Tag Archives: Banks

“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

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

“He said that he is currently managing about 337 foreclosed/court ordered sale properties in Mission and Maple Ridge.”

“Bought a court ordered sale in Mission…
Property manager for the Banks came by, wondered why we were in the house…
Bank had not told him it sold… two weeks ago.
He removed the lock key holder.. we talked a bit…
He said that he is currently managing about 337 foreclosed/court ordered sale properties in Mission and Maple Ridge right now… that’s right… I asked three times just to make sure he didn’t mean 37… 337 is what he said.
… said he was not able to provide a list of the properties as the banks had forbidden him to disclose the list as part of his contract…, that’s in Maple Ridge and Mission… alone…
Yikes…
That was Three Hundred and Thirty Seven property’s in just the two districts…
WOW…Don’t see that in the news… or the real estate/assessment tax vultures sales lists…”

Silver at VREAA 14 Mar 2013 10:08am

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

Fitch Ratings – Canadian RE 20% Overvalued; BC 26% Overvalued

“American-based agency Fitch says house prices are overvalued by approximately 20 per cent in real terms across Canada, with regional variations.
But in releasing its ratings on Monday, it said Alberta’s market is overvalued by 15 per cent.
“Because of the effects of inflation and price momentum, it is not expected that prices would drop by this amount,” said the Fitch report. “If growth halted and prices began to drop, it would be expected to take several years for home prices to revert to their sustainable values, depending on a number of factors such as government support and credit availability. With this time frame, the actual observed decline in prices could be as low as 10 per cent.”
It said rises in prices have continued with small corrections since 1996, and specifically since 2008 have risen when underlying fundamentals suggest that growth is unsupportable.
It said the Ontario market is overvalued by 21 per cent, Alberta by 15 per cent, British Columbia by 26 per cent and Quebec by 26 per cent.”

– from ‘Canadian housing prices overvalued by 20%: Fitch Ratings’, Calgary Herald, 4 Mar 2013 [hat-tip Nemesis]

Housing Makes Up 20% Of Canadian GDP – “This heavy reliance is not healthy. We basically borrowed our way out of this recession. Now, it’s payback time.”

“If the city is any indication of what’s going on in the country, it’s over-reliant on its housing sector.” – Herbert Crockett, a retired World Health Organization executive who lives in France says of Toronto.

“We basically borrowed our way out of this recession. Now, it’s payback time. We will be in for a period of long, slow growth.” – Benjamin Tal, deputy chief economist at the investment-banking unit of Canadian Imperial Bank of Commerce.

“It did seem a little unusual to have every policy maker in Ottawa hectoring Canadians about their excessive debt levels and yet the economic incentive for the average Canadian was completely slanted to taking on debt and not saving. The realist in me would admit it was the only tool the Bank of Canada had. The reality was, they really could not lift interest rates.” – Douglas Porter, chief economist at Bank of Montreal.

“As an economist working for a Canadian bank, I can’t go into a client meeting and have someone not ask me about housing in Canada. For U.S. investors, they are still a little gun-shy about what happened in the U.S., and I think they worry the same fate will happen to Canada.” – Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC, Royal Bank of Canada’s investment-banking unit, in New York.

Meantime, the share of GDP linked to housing, including construction and renovation, soared to more than 20 percent. A similar U.S. measure peaked at 18 percent in 2005. Canada’s share of construction jobs in total employment was 7.3 percent in January, above the 4.3 percent in the U.S.
“This heavy reliance is not healthy,” CIBC’s Tal says. “I expect to see some softening.”

- excerpts from ‘Canada Losing Debt Halo as Bull Market Housing Peaks With Carney’, Bloomberg, 26 Feb 2013 [hat-tip Nemesis]

As we have been saying here for years.
What percentage of Vancouver’s GDP is linked to housing?
– 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

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

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]

Erroneous Theories For Falling Prices #7 – Talk Of Bubbles Caused The Crash

“Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.” …
“…some media sources are now painting a dire prognosis for Canadian housing. It brings to mind the 2012 paper, “What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets,” written by Mr. Shiller and co-authors, Karl E. Case and Anne Thompson.
The paper looks at press coverage leading up to the U.S. housing collapse and documents the increasing frequency of articles depicting U.S. housing as a bubble. June of 2005 was particularly busy, with cover stories in the Economist, Barron’s, and Time Magazine.
Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006. A similar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are reasons to suspect that the price changes … are related to public swings in opinions rather than fundamentals.”
Could Canada similarly be talking itself into a housing crash (possibly followed by a financial crisis and years of stagnation)?”
– from ‘Is Canada talking itself into a housing crisis?’, Larry MacDonald, Globe and Mail, 22 Jan 2013

Actually, the fundamentals point to a speculative mania and the increasing talk of bubbles is very appropriate. Sometimes a bubble is a bubble.
Besides, a large, broad, healthy RE market would never crash based on unfounded chatter.
For someone to suggest, in 2013, that the US housing collapse was the result of baseless sentiment change is ridiculous, and to use a US parallel to attempt to argue for Canadian housing strength is more ridiculous still.
No surprise, however, to see pleas to ‘Stay Calm and Carry On’.
When all is said and done, some will blame media hysteria for the RE market collapse.
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

“Built into this situation is the eventual and inevitable fall. … Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”
– John Kenneth Galbraith, in ‘A Short History of Financial Euphoria’

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

#5 – Tightening Of Mortgage Rules Caused The Crash
“The real key thing for the [weakening of the] ownership markets was the reduction in the maximum amortization from 30 years to 25 years.”
Cameron Muir, chief economist at the BCREA, ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012

#6 – Toronto Bankers Caused The Crash
“According to several people, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed.”
‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012

#7 – Talk Of Bubbles Caused The Crash
“Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.”
‘Is Canada talking itself into a housing crisis?’, Larry MacDonald, Globe and Mail, 22 Jan 2013

“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

“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

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

flaherty

“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

“The bank called us and offered us a $300K HELOC on the $315K leaky condo without us even asking for it.”

“Our personal experience in 2008 really shook my confidence in how mortgage and HELOC approvals are handled by banks.
We used to own a 1Bedroom 1 Bath 780 Sqft “Penthouse” in East Vancouver, one block to Commercial Drive.
It was a good location, we renovated it from the inside, great so far… However the building had major issues from the outside and needed a complete rainscreening job. The Strata members fought each other for a long time and renovations were postponed while the damage got worse. Our share when it finally got done $78K.
We had no mortgage on it at the time and were able to get a loan from CMHC for the repairs which we took because it was interest free. Anyways, we sold the place for 315K after the renovation was done and made a good profit as I had bought it very cheap, back in 2001 when everybody was afraid of leaky condos and there were no buyers for this even though the location was great and the unit was nice from the inside.
Here is the part that shows the recklessness of lending though: After we were approved for the CMHC funds one of the major 5 banks who we were banking with at the time called us and offered us a HELOC on the place without us even asking for it.
I asked them how much could they give us and the answer was that based on the location, size and age they can give us up to 300K if we wanted to.”

Mike at VREAA 23 Dec 2012 2:14pm

“I was approved for about 420k in the spring I only made a little more than 50k last year. I looked at a few condos in Vancouver and decided to keep renting.”

“I was approved for about 420k in the spring I only made a little more than 50k last year. I looked at a few condos in Vancouver and decided to keep renting.
I sold my house on Vancouver island for about 40% over assessment also about 20k more than I thought it was worth. I don’t know if a human came to appraise it.
My experience of the past year from looking at condos to selling a home and getting pre-approved I see so many holes in our system.”

Funky Monkey at VREAA 23 Dec 2012 9:27am

G&M On Emili – “Everyone is getting nervous now. There is more and more potential of a downturn in the marketplace.”

“Where banks once sent human appraisers to assess a home’s value and determine whether to provide a mortgage for it, the banking industry – encouraged by the federal government’s own Canadian Mortgage and Housing Corporation (CMHC) – had largely converted to a faster and cheaper system of automated underwriting, using computerized models to determine how much money to safely lend. The models weren’t perfect, but they were close enough. And what did it matter? House prices always seemed to be going up in Canada anyway.”

CMHC’s automated underwriting program – called Emili – had been stamping its approval on millions of mortgages as safe. But in Emili-approved cases where the banks were forced to foreclose, the homes turned out to be worth much less than believed.
As the housing market in Canada begins to cool and the federal government talks of a soft landing for home prices, rather than a hard crash, attention is turning to the factors that fed record borrowing and contributed to overheated sales and price increases – and the risks that now lie within the financial system. Rock-bottom interest rates propelled Canadian real estate to undreamt-of heights, and Ottawa’s decision to loosen mortgage rules added to the froth, as marginal buyers flooded into the market.
That much is amply documented. But an investigation by The Globe and Mail has uncovered a hidden risk in Canada’s housing markets: The rise of automated lending approvals, which has created a rapid-fire system that has financial regulators worried about the foundations that underpin Canada’s housing market. There are worries that the true worth of Canadians’ homes could be lower than what computerized methods spit out. There are also worries that unscrupulous human appraisers can manipulate home values.
Those distortions matter less in a strong economy and a rising market, in which price appreciation covers up any errors. But the days of steady gains in real estate are gone: Almost all major metropolitan markets have plateaued, and in some, such as Vancouver, housing prices are falling at a worrying pace.
“Everyone is getting nervous now,” says Phil West, a veteran of the appraisal industry who is critical of Emili. “There is more and more potential of a downturn in the marketplace.”


