The Province: “UBC frathouses evict students to cash in on Vancouver Olympics”

In bubble economies, the pursuit of profits distorts principles even more readily than under normal market conditions. -vreaa

This from an article in The Province, by John Bermingham, 30 Dec 2009 –

“More than 200 students at the University of British Columbia are being forced out of their rooms by their own fraternities — which have decided to cash in by renting out to 2010 Games visitors. … Five of the eight fraternities are working through a real-estate agency to market their rooms. … Psi Upsilon house manager Aaron Thomson refused to say how much the group is making from its rentals. He told The Vancouver Province the money would go toward a scholarship fund, to pay for repairs and maintenance work, and to top up the fraternity’s contingency fund. “We have this great opportunity where we can fix the house and get all this money,” Thomson said Wednesday. “It is, of course, difficult for most people to have to leave for a month.” Thomson said frat members didn’t have a choice in the matter and no vote was held, but he said the majority favoured the plan.”

“It’s a matter of you being on the boat or not…whether you have the funds or the balls or confidence or whatever to make that next step..”

Bulls continue to use variations of “Buy Now Or Be Priced Out Forever” to justify their own positions, or to strike fear into the few non-owners who are still prospective buyers left in the region. -vreaa

This from instigator at RE Talks 30 Dec 2009 6:13 pm –

“It’s a matter of you being on the boat or not…whether you have the funds or the balls or confidence or whatever to make that next step..
I have an older co-worker. He moved to Mission years ago…back then he didn’t want to pay the prices around metro Vancouver, I guess. Well, now he regrets it, and feels he missed the boat…The difference in value of the metro Vancouver areas grew way higher in value [compared with Mission] than the difference in price 20 or so years ago just due to the appeal of the metropolitan area… It will take a long time for Mission to ever reach that level, if ever…If a person with riches comes to town they aren’t moving to Mission. There are also a lot of movie industry people living around town, too, adding to the rental pressure.. Housing demand whether for rental or PR is still housing demand. This for me means that there will be demand for as long as people are coming here…That is why I don’t want to miss this boat like my older coworker..”

This from eyesthebye at RE Talks 30 Dec 2009 6:34 pm –

“I have a friend that moved away from Vancouver in ’99 because he and his wife couldn’t justify the high cost of owning a single family home. They are dual income professionals. If he bought 10 years ago he’d be a 6-700K richer just on the appreciation, then add the equity. The fundamentals didn’t make sense to him in 1999 and now they never will. This move remains one of his life’s biggest regrets. Yes, fundamentals do matter…just make sure you focus on the correct ones.” … [ This poster ends each post with: “The cure for higher prices is moving to a destination with lower prices”.]

“I bought another investment property this year. The mortgage is more than fully covered by my tenants, so even a small drop in the short-run doesn’t matter to me in the long-run.”

Are speculators going to be sensitive to price drops? Are there cash-flow positive properties available in Vancouver?  Is there a way of shorting the Vancouver RE market? [Answers: Yes. No. Maybe.-ed.] -vreaa

At a website called Investor Village, yozzdi considers ways of shorting the Vancouver RE market, and Rotair69 replies, 30 Dec 2009 –

yozzdi – “I would like to make some investments that are essentially shorting the over-priced Vancouver Real Estate market. I realize that there are no direct trades for this (such as housing futures etc.), but am wondering if anyone else has looked at this, and found some stocks that could be proxies for this, and might be reasonable correlated to real estate prices in Vancouver?”

Rotair69 – “I’m doing the opposite – I bought another investment property this year.  However, the mortgage is more than fully covered by my tenants, so even a small drop in the short-run doesn’t matter to me in the long-run.”

“My brother in law just bought his 3rd investment property… This is the same person who would crap his pants if he had to bet $100 on roulette.”

A bull market leads participants to become complacent. Buyers simply don’t see the real risks in betting on continued RE price rises. They wouldn’t dream of buying stocks with 20:1 leverage, or of going to a casino, yet they take very large risks in RE without a blink.  -vreaa

This from oh crap at vancouvercondo.info 29 Dec 2009 3:10 am –

“My brother in law just bought his 3rd investment property, taking advantage of these low interest rates. Overextended to the extreme. This is the same person who would crap his pants if he had to bet $100 on roulette.”

“They went to the ‘RE-ATM’ to do repairs, but only spent half the money on fixing up the house.”

