortgage. Nothing has changed for my friend’s finances.”

“Sadly, I’ve been hearing lots of stories of financing falling through. Banks have done a 360 degree turnaround. They are still lending, but on their terms. Not so attractive terms. I personally know of a friend who was offered the moon from the bank to buy a home in October. This month the same bank is reconsidering the mortgage. Nothing has changed for my friend’s finances.”
- enlightened at VREAA 16 Dec 2013 3:36am

‘The Economist’ “Home Truth” – “Overvaluation is especially marked in Canada.”

“Overvaluation is especially marked in Canada, particularly with respect to rents (78%) but also in relation to income (34%). Mark Carney, the country’s central-bank governor, who is soon to jump ship to join the Bank of England, where he takes over from Sir Mervyn King in July, may have shown good market timing with his move to London as well as a deft hand in negotiating his lavish remuneration. …
At some point, central banks will have to take away the balm of easy money. If housing markets remain so fragile when they are getting so much help, they may break when it is removed.”
- from ‘Home truths’, The Economist, 12 Jan 2013

And Vancouver rent and income ratios are far more extreme than the national averages.
- vreaa

‘The Economist’ has steadily been warning of a Canadian RE bubble for some time:
‘The Economist’ – Rental Income Shows Canadian Home Prices Are 71% Overvalued, 25 Nov 2011

“I walked into bank to settle the mortgage. I wasn’t sure what I needed to do. The thing is, neither did they! The fellow I dealt with had opened hundreds of mortgages, but he hadn’t actually closed one. It took a couple of phone calls and the help of his supervisor to figure it out. But they had all the forms ready for a line of credit.”

“Our good friend Lynn from Vancouver flew to Montreal to visit family at Christmas. My wife and I dropped in to catch up. A little about Lynn: She’s just under fifty, and is a single mom with a 20-something son who has just moved out on his own. She has worked for the BC government for 15 plus years in a relatively low level job and will be finishing up a Psych degree in April. Full time job and 3 classes in the evening over several years- she’s no slouch.
Lynn has owned her modest condo in Surrey for 16 years. She casually mentioned that she had just finished paying off the mortgage, though the twinkle in her eyes betrayed her pride. After high fives all round, she told us about her visit to the bank after her last payment. “Well they wouldn’t let me pay the last $28 with my regular payment unless I payed an early repayment penalty! So, the next month after the $28 payment went through, I walked into bank to settle the mortgage. I wasn’t sure what I needed to do. The thing is, neither did they! The fellow I dealt with had opened hundreds of mortgages, but he hadn’t actually closed one.
It took a couple of phone calls and the help of his supervisor to figure it out.
But they had all the forms ready for a line of credit.”
- Berniebee at VREAA 30 Dec 2012 12:11pm

Behavioural Finance Textbook Describes Crashes – “As a bubble starts to unwind, there can be under-reaction when investors do not update their beliefs sufficiently, with cognitive dissonance, attempting to rationalize flawed decisions, and initially ignoring or unwilling to accept losses. In crashes, investors hold on to losers and postpone regret. This response initially causes an under-reaction to bad news, but a later capitulation and acceleration of price decline.”

The following from ‘a reader’, via e-mail to vreaa 29 Dec 2012, who writes: “The following is from a CFA level 3 Behavioral Finance textbook that a friend of mine found at a garage sale. Not too many people have access to the book so it might be of some interest. Nothing really too new, but it’s the only time I’ve seen bubbles and crashes written about in a textbook, they are not discussed in university level textbooks as far as I have seen. Provides a lot of insight into the biases that come into play with bubbles and the summary discusses how the crash unfolds. I sounds to me like we are at the early stages of such a crash.”
—

Bubbles and Crashes
Stock market bubbles and crashes present a challenge to the concept of market efficiency. Periods of significant overvaluation or undervaluation can persist for more than one year, rather than rapidly correcting to fair value. The efficient market hypothesis implies the absence of such bubbles. The frequent emergence of bubbles in history was documented in Extraordinary Popular Delusions and the Madness of Crowds (Mackay 1841). The book captures the concept of extremes of sentiment and apparent mass irrationality. Bubbles and crashes appear to be panics of buying and selling. A continuous rise in an asset price is fuelled by investors’ expectations of further increase; asset prices become decoupled from economic fundamentals.
A more objective modern definition specifies periods when a price index for an asset class trades more than two standard deviations outside its historic trend. Statistically, if returns are normally distributed, such periods should not represent more than 5 percent of total observations. However, for some stock markets and asset classes, these extremes of valuation account for more than 10 percent.