An on-site visit to a suburban Vancouver home with Mr. Sieb illustrates the concern. As he begins walking through the house, the appraiser grows skeptical about the information the bank has been given about this home.
The listing says this house – a bungalow listed for $479,000 – was built in 1980 and is newly renovated. He notes some fresh carpet and a recently installed light switch, but the kitchen and other rooms show troubling signs of age. “This isn’t a renovation,” he says flatly. “You wouldn’t call it that unless you were stretching what you see for the purpose of getting the value up.”
Mr. Sieb checks the dates stamped on the plumbing. “This place was built in the 70s,” he says, shaking his head.
This, he explains, is the sort of thing that the computers miss.
Last month, Mr. Sieb appraised a home that turned out to be several hundred feet smaller than what the paperwork on the house claimed.
“In my career,” says Mr. Sieb, who has been appraising for 30 years and now runs Inter-City Appraisals of Coquitlam, B.C., “maybe five times have I had the exact same measurements as the realtor.”


– from ‘Shaky foundations: How Ottawa’s computers get Canadian home prices wrong’, Grant Robertson and Tara Perkins, Globe & Mail, 22 Dec 2012[hat-tip Ralph Cramdown]

An article that is worth the entire read.
We particularly like the way the description of the current state of the market is not sugar-coated, the thorough discussion of the clearly fudge-able Emili system, and, in particular, the observation that these kinds of rethinks of aspects of market ‘regulation’ are only questioned when a market begins to fail. As the authors say: “Those distortions matter less in a strong economy and a rising market, in which price appreciation covers up any errors.”
– vreaa


UPDATE: Further regarding the Emili discussion:
“Over portfolios with hundreds of thousands of properties, there will always be overvaluation and undervaluation, and the overwhelming majority of those cases fall within safe parameters. What the public needs to know is the tail risk of auto-valued applications, versus appraiser-evaluated apps. Unfortunately, we don’t have enough data to gauge that yet.
Inevitably, people will read the Globe’s story and think that CMHC is using some back-of-the-napkin formula to judge property risk. That’s so far from the truth. Emili is not some 100-line computer program written by a college intern. It is multi-million dollar mission critical technology benefiting from the best available data and over two decades of R&D.
CMHC knows the risk of it botching property valuations en masse. It has the public, press and regulators breathing down its neck around the clock. It knows the risks in automated valuations better than virtually anyone in the country because it’s processed millions of mortgage files since 1996. And it tirelessly optimizes its systems to statistically factor in and adjust for those risks. To imply that CMHC cannot account for “recent movements in home prices” is simply laughable.”

– from ‘emili Criticisms Resurface’, Rob McLister, canadianmortgagetrends.com, 22 Dec 2012
[hat-tip Ralph Cramdown, added at the suggestion of jesse/YVR]

Okay, fair point. One has to do a careful analysis of the entire risk across the whole CMHC portfolio, agreed; it’s not enough to point to a few anecdotes of errors in valuation assessment and conclude that the entire system is at high risk. The anecdotes could be representative example of a systemic bias towards overvaluation, but they could also simply be outliers.
At the same time, when Rob McLister expresses high confidence in CMHCs risk modelling, refers to the “multi-million dollar mission critical technology”, and states that this criticism of CMHC is “laughable”, we are not immediately reassured. After all, he is
the same guy who called the idea of 40% price drops “farcical”. Any market observer who lacks the imagination to see the possibility of such an outcome is at risk of being blinkered in their analysis.
When we hear market participants calling the idea of certain outcomes “laughable” and “farcical”, we’d strongly suggest one give serious thought to the possibility of those outcomes coming to pass. Why? Because their high confidence reflects the strong probability that a very substantial percentage of market participants are not prepared for that outcome, and that is the very mechanism by which such outcomes come to pass! This is closely related to the analysis of sentiment, and is Contrarianism 101.
When market participants are 100% convinced that stock ‘x’ can only go up, where does it go?
At 125, the thought of Nortel trading at 50 was “farcical”, and “multi-million dollar mission critical technology” showed that such a drop was impossible.
– vreaa

The Myth Of The Cool-Headed Discretionary Seller – “I think that’s one of the reasons why the Canadian housing market is likely not going to have a hard landing because you’re not going to have a lot of motivated sellers – people aren’t going to be forced into it by rising interest rates or declining employment so they can take their time and wait for the market to stabilize.”

sellers
Seller’s aren’t competing with buyers, they’re competing with other sellers.

Vancouver sales dropped 27.6 per cent in November compared with November 2011, after tighter lending rules came into force this summer. The average price is down 6.3 per cent for the same period to $682,215, while the MLS home price index is down 1.7 per cent from a year ago. The average price reflects the mix of sales, while the HPI reflects price changes for typical homes.
BMO deputy chief economist Doug Porter called Vancouver a “rather obvious exception” to the soft landing that most Canadian cities would see for their real estate markets. “I don’t know that I’d call it a hard landing in Vancouver, but it’s definitely a bumpier landing than most cities in Canada are going through right now,” Porter said. Meanwhile, it appears people thinking of selling their homes are holding off, especially in Metro Vancouver, which saw the largest drop in the country for new listings. New supply reached its lowest level in more than two years, CREA said.
“That may help avert a harder landing for prices because sellers do have the leeway to back off,” Porter said. “Fundamentally, I think that’s one of the reasons why the Canadian housing market is likely not going to have a hard landing because you’re not going to have a lot of motivated sellers – people aren’t going to be forced into it by rising interest rates or declining employment so they can take their time and wait for the market to stabilize.”
– from ‘Bumpier’ landing seen for Vancouver real estate’, Vancouver Sun, 18 Dec 2012 [hat-tip Edmund Garland]

There have been many stories that served to stimulate Vancouver’s RE mania. The most prevalent latter day myth appears to be that of the discretionary seller. We are all invited by many commentators (bankers, realtors, commenters on the blogs), to imagine the cool-headed seller deciding that, no, this is not the right time to sell, and backing off, biding their time, waiting serenely for the next leg-up in the market; in calm and comfort, perhaps next to a fire with a good book; no hurry, no urgency whatsoever.
I believe that this construct is complete hogwash.
I’d submit that, in the vast majority of cases, once an owner has made the decision to sell, they start the mental preparation for unloading that property. They move into a position where they disinvest themselves of the idea of ownership, and a clock starts ticking.. they have a building desire to convert that asset into cash, to ‘get out’ of the market. In a market where prices have barely budged, but sales are weak, they may be able to convince themselves that a more robust time for sales is just around the corner, so they may take their property off the market. But make no mistake, they remain very much in the ‘sell’ mode, they have their finger on the trigger, and they are waiting to unload. There is no intense urgency at that point; more a mode of expectation, of anticipation of coming action. Imagine now how that group of wannabe sellers responds when prices take their first substantial step down. Suddenly comparables are selling for 10% or 15% lower, and for lower prices than offers they themselves rejected 6 months before. Do these sellers remain cool? Well, a few may, but, here’s the point, a majority will not. They will experience new-found urgency, and many will rush to market. And only a few of them have to do anxious deals for prices to suddenly find themselves 20% to 25%-off the peak. And then more owners holding shadow inventory will respond, and so on. This is how speculative manias unwind.
The other side of all of this is, naturally, the buyers. There will always be some buyers, of course, at each step of the descent, but not enough to rescue the market; not enough to plateau it or take it to new highs. We won’t see a rerun of 2009 (although some of the early buyers will be “buying the dip”, in anticipation of a 2009-type rebound). Buyers will dry up because prices are falling. Yes, but won’t falling prices increase demand? asks the economist. Yes, falling prices increase demand, when those prices are falling from reasonable levels to cheaper levels such that the asset for sale looks like a good deal based on its fundamental value. But, when assets are at stratospheric prices, when people have been overextending themselves to buy at prices that are 2 to 3 times those supported by fundamentals, when people have been buying only because they anticipate future price strength, the dynamics are very different. People stop buying because their premise for buying (“prices will rise”) goes away.
Thus a powerful self-reinforcing system of price increase turns into reverse, and prices collapse. Falling prices beget falling prices. If that seems circular, that’s because it is. A ‘virtuous’ cycle turns ‘vicious’, and by this mechanism price drops that few have anticipated come to pass. Perhaps 2013 will be the first sharp leg down.
– vreaa

‘Soft Landing’ Call Spotted

land ahoy
“Sure looks like you could just step out there, don’t it?”

“The Canadian housing market appears to have achieved “a soft landing” so far with sales cooler but still fairly steady along with prices, Scotiabank says.”
– from ‘Housing market appears to have achieved soft landing: Scotiabank report’, Canadian Press, 11 Dec 2012 [hat-tip Terminalcitygirl]

Will be added to the ‘premature bottom calls’ sidebar collection. -ed.