These responses came to a vreaa request at RE Talks (22 Dec 2009 10:32 am) for stories about Pre-2000 owners who have borrowed more against their holdings as prices rose.–

Danigirl 22Dec 2009 12:36 pm – “I knew one person (closely) who increased his mortage every time he re-mortgaged, for at least 2 go-arounds I am aware of. I believe he even broke the mortgage once in 2005 or 6 under the guise of “getting a better rate” and “just happened to consolidate” some debts into the mortgage at the same time. My best guess, he was going backwards close to 20K a year for at least 5 years, and figured that’d all be fine because he bought his house 20 years ago and, it covered the debt. On paper it did, but, he was mining his equity out far, far faster than it was re-growing.”

underdog 22 Dec 2009 12:54 pm – “I have a neighbour whose rental in Surrey was discovered being used for a grow-op about 18 months ago. They went to the ‘RE-atm’ to do repairs, but only spent half the money on fixing up the house. Since the husband was laid off from the construction industry, the rest was used to ‘supplement’ income. Talking with the tenant, the house was ‘assessed’ again 7 months ago and another equity withdrawal was made, ostensively to do more repairs on the garage/deck. The repairs they did were laughable (not hard to see why the husband is still out of work if his trade is construction) and everything done on the cheap. The tenant says the landlord was going on about how times are ‘tough’ with the husband out of work. Three weeks ago the tenant was advised they wanted to set up another assessment for another ‘withdrawal’ on equity. Landlord is hoping home values (withdrawal limits) have gone up. My understanding is they bought the place for $200,000 and comparable homes in the area are now selling for $475,000. Tenant says landlord seems to think bank should be appraising at $500,000 – $520,000, so I suspect they have maxed the home atm to the $475,000 amount – at the very least. Tenant also commented that landlord was convinced that rates would not be going up for a very long time. I’m willing to bet they are the equivalent of a 0/35 borrower right now.”

canadian 22 Dec 2009 2:44 pm – “I know this family, bought a mega-mansion and a rancher since husband is in mortgage industry and seems to making a huge moolah. Moved to mega mansion and rented both rancher and their old house. Come on, who sells real estate in lower mainland? It only goes up! They saw me as some kinda alien with 3 horns and 1 eye when I spoke my mind out about why I am not buying. Just a year ago – the hubby had a constipated look on his face – as everything was not going as per his plans. Now it seems that the valve down there has been opened good by Carney-Flaherty-CMHC trio, so he is back to his standard rumblings about how [price drops] would never happen here. He gave me that “35% drop? are you crazy” look. “

Prediction For The Coming Decade: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.

vreaa is taking liberties with this ‘end-of-the-decade’ note by departing from archiving anecdotes and instead posting a prediction:

A remarkable decade comes to a close. The dot.com bust, 9/11, the US sub-prime housing mess, extreme loonie volatility, failing forestry, commodity roller-coaster rides, the stock market crash of 2008, global recession. Each of these events affected Vancouver’s economy in an exceedingly limited fashion. The strength of the Real Estate market saw us through, and RE was without doubt the social and economic story of the decade. Now, factors threatening market health have steadily accumulated, and in our opinion they are approximating a critical mass. A virtuous cycle is about to turn vicious. All evidence suggests that Vancouver Real Estate is heading for a very significant bear market. Unfortunately, conditions have become so distorted that a simple return to normal will have profound and prolonged consequences for our city.  The coming housing bust will effect all Vancouverites, and the fallout will not be good. For our city, this RE crash will quite likely be the defining social and economic event of the next decade. The factors in the drama are distilled below. Comments welcome. – vreaa

.

‘The Vancouver RE Bubble And Bust’

.Act One – Background Stories:

“Best Place On Earth”.

“Running Out Of Land”.

Chinese Economic Growth.

Wealthy Foreign Buyers.

2010 Winter Olympics.

Grow-Ops; “Multi-Billion Dollar Underground Economy”.

“Real Estate Always Goes Up In The Long Run”.

Free Money; Government Distortion Of Lending Risk.

‘Affordability’ Based Solely On Monthly Carrying Cost.

“Prices Are Going Up”; Bidding Wars.

RE Dominates Social Dialogue; “My Neighbour Made 10 Years’ Salary Flipping.”

Uncritical Media; Vested Interests; Government Compliance.

“Buy Now Or Be Priced Out Forever”, Buying Panic.

Housing Predominantly Valued As Wealth Accumulation Vehicle.

.

The Major Players:

Overextended Local RE Owners.

Local Investors; Households That Own Two or More Properties.

Housing-ATM-Syndrome Sufferers.

Developers, With Lots Of Product.

Speculators, Waiting To Run For The Exit.

Boomers, Waiting To Cash Out For Retirement.

Equity So Life Changing, I’ll Cash Out Soon

Foreign Investors, Who Have As Yet Seen Nothing But Vancouver Gains.

.

Act Two – The Stage Is Set; Current Conditions:

‘Rent to Price’ and ‘Income to Price’ Ratios At Historic Extremes; Both Suggest Housing > 2x Overvalued.

Ownership Levels At Record Highs.

Slow Economy, Strong Loonie, Moribund Industries.

Rising Unemployment, Negative Savings Rate, Dropping Disposable Income, Household Debt.