Bubbles and crashes are, respectively, periods of unusual positive or negative asset returns because of prices varying considerably from or reverting to their intrinsic value. Typically, during these periods, price changes are the main component of returns. Bubbles typically develop more slowly relative to crashes, which can be rapid. This asymmetry points to a difference in the behavioral factors involved. A crash would typically be a fall of 30 percent or more in asset prices in a period of several months. Some bubbles and crashes will reflect rapid changes in economic prospects that investors failed to anticipate. The global oil price shock of the 1970s and the Japanese asset price bubbles of the late 1980s, in which real estate and stock prices rose dramatically, would be examples. Initially in a bubble, some participants may view the trading and prices as a rational response – for example, to easy monetary conditions or a liquidity squeeze – but this view is typically followed by doubts about whether prices reflect fundamental values.
These bubbles have been observed in most decades and in a wide range of asset classes. Recent examples are the technology bubble of 1999-2000 and the residential property boom of 2005-2007, evident in a range of economies globally including the United States, the United Kingdom, and Australia. They appear to be periods of collective irrationality, but can be analyzed in more detail as representing some specific behavioral characteristics of individuals. Behavioral finance does not yet provide a full explanation for such market behavior, but a number of specific cognitive biases and emotional biases prevalent during such periods can be identified.
First, it should be noted that there can also be rational explanations for some bubbles. Rational investors may expect a future crash but not know its exact timing. For periods of time, there may not be effective arbitrage because of the cost of selling short, unwillingness of investors to bear extended losses, or simply unavailability of suitable instruments. These were considerations in the technology and real estate bubbles. Investment managers incentivized on, or accountable for, short-term performance may even rationalize their participation in the bubble in terms of commercial or career risk.
The extent to which investors may rationalize their behavior during bubbles is evident in Exhibit 12 [Investor Behavior in Bubbles]. Both managers appear to have misunderstood risks and exhibited the illusion of control bias. The manager of Fund A believed he could exit a bubble profitably by selling near the top. The manager of Fund B may not have recognized the potential scale of a bubble, or client perspectives on a period of relative underperformance while not participating in the bubble.
Consider the differing behavior of two managers of major hedge funds during the technology stock bubble of 1998-2000:
The manager of Hedge Fund A was asked why he did not get out of internet stocks earlier even though he knew by December 1999 that technology stocks were overvalued. “We thought it was the eighth inning, and it was the ninth. I did not think the NASDAQ composite would go down 33 percent in 15 days.” Faced with losses, and despite a previous strong 12-year record, he resigned as Hedge Fund A’s manager in April 2000.
The manager of Hedge Fund B refused to invest in technology stocks in 1998 and 1999 because he thought they were overvalued. After strong performance over 17 years, Hedge Fund B was dissolved in 2000 because its returns could not keep up with the returns generated by technology stocks.
In bubbles, investors often exhibit symptoms of overconfidence, overtrading, underestimation of risks, failure to diversify, and rejection of contradictory information. With overconfidence, investors are more active and trading volume increases, thus lowering their expected profits. For overconfident investors (active traders), studies have shown that returns are less than returns to either less active traders or the market while risk is higher (Barber and Odean 2000). At the market level, volatility also often increases in a market with overconfident traders.
The overconfidence and excessive trading that contribute to a bubble are linked to confirmation bias and self-attribution bias. In a rising market, sales of stocks from a portfolio will typically be profitable, even if winners are being sold too soon. Investors can have faulty learning models that bias their understanding of this profit to take personal credit for success. This behavior is also related to hindsight bias, in which individuals can reconstruct prior beliefs and deceive themselves that they are correct more often that they truly are. This bias creates the feeling of “I knew it all along.” Selling for a gain appears to validate a good decision in an original purchase and may confer a sense of pride in locking in the profit. This generates overconfidence that can lead to poor decisions. Regret aversion can also encourage investors to participate in a bubble, believing they are “missing out” on profit opportunities as stocks continue to appreciate.
Overconfidence involves an illusion of knowledge. Investors would be better off not trading on all the available information, which includes noise or non-relevant information. Asset prices provide a mix of information, both facts and the mood of the crowd. But in a stock market bubble, noise trading increases and overall trading volumes are high. Noise trading is buying and selling activity conduceted in the absence of meaningful new information, and is often based on the flow of irrelevant information. A manager increasing trading activity in a rising stock market can misinterpret the profitability of activity, believing it is trading skill rather than market direction delivering profits.
The disposition effect recognizes that investors are more willing to sell winners, which can encourage excess trading. There can also be a confirmation bias to select news that supports an existing decision or investment. Indeed, search processes may focus almost exclusively on finding additional confirmatory information. Investors may be uncomfortable with contradictory information and reject it. Investors can also have a bias to buy stocks that attract their attention, and pay more attention to the market when it is rising. For short-term traders who may derive entertainment from the market, monitoring rising stock prices is more entertaining and instills more pride. Entertainment and pride are emotional effects.
As a bubble unwinds, there can be under-reaction that can be caused by anchoring when investors do not update their beliefs sufficiently. The early stages of unwinding a bubble can involve investors in cognitive dissonance, ignoring losses, and attempting to rationalize flawed decisions. As a bubble unwinds, investors may initially be unwilling to accept losses. In crashes, the disposition effect encourages investors to hold on to losers and postpone regret. This response can initially cause an under-reaction to bad news, but a later capitulation and acceleration of share price decline. This situation will only apply to stocks already held by investors, with hedge funds that can sell stock short being more inclined to react first to bad news in a downturn. In crashes, there may be belief that short sellers know more and have superior information or analysis.
—

Less Expensive Is Better – “So they’ll buy a less expensive home. Good. I consider that desirable.”