BOC Warns Of Circumstances That Their Very Own Policies Have Encouraged – “The most important risk to financial stability is the elevated level of household indebtedness and stretched valuations in the housing market.”

“High household debt and a heated housing market remain the biggest domestic threats to Canada’s financial system, the Bank of Canada said on Thursday, despite tighter mortgage rules introduced by the government in July.
“The most important domestic risk to financial stability in Canada continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market,” the central bank said in its semi-annual Financial System Review.
Canada’s financial system remains robust but the overall risks to the stability of the banking sector remained high, unchanged from June, it said. …
Housing prices and construction in Canada roared higher in 2011 amid low interest rates, sparking fears of a U.S.-style bubble. The market started to slow after the government tightened rules on mortgage lending in July, the fourth time it had acted to curb borrowing since 2008.
The Bank of Canada’s two-year freeze on interest rates is also seen as a reason for the credit binge and the bank has said it could, as a last resort, use monetary policy to address the problem.”

– from ‘Bank of Canada says housing market risk still high’, Reuters, 6 Dec 2012

“Chief among those domestic concerns is record-high household debt, the inevitable result of rock-bottom interest rates that, nevertheless, have acted as a buffer against even more worrisome threats from outside Canada.”
– from ‘Bank of Canada warns own low rate policy poses risk to economy’, Financial Post, 6 Dec 2012

The Bank is warning us of a problem, while simultaneously confessing that its own ongoing policies have caused and are perpetuating this problem.
– vreaa

Mark Carney Named New Bank of England Governor

“Mark Carney named new Bank of England governor”Guardian, 26 Nov 2012, 16.28 GMT [Hat-tip Aldous Huxtable and proteus]

Interesting, but not something that should affect the predicament of the Vancouver RE market.*
Carney is clearly very smart and very competent, so congratulations to him for the promotion, and we and most other Canadians would wish him well with the new job.
At the same time, the appointment is likely the result of larger, arguably ironic, forces: Canada’s accounts have appeared stronger because our debt spending (and closely related housing bubble) has not yet reached its inevitable crisis point. This delay is not Carney’s doing directly, there are too many forces at play to believe that, but he has been part of it. Canada and Carney haven’t by any means actually solved the problem, and have yet to deal with the unwinding. Household debt is at nosebleed levels, and there are clear speculative manias in housing in all major centres. The delay in reconciliation has given the false appearance of strength in Canadian fiscal governance. The UK has quite simply chosen a new BOE governor who looks strong because he’s from a place where the debt bubble hasn’t yet burst.
– vreaa

* - There is a possibility that this will effect sentiment. The BOC will obviously now rush to assure us it has firm hands on the tiller. It also may, interestingly enough, end up as another erroneous ’cause’ for the coming housing collapse, as in “Mark Carney leaving caused the housing market to crash”.

[vreaa comment on Guardian discussion thread 26 Nov 2012 5:16pm]

Premature Bottom Call – “Vancouver’s housing sector may have hit its bottom with an improvement in home sales seen in October”

“Vancouver, British Columbia’s housing sector may have hit its bottom with an improvement in home sales seen in October”
Marc Pinsonneault, National Bank, Wall Street Journal, 21 Nov 2012

Added to our ‘Premature Calls Of Bottom’ sidebar collection. A steady stream should follow, over the next few years. – vreaa

[Thanks to Ben Rabidoux for pointing out this gem.
Ben is a national RE analyst whose posts at his blog 'The Economic Analyst' have been invaluable reading for those interested in Canada’s RE market. He is more recently working with M Hanson Advisors, ‘a market research firm catering to professional, institutional investors’. Ben tells me he is putting on a seminar regarding the state of the Vancouver RE market, next Wednesday, 28 November 2012, here in Vancouver. Details at http://www.realestate2013.ca%5D

Nine Out Of Ten Analysts Agree: House Prices To Drop, But Not By Too Much

“Canadian housing prices will fall 10% over the next several years and homebuilding will slow sharply in 2013, but the country’s recent property boom is not expected to end in a U.S.-style collapse, according to a Reuters poll.
The survey of 20 forecasters published on Friday showed the majority believe the Canadian government has done enough to rein in runaway prices, preventing the type of crash that has devastated the U.S. market for years.
“This isn’t a sharp correction, this isn’t a U.S.-style correction, it’s just simply an unwinding of the excess valuation that was created by artificially low interest rates for a long period of time,” said Craig Alexander, chief economist at Toronto-Dominion Bank.
“I would emphasize that while a 10% correction sounds scary, in actual fact, this would be a healthy outcome.”


“Vancouver prices were forecast to fall 2.7% in 2012 and 3.8% in 2013, with an eventual decline of 12.5%.”
– from ‘Canada home prices seen falling, but not crashing’, Andrea Hopkins, Reuters via Financial Post, 9 Nov 2012

“Canada’s house prices are expected to drop and stay down for a decade, says a new report from Scotiabank that also warns of an “adverse shock” to the economy when the decline comes.
The bank’s latest housing outlook predicts a 10-per-cent price decline across Canada in the next two to three years, driven by larger declines in the Toronto and Vancouver markets, “where supply risks and affordability pressures have the potential to trigger larger price adjustments.”
The report notes that previous housing market downturns — in the 1970s and 1990s — took eight or nine years to bounce back to price levels seen before the decline.
“Historically, long cycles of rising home prices have been followed by extended periods of persistent softness, allowing affordability to be gradually restored and generating renewed pent-up demand,” the report stated.
The bank also warned that “balance sheets heavily skewed to real estate leave Canadians vulnerable to an adverse shock, including a sharp rise in unemployment and/or a sharp drop in home prices.”

– from ‘Canada House Prices To Drop, Stay Down For A Decade, Causing Unemployment, Scotia Says’, Daniel Tencer, The Huffington Post Canada, 8 Nov 2012.

Analysts in the industry are largely commentators, rather than instruments with any convincing positive predictive capacity. Their predictions are noteworthy to the extent that up until very recently there was a broadly held belief that housing prices would not fall at all. So, for the media to be announcing even the idea of coming drops is significant. But, from a quantitive perspective, their consensus about price drops being relatively benign reflects characteristic hope over substance.
Based on the size and all-consuming pervasiveness of the speculative mania, and on price levels determined by fundamentals such as rental incomes, we foresee larger than 10% drops for the nation and far, far larger drops for Vancouver (50%-66% real, peak to trough). Aren’t we already at about 10%-12%-off for most RE sub-types in Vancouver?
And another point: it took 25 years for real prices from the 1980-81 peak to be regained in Vancouver, not 10.
– vreaa

PostCardsFromTheBlastRadius #16 – “Where Dreams Are Real!… and TheHype is ‘Realtor’™”

He’s Baaaack! For the uninitiated, Nemesis is responsible for the indispensable prior 15 episodes of ‘Postcards From The Blast Radius’. And, here it is… Number Sixteen!
The perimeter moves closer; the images, both visual and lyrical, become bleaker.
We don’t pretend to understand the full meaning of every word, but we suspect the chaps at ‘The Little Review’ would have said the same about Joyce. Once in a while, it’s good to give your brain a workout. Keeps you agile.
Thanks to Nem; and, to readers: good fortune.  Be sure to click on the panoramas for large images. – vreaa

—–

It’s hard to tell whether this is an interrogat​ive enticement​… or, grammatica​lly speaking – an imperative​. Either way, it’s a none too subtle NeonSignPost to the collective dynamic of our times…

Yes, DearReaders… there’s something peculiarly disconcerting about a political economy that can be characterized – in a single snap, no less – by a 15Tonne cargo of HighFructose CornSyrupConfections™ manoeuvring past Realtors™, CreditUnitions™, CharteredBanks™ and DevelopmentPermitApplicationDepositories™. …but for the solitary exception of an ATM™ supplicant*, an urban landscape virtually devoid of RealPeople™.

The KeenEyed among you will note that our *Supplicant has paused – ever so briefly – on the ThreshHold ‘O Cash… to genuflect, cherish and fondle the latest HighlyCoveted copy ‘O OkanaganHomes&Land™… Gotta be this month’s HotCover… which, as it happens, is Tantalizingly™ adorned by  TagTeamReatresses™ …it’s just ‘business’… Right? PageHits. Eyeballs. ClickThroughs. Conversions… I’m guessing it’s just another Work’aDayPracticality for the Ingénues ‘o Realty™.

Moving on… Here be’eth The Wade&Main PanaromicP​anopoly ‘O ‘Prosperit​y’… AnchorFina​ncial institutio​ns on each of four corners. Egads!, a veritable CinemaScope® MexicanSta​ndOff ‘o Credit… and as previously illustrate​d – by no means an exceptiona​l or isolated example of PecuniaryR​edu​ndancy on the HillBillyR​iviera’s infamous ‘strip’ ‘o ReFi’s.