Misallocation of Capital.

Demand From The Future All Used Up; Depleted Pool Of FTBs.

Adequate Supply.

Olympic Rental Market Underwhelming.

Double Top On Technical Analysis (For What That Is Worth).

Irrational Local Confidence; “We’re Different”; Complacency; Bull Hubris; Bear Capitulation.

.

Act Three – Coming Action:

Dropping Rents, Increasing Vacancy Rates, Worsening Fundamentals.

Mortgage Terms Tighten; At Least 10% Down, 30 Years Maximum Amortization.

Post-Olympic Blues; Olympic Nomad Exodus; Post-Olympic Supply.

Spring 2010 Supply.

Rising Interest Rates.

Price Falls Commence.

Speculator Supply.

Rising Taxes, HST.

Prices Drop Below Jan-Mar 2009 Trough Lows (15% Off).

“Prices Are Going Down”; Dearth Of Bids.

Foreign Investor Supply

Boomer Supply.

Seller Urgency; Irrational Fear.

Stagnation; Multi-Year Bear Market; BC Economy Struggles.

RE Vacates Social Dialogue; “My Neighbour Lost Everything .”

Housing Predominantly Valued As Shelter.

…

Prediction 2010-2019: A Real Estate Bear Market Will Be Vancouver’s Defining Social And Economic Event.

VREAA will continue to collect stories from the Vancouver RE Bubble ‘n Bust. Please post or e-mail stories from the trenches. The majority will be headlined. The blog posts read like a chronological series of stories. The category and tag sidebars allow you to access specific types of stories. -vreaa

[update: 31 Dec 2009, ‘Foreign Investor Supply’ added]

Related posts:

Regarding the possible relationship between Vancouver RE and Chinese stock & RE markets [27 March 2010].

The Stigma Of Renting In Vancouver [26 May 2010].

Price Drops Will Beget Price Drops [11 August 2010].

Regarding debt & the bubble, Two Charts: All You Need To Know About Canada’s Housing Bubble [26 August 2010].

A Housing Crash Rescue Cannot Be Legislated [6 Sep 2010].

Five Charts: Predicting Future Vancouver Housing Prices [11 Sep 2010].

Stealth Speculators & Shadow Inventory [17 Dec 2010].

“As frustrating as it may be” on the Wrong Side of the Bubble, the Bearish Position Remains Right [24 Jan 2011].

Disillusion Row, Numbers 1-12: Distracted and demoralized locals, many thinking of leaving. [2 Feb 2011]

On Government Intervention [16 Apr 2011]

The Third Fundamental: Total Housing Market Value to GDP – BC in the Stratosphere [7 May 2011]

It Is Dangerous To Blame The Consequences Of A Speculative Mania On One Sector Of Our Community: Let’s Make Sure We Don’t Do That. [18 May 2011]

Misallocation Of Human Capital During Speculative Bubbles – “What do you call societies that depart from meritocracy? What tends to happen to them in the long term?” [30 May 2011]

Was that it? ‘The Top’? [Possibly] [12 Oct 2011]

Land: Not Making Any More; Don’t Need To [9 Dec 2011]

Denying The Obvious Bubble – Close Your Eyes; Think Happy Thoughts; Don’t Use Nasty Words; Bad Things Will Go Away [7 Jan 2012]

Regarding the over-dependence of our economy on the property sector. [19 Jun 2012]

“25% of buyers won’t be able to purchase anymore.”

The tightening of mortgage lending criteria will likely herald the end of the current RE market cycle. -vreaa.

This from mortgage broker Marcus Tzaferis on CBCs The National 22 Dec 2009 (also cited in good articles at canadianmortgagetrends.com and greaterfool.ca) –

“25% of buyers… these people that are buying with 5% down, and those that are buying with 35-year amortizations… won’t be able to purchase anymore.”

“My co-worker bought recently with the full expectation he and his wife are taking a major hit in the near future, but with a second child on the way family outweighed finances.”

Regardless of where we are in the RE cycle, there will always be buyers and sellers motivated primarily by life circumstances. For some this results in serendipitously good timing, for others, bad. -vreaa

This from a poster at RE Talks 22 Dec 2009 –

“A co-worker bought recently with the full expectation he and his wife are taking a major hit in the near future, but with a second child on the way family outweighed finances.”

“I’m a lender for a large Credit Union in Vancouver. Refinancing either in form of Line of Credits or second mortgage is huge business. People have used their houses as ATMs in a very big way.”

This from Ultraman at greaterfool.ca 22 Dec 2009 1:50 pm –

“I’m a lender for a large Credit Union in Vancouver, refinancing either in form of Line of Credits or second mortgage is huge business. Yes, people have used their house as an ATM in a very big way.”