“It will mean that some people will not buy into the market. It will also mean that some people will buy less into the market… so they’ll buy a less expensive home, or less expensive condominium. … Good! I consider that desirable.”
- Jim Flaherty, Canadian Minister of Finance, April 2012 news conference regarding mortgage condition tightening, as recapped on Global TV News, 18 Dec 2012 [hat-tip Greenhorn for the archived video clip]

Not less of a home, note, but a less expensive home.
This is, indeed, desirable.
- vreaa

“I am probably one of the few on this and other blogs who sat thru a RE collapse first hand in Canada back in the early 80′s when I was a banker here in Calgary…”

“I am probably one of the few on this and other blogs who sat thru a RE collapse first hand here in Canada back in the early 80′s when I was a banker here in Calgary. I watched the second mortgage portfolio I managed for National Trust Company go down from 100MM, to about 65MM, in a little over 12 months due to foreclosures and property devaluation. This was at a time when CMHC financing needed 15% down, and we actually took such obscure concepts as credit worthiness, debt to income ratios and past payment history into account “before” we dished the money out. Also, most second mortgages were in the amount of $15-25K on average, as most houses were not much above $125-150K at the peak. If any you thought it was bad last time………..this time around will make history look like picnic.” …
“I was averaging 75 – 100 foreclosures / quit claims a month over 1983/84. And, I just ran the second mortgage and personal loans department. We also had a humongous first mortgage department with its own problems. Thing is, I distinctly remember foreclosing on a ton of realtors’ spec properties, and also their primary residences, as well as that about 75% of the places we eventually got back had been listed in vain (priced too high) for 12-18 months beforehand.”
- Carioca Canuck at VREAA 27 Dec 2012 5:58pm and 28 Dec 2012 8:28am

“I was there, too. Was working for a Trust Company that was scrambling to save its own sorry arse after having dished out too much credit. People were desperate to get loans but easy lending had dried up and rejections were the game of the day if you could not bring collateral. Hardly a day went by when I did not see someone sobbing at the loans officers desk. They brought in art work and antiques and junk they thought was valuable to persuade the manager. Nobody cared though. You know how much that stuff is really worth when only cold hard cash, bonds or securites will suffice? Not a spit. I was an assistant then and a mere observer but the image stuck. Never get in debt over your head because when the day of reckoning comes even your friendly banker will pull the plug on you and never give it a second thought. Most people do not realize that internal policy changes at financial institutions where lending is concerned are bureaucratic and very inflexible when the mood changes. It is just a machine that will not be swayed by sentiments and emotion. And all that crap that you thought was valuable is not worth ten cents on the dollar anymore. So I agree with Carioca. This next go-round is going to be quite an experience for the novices in the crowd.”
- Farmer at VREAA 27 Dec 2012 10:53pm

“I was a loans officer at a medium sized Credit Union in the 80s.
Heartbreaking. Homeowners were dropping off the keys, walking away.
We did not have the heart to foreclose, ended up as landlords of properties valued way below the mortgage.
After 3 years, the auditors forced us to write down the properties to market value, which almost bankrupted us.”
- Real Estate Tsunami at VREAA 28 Dec 2012 7:11pm

Thanks to Carioca Canuck, Farmer, and Real Estate Tsunami for the above anecdotes.
Interesting to see that three regular readers saw battle during the 80′s RE collapse. There is little substitute for first-hand experience when it comes to markets.
- vreaa

Mortgage Policy Decisions – “The pressures on the Minister of Finance are to do the wrong thing.”

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.”

Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.

- from ‘Ottawa’s $800-billion housing problem’, Tara Perkins and Grant Robertson, The Globe and Mail, 26 Dec 2012

CMHC allowed the mis-pricing of the risk of lending capital, and this contributed to the massive speculative mania in Vancouver RE. Note how this opinion is now becoming mainstream.
By the time prices have crashed (in a year or three?) we’ll have certain individuals saying both “We all knew it was a bubble” and “Who could have possibly foreseen this?”, sometimes in the very same paragraph. Just watch.
Further point: As usual when markets go through one of these massive manias, policy rethink always happens after the fact, when the horse has long since bolted and the market is already looking after the problem.
- vreaa

“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.”

Sarah O’Brien and her husband Darryl Silva were able to buy a home a few years ago because their 35-year mortgage kept payments low.

“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.”
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“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.”
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- above two anecdotes excerpted from ‘Ottawa’s $800-billion housing problem’, Tara Perkins and Grant Robertson, The Globe and Mail, 26 Dec 2012

Examples of two couples who bought houses, but shouldn’t have; and who, under normal circumstances (and, ironically, at lower prices), wouldn’t have.
- vreaa