[NoteToEd: Albeit, not otherwise here depicted..​. and but "mere steps" away... there be not 1... there be not 1&1/2... but 2! Yes!!! 2CashStore​s! 'Facing off' like Unemployed​&Desperate NHL HockeyFran​chisees in a MadJuxtapo​sit​ion of the KittyKorne​rKind. Rather like StarBucks on RobsonStra​sse used to be... before the BenightedB​ubbleTea 'invasion'​.​]

Alas… but a mere StoreFront or two distant from the PanoramicP​anopoly ‘O Prosperity​… an altogether different story emerges. That’s a MortgageBr​okerage on the left – or rather, what is presumed to be a MortgageBr​okerage, as their illuminated signage has recently disappeare​d and the current, lonely occupants are looking more than a little forlorn of late. I wonder, is their Signage next door – awaiting redemption…

Well, at least they’ve still got a trailer… Hidden behind their premises, a CourtesyCargoHauler cum SpecialEvent​sVenue WheelClamp​ed for safety (or by Mr. “Quick n’ Easy”?) in a far flung corner of the adjoining, spooky, Develop​ersGraveYa​rd…

[**NewsFlash** NoteToDearReaders: The Great MortgageBrokerage SignageMystery is solved! - and very much a case of, "from the Sublime to the Ridiculous"... or should that be from the Ridiculous to the SubPrimeLender™... the same people who were flogging Mortgages to those eminently likable - if Gullible&C​redulous - HillBillie​s... have since reinvented themselves as a DominionLe​ndingCentr​e™! With a FancyNewBl​ueAwning! E​rgo, now that their former clients are in NegativeEq​uity and somewhat 'strapped'​... it's a simple matter of, "Heck, Bubba... sure we kin sport you a FewExtraTo​onies. Just sign right here."]

Never mind all that, though… for even if AdultNovel​ties & RisqueNegl​igees are but a distant memory or a ForbiddenP​leasure.. and assuming – Shock&Horror! – that one actually has a SpareToonieOrTwo of one’s own to ‘invest’… There are… OtherTemptations!
 
How about… A Scratch n’ Win GIC!… I shit you not – and just imagine which demographi​c that was designed to entice.

Yep​, exclusivel​y for you, Granny – from the VeryNicePe​ople @ Prospera.

[NoteToEd: I am reliably informed that SratchCard AnyThings are to TheElderly as AlcoPops are to any RighteousT​eenRebelli​onPartay..​.]

Scratch&Wi​n GIC not pan out?… Well, “DurnIt”..​. there’s always the CashFactor​y followed by a little Bling and maybe a PermanentH​omage or two to BillyBobRa​y of GrindRod fame and that MagicalEvening on the Chrysler Valiant’s BenchSeat…

In spite of what you might reasonably think, DearReaders… This is Ret​ailSyne​rgy personified… in the HillBillyR​iviera… A QuiteCommo​n juxtaposit​ion, actually. Really.

[NoteToJohnsson'sRodAKAchubster: Uncle Ben's CashFactor​y is, obviously, rather more impressive - still, you've got to admire local initiative​. Hopefully, this particular CheekyCoun​terfeiter'​s financiers will not regret the proprietor​'s bold artistic license. As for your Rod, Johnsson... I neglected to add... yes, there is actually a place called GrindRod in the HillBillyR​iviera. It's quite charming and just North 'o Enderby. Cue: LillyTomlin as child going: "SoThere, SFX: PROLONGED RASPBERRY']

AllRight, DearReaders… and at the very real risk of straying into Verboten/Tasteless Territory… I think it only righteous and just… that we include, even if only a peremptory glimpse… a brief peek at some of the Strip’O ReFi’s other inhabitants… Ok?

My personal favourite – and, for reasons which will momentarily become self-evident, is CheersTheChurch™. No, your FearlessForeignCorrespondent has not attended a service. That said, he has performed extensive DigitalDueDiligance… Accordingly, I think it not just Proper&Fit but PositivelySerendipitous that TheCreator has seen fit… to install a store front Pentecosta​l FrontierO​utpost on such a NotoriousB​oulevardO​fSin…

[No​teToEd: Come on... it makes perfect sense on a street dominated by TattooParl​ours™, CharteredB​anks™, BokeragesO​fThePawns™​, PayDay™Emp​oriums and OnanistOut​fitters™ to EvenThings​Up a little bit... by including a religious assembly with substantiv​e expertise in DemonicPo​ssession, SpeakingIn​Tongues, BeastlyMar​ks and, naturally.​.. the inimitable CrefloDoll​ar's 'Prosperit​yGospel'™. Wouldn't you agree?... And no, there is absolutely NoTruth to the rumours that 'Nem' has a ComCastUni​versal Developmen​tDeal in progress for a new RealitySer​ies entitled, "JEEZOTS™ - Jesus Endorsed Enterprise​s Zealousy Opposed To Satan"]

Well, irreveranc​e aside…. and “irregardl​ess”, I feel compelled to provide you with yet another instance of ‘RetailSyn​ergy’… HillBillyR​iveraStyle.

Which, as you can clearly see… is indeed, Alive&Well​!

Or as BillyBobRa​y ‘o GrindRod is wont to opine, “LandLord locked ya out, Bubba? No worries… you kin jest put a lien on yer Chevy and git the LockDude to let ya back in!….”

Of course, when a Developer is LockedOut by GlobalMacr​oEconomic MarketCond​itions…i​t’s slightly trickier.

Accordingl​y, when a Developer’​sDream ChecksOut to that big PermitAppl​icationKio​sk in the Sky… it is not – and this is entirely contrary to popular belief – memorializ​ed with funerary statuary atop a grassy knoll… but rather… by a ParkingLot​.

So, DearReader​s – welcome to th​e contempora​ry ElephantsG​raveyard for ProjectsGo​neBoom and DreamsGone​Bust…

Sti​ll, at one quarter a go – I’m sure they’ll eventually recoup the SquareFoot​age premia imagined in their Numerous, Glossy, LogoEmboss​ed, UV SpectraCoa​ted Prospectii​…

Emphasi​s on eventually​. As measured in Geological​Time.

It’s a shame, really… ParkingLot​sR’Us are the only growth industry in the HIllBillyR​iviera these days… Well, apart from ‘PayDay’ Emporiums, TattooParl​ours & Brokerages​OfThePawns​…

Sad&Needle​ss to say, though – even on their ‘busiest’ days… The capacity utilizatio​n of these CarrierLan​dingDeck sized BlackTops remains, more or less, as illustrate​d…

Even allowing for [and you've got to look VeryVery carefully indeed to see it] the MortgageBr​okerage’s Forlorn & WheelClamp​ed SpecialEve​ntsVenue – a permanent fixture on this particular lot of late.

Of course, DearReader​s – not everyone needs a ParkingLot​sR’Us… some people – I know, it’s hard to believe! – actually depend upon TransitusP​ublicus…​

Pity them as they disembark.​.. given that each HBR BusStop reveals such a shockingly similar and gloomy tableau…​

But never mind all that!… Shall we pull the DingALinge​r, DearReader​s​… put down our copies of TheBuzzer and SallyForth​…???

OhM​y!… oh my oh my oh my… Do you hear that!? Shade’s ‘O Disney AudioAnimatronica circa ’62

It’s… It’s… WindowTalk™. Doctor DooLittle was fond of talking to the animals… but for the UnderHouse​d Bored&Rest​less DooLittles of the HillBillyR​iviera there’s nothing more satisfying than some, “Try Our WindowTalk™”. Well, to be completely truthful… it’s a Window that talks to you.

Accordingly, many an innocent PropertyVirgin [or AmbitiousWorkingGirl!] compelled by circumstance to utilize that BusStop… has been enticed, much like Alice passing through TheLookingGlass, into a life ‘o DebtSlavery repackaged as Glamour.

What a bleak ‘present’ we have wrought for ourselves.​.. Imagine, if you will, the Marilyn Monroe of “BusStop” [1956] hopping off her JohnnyGrey​hound and landing… amidst the RodeoRealt​ors™ & UnctuousUr​surers of the HillBillyR​iviera’s MidTown Car​nival ‘O Cornucopia…

…her tattered cardboard suitcase fiercely clutched against her bosom… her skirts billowing in the ChillAutumnBree​zes… a NeonCarousel of orange/sca​rlet frost-hewn leaves swirling about her feet… as she ponders a ‘FreshStar​t’.

Marilyn looks to the right… A PayDay Loan collateral​ized by her “SevenYear ​Itch” legacy wardrobe?..​.

She glances to the left… A NewCareer™ KickStarte​d by Cleavage???!!​!.​..

Yes!!!! Rea​lTress it is, then!…

No more diners and HonkyTonks for our Marilyn! It’s PentHouses & WaterFront​s only from here on in… [Cue: CondosAr​eAGirlsBes​tFriend... SMASHCUT: CandleInTh​eWind]

[No​teToEd: And Marilyn thought she was on to the BigTimes..​. alas, she's just another PrettyGirl in a Window now... albeit, slightly less provocativ​ely displayed than is normativel​y the case in Amsterda​m. Same business, though. Whatever they tell you.Bus​Stop...]