“I inform buyers of the inevitable ‘market adjustment’ soon to come, and most of them give you a nod of acknowledgment and then ask what maximum home they are able to purchase with their pre-approved ultra-low variable rate mortgage.”

The bankers nod sagely and call for ‘prudence’, but, Canadians, being human, take as much as they think they can get. -vreaa

This gem from insider ckung at RE Talks 22 Dec 2009 9:57 am –

“People sometimes become quite irrational when it comes to buying real estate, especially when  supported by bullish notions. I should know, I work with Buyers whom I have informed of the inevitable “market adjustment” soon to come, and most of them will give you a nod of acknowledgment and then ask what is the maximum home they are able to purchase with their pre-approved ultra-low variable rate mortgage. The general mentality is that when rates rise, most buyers think, optimistically, that their financial situation somehow would have strengthened and improved to be able cope with it when the adjustment occurs.”

“All of the people I know ditched their starter homes, bought big new places and renovated”…”They are far more in debt today than when they started the property game.”

Superficially, one would imagine that those who purchased prior to 2000 would be in good shape with regards to equity-to-mortgage ratio. But many have used growing equity to move up, renovate, buy a second property, or spend more. This group are now substantially more exposed to the RE market than they would have been under normal RE market conditions. – vreaa

Here’s Emma at greaterfool.ca 22 Dec 2009 3:08 am –

“The middle-class pre-2000 buyers that I work with all jumped up in scale from their ‘starter home’ (which could have been paid off in a few years from now at these rates) to a McMansion. They used their equity from the first house to qualify for ever bigger mortgages and reno their new digs to their hearts’ content. They are far more in debt today than when they started the property game. In the last 5 years, the more you made, the deeper into debt you were allowed to go so I don’t think anyone is immune.”

And Dean also at greaterfool.ca 22 Dec 2009 9:42 am –

“I’ve seen the exact same thing. All of the people I know ditched their starter homes, bought big new places and renovated. I don’t know their finanancial situations, but I’d estimate they’re going from 100K debt to about 300k as a best case scenario. They stretch it out to 35 years, and the payment isn’t really much different than they had before at current rates. These are not first time buyers, kids, nor dummies. They’re not low income either. Buy now, pay later, with the current interest rates is a powerful attraction to everyone, myself included. But I’m still one of those pre-2000 purchasers happy in my “starter” home. Nearly debt free thanks to these wonderfully low rates.”

“I have friends in their mid 50’s to early 60’s who have stopped working. Cheap money creates a high level of complacency among existing home owners.”

Surging housing prices have led many homeowners to change their retirement plans. Whether they decrease their rate of savings, spend their savings, or retire early, it all adds up to a dangerously disproportionate reliance on future RE prices. -vreaa

Summed up well by Direct at greaterfool.ca 22 Dec 2009 1:44 am –

“Cheap money creates a high level of complacency among existing home owners. I have friends in their mid 50’s to early 60’s who have stopped working. These homeowners believe they will sell their houses in five years, make a killing, and move to a beach in Mexico. All their equity is embedded in their homes.”

“This is starting to worry me more than before, and this is the first time that I am considering unloading my purchase into next year’s spring bounce.”

In July 2008 Canada’s Finance Minister Jim Flaherty bumped up lending requirements, making it necessary for all property buyers to save, beg, borrow, or steal at least a 5% downpayment. Vancouver RE started a  descent that month that ran 15% before being halted by the free money made necessary by the fall 2008 stock market crash. Prices are now back to the July 2008 highs. Now Flaherty fears a nation-wide housing bubble, and is threatening to drop amortization periods to 25 years and raise downpayments (most likely to 10%). His announcement today is discussed in a Financial Post piece by Ian McGugan 21 Dec 2009. Global TV, in perhaps the most bearish BC RE piece it has ever aired, today (21 Dec 2009) talked of ‘bubbles’ and ‘speculators’ and printed clearly that ‘Tighter rules could shut down 25% of the market’. Whatever exactly ‘shut down’ means, it doesn’t sound good. Despite all this, it is remarkable how long it is taking for local Vancouverites to cotton on. Are all the speculators going to be trying to unload with perfect timing in the spring of 2010? After the Olympics, before the stricter mortgage requirements, before the HST, before the interest rate rises? If they do, the annual spring bounce could be a rout. -vreaa

This from rofina at RE Talks 21 Dec 2009 6:33 pm –

“This is starting to worry me more than before, and this is the first time that I am considering unloading my purchase into next year’s spring bounce.”

“We ended up with a mortgage offer 7 times our household salary.”