No PropertyBordellos for Elaine TheArtist, though!… &Bravo!, Elaine. Bravo! [NoSarc Intended/I​mplied]

For​get about JadedMaril​yn’s BusStop.. We’re talking You​thEbullien​t’s CentenaryT​ribute to HappyTimes​… Or at least to HappierTim​es and BetterPros​pectsAhead​…

The WorthyDrea​ms of Efferevesc​entAdolesc​ent CivicPride​…

Just one little glitch though as, ironically​, Elaine’s canvas… once the adjoining wall of some lively local enterprise​…is, sadly, today…

…just another vacant lot… years on the market… years. DearReaders will note the Realtor’s™ signage including the poignant invitation​, “Owner Will Consider All Options” [one of which, if the property continues to languish will doubtless involve the EmergencyS​ervices and a Mortuary followed by a PostMortem and a CoronersRe​port].​..

[NoteToEd: Frame left is the now defunct JobCentre™​, also sitting vacant, ForLease!, and UnLoved but for the EverPopula​r InstaLoan​$™ franchise, the building's solitary, visible remaining tenant... Woe is us.]

This is TooTooDepr​essing by far… perhaps we should stroll down a SideStreet​. GottaBe something Lively there, eh!??? Eh???

RapidPawn & FairRealty​?… Hmmm… I propose RapidRealt​y & FairPawn..​. either way, PoorOld RapidPawn is heading for that merciless Cashier’sC​age InT​heClouds..​. In their own words …

“If you are unable to pick up this month and roll you can pick up next month. We are sorry for any inconvenience. [Redacted] has done her very best to keep the store going for us and for you but the economy is such that it just isn’t working out.

Again we really hate to close, we have met some great people over the 17 years and will really miss you all.”

Ok.. That’s enough. Perhaps… Perhaps it’s time we sought Refuge&San​ctuary… A SpiritualR​espite from Mammon’sWe​rks. ShallWeThe​n?!….

Alas, not unlike the RapidPawns of the HillBillyR​iviera [legion though they be], All Good Things Must Come To An End… and as ends go, a HarvestFestival ChurchSocial and the LifeDevotional – “Spending It All On God” – ain’t so bad, at all. [NoteToEd: A fascinatin​g moral 'ElevatorP​itch', wouldn't you agree?]

Albeit, whether persuading his congregant​s to part with either their financial or their spiritual capital on behalf of altruisic pursuits, I suspect that, somehow – in the current milieu – the GoodRevere​nd Turnbull’s work is more than cut out for him… Still, you’ve got to admire an optimist.

Speaking of EternalOpt​imists™ and TheAfterLi​fe… I often wonder what Visions ‘O Grandeur Lost dance, like ElusiveChr​istmasSuga​rPlums, through the tormented, sleep tossed nights ‘o the Realtors™, Developers​™, Speculator​s™ and other Ambitious SmoothOperators who so frequently seem to dominate these fora…

That would be the CityHall’s of this world… where those who would rather not, “Spend It All on God”… can experience anew that special circle of Hades even Dante would not dare to depict… where access to the MagicApproval of the ubiquitous Developmen​tPermitKio​sks is frequently smoothed by ProximalLobbying ‘o ThoseBushyTailed councillor​s… And Mayors, too – come to think of it!

Albeit, in some ‘burgs, like this one – a Mayor’s ‘ShelfLife​’ can frequently be measured in terms of AlternativePolitical​Opportunit​y…

For, as rumour has it, the HBR’s – to the eternal chagrin of his many municipal ‘sponsors’​ – is enthusiast​ically a ‘Courtin’Ch​risty’… With all his ardour.

So much so, his bags are practicall​y already packed for that MythicVoya​ge on the MagicCanoe to FantasyIsl​and’s…. Legislatur​eLost.

Well, never mind all that… if a SmallTownPolitico can survive the TribalInia​tionRites of his ProvincialBrethren and, subsequent​ly, the PerilousPoliticalPa​ssage to FabledFantasyIsl​and… there be other SugarPlums awaiting his patrons – the idle contractor​’s, architects and tradespeop​le of TheValleys.​.. PrisonsR’U​s, anyone?…

[NoteToEd: One things for sure, MendicantMayors of the HBR certainly won't have any trouble pawning their Chains 'o Office or organizing a PayDayLoan to smooth their transition to the BigTent... Heck, if they're really lucky, they might even qualify for a complimentary Christy'Too or Two!]

——-

[Images Ⓒ​2012 ‘Nemesis’ – All Rights Reserved]

Household Debt Growing Larger At A Slower Pace


He knows

“There are some signs that accumulation of household debt is slowing… So the pace is slowing, it’s still accumulating… and that some adjustment appears to be under way in the housing market. This requires continued vigilance by all parties and we intend to play our part in that.”
Bank of Canada Governor Mark Carney, 30 Oct 2012, in response to a question from a member of the House of Commons Standing Committee on Finance (Reuters)

Ever had that experience in a station where a train passing yours makes you feel like you’re going backwards, even though you aren’t?
Me neither, but I’ve heard it happens.
Household debt expansion and spending is still growing, but the slowing pace sure feels like it’s stopped all together, or even reversing, doesn’t it? And when household debt load actually stops expanding (or, the mind boggles, starts shrinking) our economy is going to feel like it’s running backwards at significant speed.
– vreaa

“73% of homeowners can’t afford their own homes”; “Mark Carney admits to ‘droning on in public about the dangers of household debt'”; “They offered me close to a million last year (25 years old) just because I’m in Fort McMurray.”

“Canadians will learn an ugly lesson if they keep piling on debt the way they are at the moment.
The Bank of Montreal report that came out Monday and noted that almost three-quarters of homeowners would feel a significant squeeze from even a small rise in interest rates shows just how close Canadians are to falling over the edge of their finances. What it means, in essence, is that 73% of the people surveyed can’t afford their own homes. And a lot of them are already feeling the pinch.”


“This is at a time when interest rates are at historic lows, which means they can only go up from here. That they will rise, eventually, is inevitable. Yet 16% of the people in the survey said they might not be able to make their payments if rates rose by even a tenth.
You don’t have to think hard to imagine what the fallout would be from an event like that. You can picture the headlines — “Canadians driven from their homes by rise in interest rates” – and the panic in Ottawa. The papers – well, some of them, anyway – would be full of stories about innocent families who insist they had no idea they were getting into such a mess when they took out the mortgage on their “dream home.”


“Mark Carney, the Bank of Canada governor, has wagged his finger at big borrowers so often he seems almost sheepish about it.
“Me droning on in public about the dangers of household debt is a way of reminding households that: don’t assume that current levels and the current situation will be there forever,” he said on one recent address.


“As the housing market cools and home prices slip, a lot of people could find themselves making monthly payments they can barely cover for a house that isn’t worth what they thought it was. If you can’t cover the mortgage, you just have to pray the roof doesn’t start leaking or the furnace fail.
And borrowers won’t really have anyone to blame but themselves. The warnings are out there. The examples are rife: all anyone has to do is examine the experience of U.S. homeowners over the past few years. The dangers aren’t a secret, they’re just being ignored.
But people keep borrowing, because it makes them feel good to spend, because they’re too busy to think about it, because they figure they can cover the payments in the short term and will deal with the future when it comes. And because they can always blame it on someone else when the roof caves in.”


– from ‘Hard-pressed homeowners just close their eyes and borrow some more’, Kelly McParland, National Post, 24 Oct 2012

And from the comment section below that article:

“When I was shopping for a house in 2010, the bank told me I could afford $850k. I am a compulsive budgeter, with detailed spreadsheets, played with various amortizations, and incorporated all of my expensive, housing-related and otherwise, and the amount I concluded that I could afford was $500k. That’s a huge difference.” – Jc

“They offered me close to a million last year (25 years old) just because I’m in Fort McMurray. Didn’t go anywhere near that mark.” – doodles

“I was also offered a $750K loan 10 years ago, and only borrowed $500K upon my own analysis (based on property costs < 30% of gross income). The Scotia loan officer told me that I was smart, and that she feared for others that were borrowing all they could get." – cash0

“We wanted to move a year ago and decided we could afford about $400K. Bank offered us $750K. We spent $362K fully expecting to pay higher interest rates eventually.” – chmilz

No surprises; Lenders have allowed borrowers to overextend.
Headlined for the record.
– vreaa

Mortgage Prisoners – “Something like that will never happen in Canada”

“How it happens
Here is a fictional but typical example:
A shop owner moved home in 2006, after being offered a mortgage without needing third-party corroboration of their income.
The interest tracked base rate at 1% over bank base rate for five years, after which the rate would revert to the lender’s standard variable rate (SVR).
The lender was happy to lend the money on an “interest-only” basis, where the repayment of the loan would come from future profits in the business, or from an inheritance, or from the sale of the property itself.
With the Bank rate at 5%, the interest stood at 6%, so the householder had to pay £2,000 a month.
In 2007, the Bank rate increased to 5.75%, so repayments increased by a further £250 a month.

Changed circumstances
It is now 2012, the High Street is suffering, and the shop owner’s current income is only £50,000. The property might be worth only £570,000.
From April 2008 until March 2009, his mortgage costs dropped from £2,000 pm to £500 a month as the Bank rate fell to a record low.
All appeared well until the end of the five-year Bank rate tracking product in November 2011.
Now, payments have gone from 1.5% (£500 a month) to the current SVR of 4.25% (£1,416 pm).
Traditionally over the last 25 years or so the answer to this issue of increasing costs would be have been to remortgage to another lender.
However in the current environment things are different, with lenders being much more conservative.
The shop owner would find it difficult to find a new loan on an interest-only basis.
The loan is now at 70% of the value of the home, so almost every lender would require him to take a repayment loan.”