Lenders are clearly encouraging people to overextend their borrowing. At the same time they are calling for ‘prudence’. This is hypocrisy. -vreaa

This from junius at greaterfool.ca 21 Dec 2009 12:03 am –

“Three months ago my wife and I were considering moving up in the market and went to a mortgage broker introduced to us by a friend. We ended up with an offer 7 times our household salary. [Our household salary] is more than twice the provincial average. We were shocked. However all our friends here in Vancouver hit us with the usual bubbly baloney such as “housing prices never go down” and “there isn’t enough land” and the ever popular “you just gotta play big to win big.” Fortunately my father (a retired contractor) and my mother (a nearly retired real estate agent) talked us out of it.”

“I’m 27, and 4 months ago, I was on the verge of buying…the constant BUY NOW, or miss out FOREVER had finally got to me.”

This from Jay-C on greaterfool.ca 20 Dec 2009 11:20 pm –

“I’m 27, and 4 months ago, I was on the verge of buying…the constant BUY NOW, or miss out FOREVER had finally got to me. My instincts told me the market was overpriced and due for a correction, but all my friends were either ‘doing it’ or had “done it”. Thankfully a friend showed me [greaterfool.ca] and my common sense prevailed, I’ll continue to rent and easily sock away upwards of 2.5K a month. On another note, I was pre-approved for my first ever mortgage at just under $500K. All in, I make just under $90K annually. I thought they were crazy.”

“The people I am talking to in the Downtown Vancouver Condo market are not panicked and looking to bailout. They are looking to sell after the Olympics in the Spring market.”

Can the market tell the difference between sellers who are “panicked and looking to bailout” and those who are “looking to sell after the Olympics in the Spring market”? Supply is supply. -vreaa

This from MikeStewartRealtor (realtor) at RE Talks 21 Dec 2009 10:37 am –

“I met with a prospective seller a few days back. We were talking about what will happen after the Olympics and she asked me if there are lots speculators hanging on by the skin of their teeth looking to flip after the Olympics. And my answer was “No”. The people I am talking to in the Downtown Vancouver Condo market are not panicked and looking to bailout. The people I am talking to are looking to sell after the Olympics in the Spring market, which tends to be a good time of year to sell real estate. Nothing out of the ordinary here.”

habs100 adds at 11:06 am – “I have a few friends who unloaded/are unloading their downtown condos right now. One actually sold his brand new condo a month ago… Barely broke even after all the expenses.”

“So it looks like I am wrong about 0/40 mortgages!”

Even some industry insiders don’t understand the terms of their own mortgages, or the products that their clients have been using to purchase RE. -vreaa

Finance Minister Jim Flaherty now says he may tighten mortgage eligibility rules. Excerpts from a consequent discussion at RE Talks, starting 21 Dec 2009 8:42 am –

MikeStewartRealtor (realtor) – “I have a 40 year amortization mortgage on one of my properties and my broker told me that is the way it will stay for the life of the mortgage. [see below -ed.] I am going to confirm this closer to the end of term, but this my understanding from him.”

MikeStewartRealtor (realtor) – “Where did you guys hear about zero down purchases here in Canada? I’ve done hundreds of deals and none have been zero down like you get in the US.”

Marco911 (mortgage broker) – “Almost all of the deals I have done were 0% down. Lenders want something but how they get that something is up to how creative the buyer/seller is.”

MikeStewartRealtor (realtor) – “I have many clients who have bought properties with lines of credit, but a mortgage was not involved. Please share with me your experiences of buying property with mortgages in Greater Vancouver with zero down. I am very interested to hear more especially these so-called 0/40 mortgages…”

silverman (realtor) – “I don’t know anybody who bought with zero down either. Even if the banks could approve such a thing, what seller in his right mind would accept an offer with zero deposit?”

MikeStewartRealtor (realtor) – “So it looks like I am wrong about 0/40 mortgages! I checked with Doug Atkinson at the Centum office attached to my office and 0/40 mortgages were allowed for a few years. He also said that my 40 amortization does not last the life of the mortgage. He also said with a 0/40 mortgages the client had to qualify for a 25 year amortization. I guess the lender would also supply the deposit.”

talking – “So, if Flaherty changes the rules on mortgages back to 25 yr max and some poor guy put 5% down with a 35 year mortgage, his mortgage will become a 25 year mortgage upon renewal? That’s gonna kill a lot of people, considering how many are already stretched at a 35/40 yr mortgage at historically low interest rates.”

“I am personally comfortable to be 65% Real Estate 25% Stock Market 10% Cash.”

Canadian investors see RE as a safer investment vehicle than stocks. -vreaa

This information from Vanlord at RE Talks starting 20 Dec 2009 4:09 pm –

“Stops have their place, but they aren’t going to guarantee you safety in the stock market, either way I don’t use them in most cases, and am personally comfortable to be 65% real estate 25% stock market 10% Cash. At current rates, I’m paying down significant principal so even when interest rates rise I will have a lot less debt owing than if rates remained “normal”, and when Interest rates rise, I will be allowed to increase my rents at much higher percentages each year, due to the higher inflation rate. If housing prices do drop off the cliff, I’ll be ready to scoop up cheap properties with my cash and stock equity, and am well positioned to ride out the hit against current RE equity, since they pay for themselves anyways.”