- from ‘Mortgage prisoners’ are locked in to home loans, Simon Tyler, BBC, 25 Apr 2012

Hat-tip Erebus at VREAA 25 Oct 2012 for this link, and who added:
“My co-worker’s response to this: “Something like that will never happen in Canada” “.

Note that in the above example, problems have arisen even with property prices rising.
Yes, there are some differences between UK and Canadian mortgages, but the broad principles of those in debt coming under increasing pressure, as the virtuous cycle turns vicious, are the same.
– vreaa

Mark Carney Magic – Soft And Strong At The Same Time

“The Bank of Canada softened its stand on raising interest rates , a shift that reflects an economic outlook that has deteriorated markedly since the spring.
Canada’s central bank also left its benchmark interest rate at an ultra-low setting of 1 per cent for the 25th consecutive month, and left its economic outlook for the next few years largely unchanged.”

– from ‘Bank of Canada softens rate stand, flags debt concerns’, Kevin Carmichael, G&M, 23 Oct 2012

“The Bank of Canada strengthened its bias for raising interest rates, retaining its outlier status among the Group of Seven nations while signaling concern about record household debts it says will keep growing.
Policy makers led by Governor Mark Carney kept the benchmark rate at 1 percent, where it’s been more than two years, and said “some modest withdrawal of monetary policy stimulus will likely be required.”

– from ‘Carney Strengthens Bias to Raise Rates as Debt Risk Grows’, Greg Quinn, Bloomberg, 23 Oct 2012

The speculative mania in Vancouver RE will resolve itself regardless of whether rates stay low, or whether they strengthen slightly. Either way, there is too much debt, and the market is collapsing under its own weight.
Fortunately, our predictions are not dependent on trying to read the BOC’s intentions.
– vreaa

Erroneous Theories For Falling Prices #6 – Toronto Bankers Caused The Crash

“But what if on the way to try to address the housing crisis, Mayor Gregor Robertson and council overlooked a key consideration? Housing isn’t built in a vacuum. It invariably requires financing. And according to several people contacted by the Straight this month, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed to the Straight by phone.”

– from ‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012 [hat-tip 'allen' and 'Where's the HAM?']

The argument is a slight variant of blaming ‘the Conservatives’ and ‘the tightening of mortgage rules’, but it’s a variant nonetheless.
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

“Built into this situation is the eventual and inevitable fall. … Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”
– John Kenneth Galbraith, in ‘A Short History of Financial Euphoria’

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

#5 – Tightening Of Mortgage Rules Caused The Crash
“The real key thing for the [weakening of the] ownership markets was the reduction in the maximum amortization from 30 years to 25 years.”
Cameron Muir, chief economist at the BCREA, ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012

#6 – Toronto Bankers Caused The Crash
“According to several people, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed.”
‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012

Almost All Buyers Are Very Leveraged – “41% have less than 10% down-payment, a further 21% less than 20% DP. Only 39% put down more than 20%.”

“According to the latest data from Will Dunning, Chief Economist of CAAMP, less than 4 in 10 buyers have 20% down payments.
For those purchasing from 2010 through spring 2012:
41% had less than a 10% down-payment
21% had a 10-19.99% down-payment
Only 39% put down 20% or more.
(This survey included both first-time and repeat buyers. First-time buyers accounted for 56% of the dataset. Totals don’t add to 100% due to rounding.)”

– jesse (‘YVR Housing Analyst’) at VREAA 8 Oct 2012 10:55am, quoting from a Canadian Mortgage Trends article on the recent CAAMP released figures.

Headlined for the chronological record.
The vast majority of buyers are very leveraged to RE prices.
The Vancouver subgroup is likely worse, given our price levels.
This flies in the face of those who claim that Vancouver is supported by vast numbers of cash buyers.
And, as we all know, if an owner has less than 20% equity in a house, they lose it all when prices drop 20%.
– vreaa

Calm Before The Storm – “While some point out that Canadians delinquency and default rates are very low, this is often the case in a credit boom because the availability of cheap credit allows people to keep borrowing.”

“With Canadians so deep in debt, it would be extremely difficult for domestic spending to pick up slack in the economy if things started to go downhill. That could result in a serious downward spiral in employment levels, household spending and the quantity and quality of credit outstanding, the report says.
“There’s a legitimate fear that there may be a Wile E. Coyote moment here,” says Hopkins.
“Households are spending money they assumed would be coming, then they realize they’ve run over the cliff because income from exports from these trading partners is not materializing and that’s translating to weaker jobs.”
The situation Canada currently faces is unique, the authors say, because domestic consumption is usually the more steady contributor to economic growth compared to exports and investment. But this time, household debt is out of control.
“Right now it all depends on the household sector and the household sector is overstretched, especially compared to historical trends,” Hopkins says.”


“While some point out that Canadians delinquency and default rates are very low, the Moody’s analysts say this is often the case in a credit boom — the “calm before the storm” — because the availability of cheap credit allows people to keep borrowing and gives more flexibility in paying it back.
The problem is once a crisis hits, which most likely would be caused by external factors, it could be exacerbated because so many Canadians have little wiggle room to borrow and spend. Defaults and delinquencies could rise quickly and leave more households underwater, they say.”

– from ‘Canadians stretched to limit as Moody’s warns of sky-high debt loads’, G&M, 6 Sep 2012

When it turns, virtuous cycle turns vicious.
Not a wish, simply the way it will be.
– vreaa

“I’m a Realtor, an elected official. I had lunch with a banker yesterday. The changes in mortgage qualifications appear benign but will actually have big effects in Vancouver.”

“I’m a Realtor, an elected official, and had lunch with a banker yesterday.

The changes in qualification and to line of credit ratios appear benign but will actually have a big effect in debt driven consumer markets such as Vancouver lower mainland.

Equity mortgages are basically dead. You must have income to support the mortgage and show where the income is originating via your tax form. Offshore investors slapping down 50% no questions asked are finished unless they show their declared income … not something they like to do.

Downsizing boomers, we are now in the first wave, who planned on cashing in the home, putting some money aside for income and taking out a little mortgage for new townhouse or condo are in trouble. Their retirement income will not qualify for a mortgage. I had three listings cancel last month, when these changes were announced, by boomers planning to downsize.

Small business is screwed because they now have to show their tax declared income, not their claimed income as was the practice here in BC.

Small builders, likewise. They can no longer get debt financing to start a new project based upon the equity in an existing build. They have to show income.

The rest of Canada may not understand that in BC, credit unions were giving out $350,000 mortgages for a pulse during the peak in 2006. Zero down, intent to pay based upon a claimed income.

The drug money now must show income. A big whack down is no longer sufficient.

Now throw in LOC ratio down from 80% to 65% and the BC practice of using your house equity as an auto teller is suddenly stifled.

Subtle changes but big impacts over the next year. My banker friends, as opposed to independent mortgage brokers, say a 10-15% correction is immediately conceivable.

A working family is looking at reduced prices and access to debt if they have jobs and income. The rules are returning to historical regulation. No income, no access to debt.”

- L Rob, commenting on ‘Doors shutting on first-time buyers’, Globe and Mail, 6 Sep 2012 11:32am and 1:49pm [hat-tip jesse]

Screws are tightening, and the effects won’t be smooth and steady.
At certain thresholds, things that were happening gradually can suddenly happen quickly.
– vreaa

BC Consumer Non-Mortgage Debt At All Time High

“A new analysis suggests Canadian non-mortgage debt rose to its highest level in nearly a decade during the second quarter.
The latest report of Canadian debt trends by TransUnion found the average consumer’s non-mortgage debt load rose to $26,221 in the second quarter.
That’s up 0.74 per cent from the first quarter of 2012 and up 2.41 per cent from a year earlier.
The credit reporting firm said that’s the highest average debt per person it has seen since it began tracking the variable in 2004.
There were wide regional variances, with the average debt load in B.C. hitting $37,879 [up 2.9% YOY]. Quebeckers, on average, have the lowest debt loads in the country, at $18,580 per person, the company said.”

CBC 23 Aug 2012

Less cushion in a downturn.
– vreaa

Infographic: Vancouver Detached Home Price vs Government Intervention.

‘Infographic: Vancouver Detached Home Price vs Government Intervention’, care of Canadian Watchdog, 18 Aug 2012

Financial Institutions Underestimate The Downside – “Metro home prices will slip, not plunge”

“Canada’s hot housing market is beginning to cool off, Scotiabank said Wednesday in a new report, with average home prices expected to decline by about 10 per cent over the next two to three years.
Scotiabank economists warn that the housing price correction will largely occur in the Toronto and Vancouver markets.” …
“The Scotiabank report says that the balance sheets of Canadian households remain in good shape, with real-estate equity sitting at an average of 67 per cent. However, Canadians are still carrying high personal debt loads, and with their balance sheets so heavily skewed to real estate, they are vulnerable to a sharp price correction.”