Vanlord later clarified that the ‘65%’ was his own actual equity in RE, with mortgages still existent for over 50% of the total property value. Thus Vanlord’s Portfolio is 10% Cash, 25% Stocks, 130% RE (of which more than half is borrowed). His total portfolio leverage to movements in RE prices is >1.3 to 1.

“Unlike previous years, my reply that I had NOT purchased was NOT greeted with exclamations of “Why not?? You gotta buy sometime! Come on, hurry up and buy!!!”

There’s A Change A-Comin’. Warnings to be prudent bubble up ever closer to the surface. But the Vancouver RE market moves slower than the speed of dark. So slow it can’t get out of its own way. Instead of anticipating the after-effects of the Olympics, it looks like we’ll have to trip right over them before we stall. Never underestimate the foolhardiness of those determined to get rich quick. -vreaa

This from pricedoutfornow at vancouvercondo.info 20 Dec 2009 5:49 pm –

“Some interesting observations from this weekend. Went to a few Christmas parties where RE came up. One co-worker revealed she and her husband recently purchased a house in South East Vancouver ($600k maybe?) They are both around 55 years old. First time home buyers, they’ve rented since arriving in Canada about 15 years ago. Everyone at the table fell silent and one person was bold enough to ask “What are you doing, planning to pass on the debt to your children??”
Another party I was asked not once, but twice, by different people, if I’d purchased the new place where I’m living. However, unlike previous years, my reply of “NO” was not greeted with exclamations of “Why not?? You gotta buy sometime! Come on, hurry up and buy!!!” Both people simply fell silent, and no one who was listening even offered any such advice. Strange indeed. Has the wind changed direction finally?”

“If RE prices drop 35% then this couple’s paper net worth will plummet from $354,000 to $102,000.”

What percentage of your net worth is in RE? What is your leverage to the RE market? An April 2009 VREAA attempt to poll Vancouverites in this regard was spectacularly unsuccessful. Does anybody have suggestions as to how to plumb available statistics to get an idea of the distribution of responses to those questions for the citizens of Vancouver? -vreaa

The Globe & Mail’s Financial Facelift 18 Dec 2009 describes a couple aged 36 & 39 from ‘central Canada’ who are admirably planning for their retirement and for their disabled daughter’s future. Here are some details of their finances –

Annual combined income: $66,670

Assets Total: $792,000
(House $250,000; Rental property $468,000; RRSPs $70,095; RESP $1,000; RDSP $3,517)

Liabilities Total: $438,000
(Mortgage on principal residence $70,000; mortgage on rental property $318,000; family loan $50,000)

vreaa comment:
Net worth is $354,000.
Total RE being carried is $718,000.
Leverage of net_worth to RE is >2:1.
If housing prices pullback by 15%, this couple will see their paper net_worth drop by >30%.
If RE prices drop 35% (the high end of David Rosenberg’s recent estimate) then this couple will see their paper net_worth plummet from $354,000 to $102,000.  For a couple with an annual gross income of $66K, this would be devastating.

Banks Are Tightening Non-Mortgage Lending

Mortgage rates remain very, very low. In fact, RBC even further reduced some fixed rates recently (albeit by as little as 0.1%). At the same time, banks are starting to tighten lending on loans that are not government backed. -vreaa

This from OttawaMike at greaterfool.ca 20 Dec 2009 10:32 am –

“The subject of banks resetting HELOC’s and even calling lines of credit came up [on greaterfool.ca] a few times in past. This week I heard from 3 people who were hit. One colleague has an I.T. consulting firm with 5 employees and lots of work in the pipeline. The bank arbitrarily called his LOC and left him scrambling. Two other home owners I know had their HELOC rates increased 1.25%. All these individuals are low-risk/high-equity customers, but I guess CMHC won’t backstop those products.”

“The bank wanted to give us $700,000 and we make $115,000 together.”

In times of typical interest rate levels, buying a house for more than three times household income is seen as imprudent. When the average price to income ratio is four or more, it is argued that housing has reached ‘extremely unaffordable’ levels. In Vancouver, average homes now have prices 10 times average incomes. Where do households get the funds to make these bids? Here’s an example of a bank offering a household a mortgage of 6 times their annual income. -vreaa

This from Dan at greaterfool.ca 19 Dec 2009 7:16 pm –

“The banks will give a loan to anyone. Just go to the bank and see. The bank wanted to give us $700,000 and we make $115,000 together.”

And a second example from CalgaryBoy 20 Dec 2009 5:11 am –

“Yeah, the bank also wanted to give me $458, 000 and I make $68, 000 a year. I walked out of there thinking there is absolutely no way I can carry that big of a mortgage. People I know were all happy for me the bank gave me such a figure, the same people telling me to buy buy buy.”