‘Canada’s housing market cooling: Scotiabank’, CTVnews.ca, 8 Aug 2012

Metro Vancouver home prices may slip a bit over the next year, but don’t expect them to drop sharply, according to a report released Wednesday by Central 1 Credit Union. …
“Right now, we’re undeniably in a sales slowdown with substantial declines in sales over the past several months,” said report author and Central 1 economist Bryan Yu. “But we’ve also seen positive employment growth and continuing very low interest rates.
“We believe the supply side will adjust substantially. When prospective sellers see weak sales and pricing, they pull their listings. [Most] don’t have to sell. This balances out the supply side environment.”
Yu’s report maintains home prices in Metro Vancouver should drop more than five per cent this year before rising 2.9 per cent in 2013 and 2.0 per cent in 2014.
“A recent tumble in home sales coupled with a drop in headline prices have some wondering (hoping?), whether Canada’s longtime poster child for a potential housing price bubble is set to burst,” the report concluded. “While a weakening state of demand in Metro Vancouver makes short-term price drops a near certainty, we expect that declines will be both modest and temporary.
“Prospective sellers are expected to respond to weaker market conditions by curtailing listings activity, which will limit excessive inventory in the housing market. Short of another recession and large-scale job losses, market activity in the Lower Mainland is expected to be characterized by a relatively low sales and a flat-to-weak pricing environment.”

– from ‘Metro home prices will slip, not plunge: Central 1 Credit Union’, Vancouver Sun, 8 Aug 2012

As numerous savvy web-based analysts have already observed, these are the same guys who had previously reassured us that any falls at all were unlikely. Now that we’ve already had the falls they’re ‘anticipating’, they ‘predict’ they’ll happen. This is rear-view mirror commentary, and they’ll chase the market all the way down with their non-predictions.
– vreaa

Mark Carney – “Invest in productive capital, not in houses or condos”

“And there’s a variety of things that European authorities can do, that the IMF can do, others can do to contain it so that Canadian business and Canadians can get on with their lives and focus on how we’re going to grow our economy, which is largely going to be investing in productive capital, not in houses or condos, and in growing our economic relationships with the major emerging markets,” Mr. Carney, the Bank of Canada governor, said in an interview with CTV.
– from Globe and Mail, 9 Aug 2012

Excellent point; a reference to the dire misallocation of resources that occurs during speculative manias in housing.
At the same time, it’d be fair for many to retort:
“But, Mr Carney, thanks to your low interest rates, my money is not attractive to potentially productive business concerns; as a result I’ve been drawn into high risk speculative activity, such as buying over-priced RE, with leverage, for presumed future price increases.”
– vreaa

Ben Rabidoux Reviews the Status and Implications of the Vancouver RE Market

Ben Rabidoux, at his website The Economic Analyst, has recently reviewed the Vancouver RE market in an article entitled ‘Vancouver housing in full correction mode: Implications for Canadian banks’ [3 Aug 2012].
We earlier headlined a single paragraph from Ben’s article (comparing Vancouver and the US with regard to $1 Million homes), but we’d also emphasize that the entire article is worth the read. Check it out.
– vreaa

S&P Downgrade Outlook On Canadian Banks – “A prolonged run-up in housing prices and consumer indebtedness is contributing to growing imbalances, applying negative pressure on economic risk for banks.”

Ratings agency Standard & Poor’s has revised its outlook downwards on seven Canadian financial institutions, citing high housing prices and consumer debt.

“A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks,” the rating agency stated in its decision. “Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.”

House prices have roughly doubled over the past decade while, relative to GDP, consumer debt has risen from about 70 per cent to more than 90 per cent, S&P pointed out. And it suggested that Ottawa’s actions have not done enough to stem what could be a significant problem for the economy. “Successive government efforts since 2008 to counteract the stimulative effect of low interest rates on consumer borrowing and home prices have done less than we expected to counteract the growing level of consumer leverage and housing market risk in Canada,” S&P said. The agency is now watching to see if the most recent moves that the government has made will have better results.

– from ‘S&P cuts outlook on 7 Canadian banks’, G&M, 27 Jul 2012

Sherry Cooper, BMO – “There is already about a 15% to 20% correction in Vancouver, thanks to the overbuilding during the Olympics. And that’s still manageable, given that much of it is at the very high end of the market.”

Interviewer: “What is the possible worst case scenario that the Canadian consumer would look at from a housing deflation?”

Sherry Cooper (BMO Chief Economist): “Well, it wouldn’t be in general everywhere; that’s because we haven’t seen a pumped up situation, in most of the cities of Canada, with the exceptions, possibly, of Vancouver and Toronto. There is already about a 15% to 20% correction in Vancouver, thanks to the overbuilding during the Olympics. And there, uhmm, that’s still manageable, given that much of it is at the very high end of the market.”

- from BNN Market Sense, 16 July 2012, Part Five: Canadian June Home Sales.

Globe & Mail – “Canada’s Housing Market At Tipping Point”

Canada’s housing market is now at a “tipping point,” with some cities still showing strong growth and others cooling down, Royal LePage says.
The study released today by the brokerage backs up anecdotal evidence from across the country, suggesting an inevitable slowdown for the housing boom.
It also comes amid fears of overheating in some regions, notably Toronto and Vancouver, and moves by the federal government to slow the fevered pace of borrowing among Canadians who have embraced record low interest rates.
“We have had three years of solid house price appreciation in almost all regions of the country,” chief executive officer Phil Soper said in the report.
“Confidence in Canada’s real estate market is sound, but home prices cannot grow faster than salaries and the underlying economy indefinitely,” he added.


“The most recent set of mortgage changes, the fourth in four years, is also the most aggressive,” Mr. Soper said. “The cumulative impact of these new regulations has created a significantly higher hurdle for young buyers seeking their first home and comes at a time when the market was slowing of its own accord.”
Mr. Soper described the timing of Finance Minister Jim Flaherty’s latest move as “unfortunate.”
Toronto-Dominion Bank also sees the housing boom likely ending next year, with “more pronounced declines” in British Columbia and Ontario, according to a study released yesterday.
“The expected housing pause will reflect stricter regulations on mortgages and lending and what we expect to be a gradual rise in interest rates,” said economists Derek Burleton and Jacques Marcil.
Separately today, Canada Mortgage and Housing Corp. said construction starts across the country climbed in June, largely because of condo development in Quebec and British Columbia.

– from ‘Canada’s housing market at ‘tipping point’, Michael Babad, Globe and Mail, 10 Jul 2012 [thanks to the readers who quoted, cited and e-mailed this article.]

Industry Responses To Mortgage Rules

The new mortgage rules become active tomorrow. For the record, here are a few recent responses to the changes:

“We should caution the minister to avoid precipitous actions that would undermine the stability of housing markets. We have stressed the important role our industry continues to play in Canada’s economic performance. There is a clear linkage between stable markets and Canadians’ financial well-being, for both homeowners and home purchasers. …
Having made these changes to mortgage rules, the minister has an obligation to monitor their impact very closely, in all housing markets across Canada. These regulatory actions paint all markets with the same brush, whether they are currently strong, balanced or weak.
We need assurances that the minister of finance will reconsider the new mortgage rules if the evidence shows the result in market instability.”

– from ‘Do the feds really ‘get’ new mortgage rule?’, Stu Niebergall, executive director of the Regina and Region Home Builders’ Association, Regina Leader Post, 23 Jun 2012

“History may look upon this pronouncement and call it Flaherty’s Folly. In the interim, many buyers will see it as more blood drained from their rosy dream of owning a Vancouver home.”
– Larry Yatkowsky, Vancouver Realtor, yattermatters.com, 23 Jun 2012

“These changes, together with new OSFI underwriting guidelines… may precipitate the housing market downturn the government so desperately wants to avoid.”
– Statement, Canadian Association of Accredited Mortgage Professionals (CAAMP), 21 Jun 2012

“A change in the amortization period down by five years is going to affect most people’s buying power by $10,000, $20,000 or $30,000. In today’s housing market, that can be the difference between a really nice place and an average place. Most first-time homebuyers are trying to get into something they really like by pushing their limits.”
– Jeff Trounsell, Vancouver mortgage broker, Vancouver Sun, 22 Jun 2012

“Will this be enough to dampen the market? Maybe, but by own analysis not very much. I expect Flaherty’s move will prevent some on-the-edge buyers from making the leap too soon — but will do little or nothing to address affordability.”
Don Cayo, Vancouver Sun, 21 Jun 2012

For a measured analysis, read Robert McLister at Canadian Mortgage Trends, 23 Jun 2012:
Excerpt:
“Despite the short-term pain and critical comments, it is clear that housing volatility will be reduced by these moves, over the long term. And that’s a positive…if you look far enough out.
The questions are, how long is long-term, how unpleasant are the side effects, and could those side effects have be minimized by a more incremental implementation?
Whatever the case, credit is due to the DoF, OSFI and Bank of Canada… they want to do the right thing.”

RBC Research – Meetings Discussing the Canadian Housing and Mortgage Market

Thanks to Zerodown for forwarding ‘Canadian Housing & Mortgage Industry, Highlights from Meetings Discussing the Canadian Housing and Mortgage Market’, a research document from RBC Capital Markets, authored by Geoffrey Kwan and Sean Adamick [RBC, 29 Jun 2012]. Excerpts:

“We had meetings this week with senior management teams from across the Canadian housing and mortgage market, including banks (Scotiabank), non-bank lenders (Home Capital Group, First National Financial, Equitable Group), mortgage insurers (Genworth Canada, Canada Guaranty), condo developers (Tridel), real estate investment firms (Tricon Capital), real estate consultants (RealNet) and housing economists (RBC Economics).”

“Key meeting highlights include:
• Canadian government changes to mortgage insurance rules and OSFI final mortgage underwriting guidelines announced last week were generally viewed as prudent, but unlikely to cause a housing downturn.
• Housing is already slowing in Canada with certain markets moderating earlier than others (e.g., Vancouver has been moderating for many months whereas Toronto more recently is showing signs of cooling) with general expectations that housing going forward is likely to continue moderating but that a housing downturn scenario appears unlikely for now.
• Key risks to the housing market include: (1) declining consumer confidence; (2) rising unemployment; (3) within the condo market, a surge of supply into the market; (4) deteriorating global macro developments; and to a lesser extent in the near term (5) rising interest rates.
• Toronto and Vancouver housing markets are overvalued with some suggesting the degree of overvaluation to be about 10%–15%.
• Lenders have tightened mortgage loan underwriting (beyond what was required due to mortgage insurance rule changes) likely reflecting the more uncertain macro environment and OSFI’s new mortgage underwriting guidelines.”

Some (excerpted) entity specifics of possible interest:

1. Scotiabank
– Condo exposure in Canada is $13 billion.
– A stressed housing scenario is unlikely to be a significant credit issue for Scotiabank’s mortgage loan book, but potentially could be meaningful for other parts of the bank’s loan book. Small business owners tend to be relatively more resilient, but credit card loans are where there would likely be relatively higher losses.
– Loan loss provisions are low at 0.01% of loans.

2. RBC Economics
– See strong immigration going forward to help housing demand.

3. Genworth MI Canada
– MIC estimates that the high LTV market is about 35% to 40% of the market, having peaked closer to 45% during the current housing cycle and might have bottomed at 30% during the recent downturn in late 2008/early 2009.

4. Tricon Capital (North American real estate investor and asset manager [primarily multi-unit/condos in Canada])
– Tricon is cautious on the Toronto and Vancouver condo markets (only 3 deals done in Toronto since 2007/2008).
– The company sees much better investment opportunities in U.S. housing vs. Canada on a risk-adjusted basis.

“For my parents to be getting a 500K+ 25yr mortgage at age 62 with 51K income seems to me completely ridiculous and crazy. How could they have been pre-approved for this?”

“There’s been a recent development within my family that is causing me a lot of distress.  My parents are 62. My father takes in 40K after tax as he gets disability payments for the rest of his life and my mom does not work. They also take in 11K a year from renting out the basement of their Vancouver special which they bought in 1989 for 179K. On Friday, they told me they bought a 800K+ house in Burnaby using a 300K downpayment from a condo they sold in 2010. I don’t think the deal is final as they are getting a house inspector to look at the place on Monday. However, they claim they were preapproved for a 25 year mortgage. They plan to rent out the top suite to my brother, sister-in-law and their newboard for $1200 a month, and they also will rent out the basement suite.

To me, getting a 500K+ 25yr mortgage at age 62 with 51K income is just completely ridiculous and crazy, especially with the recent developments and current malaise of the market. They always spout the same nonsense about how house prices can’t go down, running out of land, house prices being propped up by mainland Chinese & drugs, Canadian banks more prudent than Americans.

So my question is how could they have been pre-approved for this mortgage 10x their income at age 62? It just seems impossible to me. Am I missing something or is there some loophole where a financial institution would actually lend this couple this much money? I am desperately trying to convince them not do this but this ‘can’t lose’ Vancouver real estate mentality is just too hard to break.”

- tektite at VCI 24 Jun 2012 8:53pm [hat-tip 'AP']

“We’ve always used our line of credit to pay our bills and credit cards. We’d then refinance our mortgage to pay off our line of credit. We’ve never had trouble making our mortgage payments so we were a little surprised when the bank told us we don’t qualify for our usual refinancing.”

“We’ve always used our line of credit to pay our bills and credit cards. We’d then refinance our mortgage to pay off our line of credit. We’ve never had trouble making our mortgage payments so we were a little surprised when the bank told us we don’t qualify for our usual refinancing. Now we’re not sure what to do because our credit line is maxed and it’s only a matter of time before we can’t afford the payments. Help!”
– from ‘Living within your means; Deal with debt by budgeting and consulting a professional’, The Province, 3 July 2012 [Hat-tip Alexcanuck and too much debt]
See the whole article for the suggestions from the credit counsellor. Excerpts:
“Anyone with a mortgage insured by Canada Mortgage and Housing Corp. cannot owe more than 80 per cent of the value of their home when they refinance their mortgage. This change will affect countless people who have been relying on their home as a money tree.” …
“If you don’t have enough money to make all of your payments, start seeking help to consider other debt consolidation options. There are a number of debt consolidation options our credit counsellors discuss with clients every day. These include loans, mortgage refinancing when possible, credit counselling repayment programs, settlements and consumer proposals.
If clients have assets they can sell it may be worth cashing in some investments. They may also be able to use their home to generate a little extra income.”

These guys have been living off ever increasing debt, and now they are puzzled and perplexed when they hit the inevitable wall. Are there really “countless people” out there this foolish?
Also, note that the advisor doesn’t mention selling their home and renting or downsizing. Probably because they have so little equity in it, it’d not solve anything.
– vreaa

TD Chief Economist – “Vancouver prices just seem insane.”

“Vancouver home prices, to me, make no sense relative to local employment and income gains,” Alexander said. “Vancouver prices just seem insane.”
– Craig Alexander, chief economist at the TD Bank, as quoted in ‘Forecaster says home prices may fall soon’, Montreal Gazette, 28 June 2012 [hat-tip penny saver at VCI]

We agree with Alexander. Prices are indeed “insane”.
Well put; that is not hyperbole.
This opinion stands in stark contrast to those of local economists, who are uniformly sanguine regarding our price levels.
And surely it must affect the readiness of TD to lend to buyers in our market.
– vreaa

“Here’s some bearish banking gossip for you as you wait for the Vancouver RE price decline…”

“Here’s some bearish gossip for you as you wait for the decline. A friend of mine, who used to work in banking, called his old boss who is now in Alberta. He called her about the mortgage changes because he is gleefully waiting for prices to deflate and wanted to solicit her opinion. She said something along the lines of hang onto your hats. The banks (like hers) may choose to no longer offer 30 year mortgages on non-CMHC-insured mortgages. They are intending to comply not just with the letter of the OFSI guidelines but with the spirit of what Flaherty is trying to achieve. That’s because…
Apparently, the word on the street is Flaherty got wind that BMO was about to launch a 5-yr mortgage at 2.09% and he flipped. He was already pissed at the endless development he was seeing in the Toronto condo market and the high level of speculation. He called all the bank heads into a meeting and told them to cut out all the shenanigans. Then the next day, to everyone’s surprise, he announced the end of the 30-yr amortizations.
This nice-lady-at-the-bank has been declining HELOCs and mortgages ever since. Everything iffy that comes across her desk is getting kaiboshed. She thinks Alberta will get creamed if other banks are doing what she’s doing.”

mac at VCI 25 Jun 2012 8:46pm

Moody’s – “The government’s moves may have come too late, owing to the build-up in consumer debt that has already occurred.”

In a weekly credit outlook report published Monday, Moody’s analysts William Burn and Andriy Stepanyants said shorter loan amortization periods should immediately cool home sales by requiring increased monthly payments.
“The government’s moves may have come too late, owing to the build-up in consumer debt that has already occurred.” In addition, slowing growth in household disposable income will be a challenge for consumers trying to pay down their debts, they said.
The analysts note that previous mortgage rule changes beginning in 2008 had “some effect” in countering the stimulus provided by historically lower interest rates, yet they “failed to stop Canadian household leverage from increasing.”
“Canadian consumers’ reliance on low interest rates to support high debt loads remains a risk.”

– from ‘Mortgage changes ‘may be too late’: Moody’s’, Financial Post, 25 Jun 2012 [hat-tip pennysaver]

Related:
‘Is Canada Too Smug About Its Economic Future?’, Bloomberg, 25 Jun 2012
Excerpt: “..there’s increased grumbling these days that not all is well north of the border—and not just because low interest rates and high housing prices have helped push household debt to the point where Canadians now owe an average of $1.52 for every dollar they earn. Economic growth has slowed, with annualized GDP growth up 1.5 percent in the first quarter, when the Bank of Canada had expected a 2.5 percent increase. Some of that is no doubt due to misery in other parts of the world, which has dampened demand and rattled investors. But it’s not the only factor that’s bothering Glen Hodgson, chief economist at the Conference Board of Canada, a prominent Ottawa-based think tank. Hodgson put out a commentary on June 25 entitled “Don’t Be Too Smug, Canada” that points to other challenges he feels are not being adequately addressed.”