—

Garth Turner highlighted these two comments in his post the next day, 20 Dec 2009. That brought more comments from people who had been offered loans larger than they had requested. Samples –

T.O. Bubble Boy 20 Dec 2009 11:21 pm – “A few months ago we went into my local bank branch to get a pre-approval so that we could continue looking around. I had stated that I only wanted a pre-approval for an amount that was about 2.5x my income. They offered a much higher pre-approval amount (4x-5x I believe). Also, the mortgage “specialist” said that everyone would apply with 2 incomes, even if 1 is about to be cut.”

“NOTHING WILL BE ALRIGHT”

Bob Rennie, the Vancouver condo marketer, installed an art piece by Martin Creed on his office building in Vancouver’s Chinatown recently. It reads ‘Everything Is Going To Be Alright’. We posted an image and discussion 27 Nov 2009. Rennie interpreted the work literally, and actually said as much, whereas the artist’s intention was clearly ironic. More information now comes to light to confirm the ironic intent. Even more ironically, the piece was previously installed in that other bastion of real estate strength, Detroit. After it had been displayed outside the Detroit Museum of Contemporary Art for some time, it was replaced by a second work, ‘Nothing Will Be Alright’. Somehow, despite the insistence from some quarters that we are a ‘World Class City’,  I can’t see Vancouver sensibilities being capable of handling all this irony. Imagine ‘Nothing Will Be Alright’ on Rennie’s building in Chinatown? No, neither can I.

Vancouver, Detroit, ‘Everything Is Going To Be Alright’, ‘Nothing Will Be Alright’. Hmmmm. -vreaa.

“28 per cent of Canadian homeowners over the age of 50 plan to sell their houses to fund their retirements”

Rising interest rates will likely cause the beginning of the coming Vancouver RE price descent. The middle of the crash will be fueled by the panic of speculators. But the slow coup de grâce will likely come from the boomers unloading their housing nest-eggs. -vreaa

These statistics and then commentary from the Macleans.ca article by Jason Kirby 17 Dec 2009 9:33 am –

– 38.5 per cent of wealth in Canada is now tied to home ownership, up dramatically from 16.3 per cent two decades ago

– As of 2006, nearly 69 per cent of Canadian households owned their own homes, up from 63.6 per cent a decade earlier. [Figure will now be >69% -ed.]

– Between 1999 and 2007 home values in Canada rose 66 per cent, leaving Canadians feeling a lot wealthier. After falling around eight per cent during the recession, prices are virtually back to where they were at the peak.

– Average savings had fallen to just $2,000 a year, or less than three per cent of disposable income, putting Canada well behind other developed countries like France (12 per cent) and Germany (11 per cent).

– 28 per cent of Canadian homeowners over the age of 50 plan to sell their houses to fund their retirements, according to a survey by Royal LePage in 2006

– An estimated 37 per cent of Canadians over the age of 55 still have outstanding mortgages.

“Assuming you still plan to use your house as a retirement vehicle, there’s something else to think about­—you’re not alone. Millions of Canadians are all betting on the same strategy, and that could lead to serious problems down the road. One very real fear is that the barrage of boomers expected to retire between now and 2030 will drive down the housing market. There may simply not be enough younger buyers to absorb all those condos and townhouses boomers hope to unload. For one thing, the net growth in the number of new households forming in Canada each year—a key driver of the residential real estate market—is expected to slow, from 1.4 per cent in 2007 to 0.8 per cent in 2030. By that year, when all the boomers will have turned 65, it’s estimated there will be just two workers for each retiree. “If everybody comes on the market at the same time, prices are going to go lower,” says Merrick. “The people at the top who are planning to use their homes for retirement are going to face major downward pressure, because if there’s no one feeding the market at the bottom, there’s no one who can move up and buy your house. Demographics say it all.”

“He admits prices are higher than he’d like, but believes he can easily cover the mortgage payments even if interest rates start to rise.”

Buyers who buy based on affordability of monthly carrying costs at historically low rates will get slaughtered. Period. -vreaa

This from Macleans.ca article by Jason Kirby 17 Dec 2009 9:33 am –

“It may be winter, but Vancouver’s love affair with real estate is in full bloom. After a brief pause to mark the recession, the hot topic over lattes is once again square footage and million-dollar views. Which is roughly the price tag Michael Lin kept coming across last week as he and a friend sat in a Granville Street café surfing MLS, the real estate listing website, on his laptop. Lin, a computer programmer in his late 20s, has watched the ups and downs, and then ups again, of Vancouver’s housing market from his rented apartment. Now, with the economy in repair mode and mortgage rates still near record lows, he’s eager to take the plunge into the city’s condo market. He admits prices are higher than he’d like, but believes he can easily cover the mortgage payments even if interest rates start to rise. But when asked whether he will have enough left over at the end of the month to save for retirement, he chuckles. He wasn’t saving much before, either. “This way,” he says, “I’ll be forced to save.”

[Note that “even if interest rates start to rise” comment strongly suggests Lin plans to use a variable rate mortgage. -ed.]

[This passage from the end of the article is relevant to Lin’s position: “Whether the housing market slows, or continues to grow at its historical average of around six per cent a year, financial advisers have more immediate concerns: the rush by younger Canadians like Lin to buy high-priced homes while mortgage rates are so low. Daniel Collison, a regional director with Investors Group in Markham, Ont., and an instructor at York University’s Schulich School of Business, says buyers could be setting themselves up for trouble in the near future. “When you see young professionals making $150,000 sitting there with $700,000 mortgages, they’re the ones who are most at risk,” he says. The problem isn’t just that prices are high, but that even a modest increase in interest rates could send their monthly mortgage payments skyrocketing. For instance, someone who took out even a $300,000 mortgage when variable rates were as low as 2.5 per cent could see their monthly payments of $1,345 jump nearly $600 if rates rose to six per cent, and more than $900 if rates returned to eight per cent, where they were earlier this decade. “The shock that’s going to hit some of these people is just astounding,” says Collison.“There’s a lot of artificial optimism about what they can afford to carry.”]

Vancouver Sun – “Debt-laden B.C. homeowners warned of interest-rates squeeze”

The BOC, the 5 major banks, realtors’ associations, mortgage brokers, previously bullish commentators, ALL warning of housing price downside. What’s next? A cautionary article in the Vancouver Sun! -vreaa

17 Dec 2009, Derrick Penner, Vancouver Sun. Excerpts –

Homeowners are being warned any rise in interest rates later next year risks putting a financial squeeze on the large number of debt-laden Canadians who took out variable mortgages at rock-bottom rates. This is a particular concern in Metro Vancouver, Canada’s most expensive housing market, where buyers have been drawn into the market in numbers large enough to drive prices back up to near their previous peaks following the recent market correction.

“Canadians are potentially leaving themselves wide open for significant financial obligations once interest rates begin to rise,” the Mortgage Brokers Association of B.C. said in a statement Wednesday [16 Dec 2009]. The association estimated that some 40 per cent of homebuyers are taking on variable mortgages. “There certainly has been more of a trend for people deciding to choose variable rates,” association president Joe Santos said in an interview. Dos Santos said his biggest concern from rising rates mortgage rates is with buyers who purchased homes in 2006 and 2007, when credit was a little more easily obtained and borrowers could get 100-per-cent mortgages, than he is for recent buyers who have taken out variable mortgages. “I think [steep rate increases] would certainly create some issues for some consumers who were stretched when they initially qualified [for mortgages],” he said. Recent buyers, Santos said, would have qualified under rules that call for an ability to pay a higher rate than the current variable rate and should have room in their budgets for bigger mortgage payments.

…..the bold prediction of economist and author Jeff Rubin that the jump in rates could be as steep as three to four percentage points over the next two years as the Bank of Canada raises rates to keep inflation caused by increasing energy costs in check. That increase could add up to $1,000 dollars a month to the payment on a typical-for-Metro-Vancouver $400,000 mortgage.

Cameron Muir, chief economist for the B.C. Real Estate Association, is forecasting mortgage rates might increase 1.30 percentage points on short-term mortgages and perhaps 0.75 of a percentage point on five-year rates by the start of 2011. That modest increase in interest rates will still dampen sales as they combine with Metro Vancouver’s high prices, he added.

Speculation In Vancouver SFH Market

Speculation is alive and well in all corners of the Vancouver RE market. -vreaa

348 East 48th Ave, Main, Vancouver East

MLS #V800943

1530 sqft House, 33×143 Lot, Built 1940

January 2009: Sold for $599,000

November 2009: Asking price $769,000

[from thread started by eyesthebye at RE Talks 15 Dec 2009]

“Bought condo in North Vancouver in Dec 2003 155k, sold in Sept 2008 for 75% gain.”

This from pezzazz at greaterfool.ca 15 Dec 2009 1:42 pm –

“Example of action taken… Bought condo in lower Lonsdale in North Vancouver in Dec 2003 155k, sold in Sept 2008 (close Dec, no mortgage penalty) for 75% gain. Benefited from some stock market downside but mostly upside over last 8 months. Now down to 25% market exposure, rest cash. Waiting for carnage [in RE market].”

“I am an executive at a company in Vancouver. I don’t believe that our relationship to Asia will make us immune to overall Canadian market forces.”

junius at greaterfool.ca 15 Dec 2009 at 11:15 am is an executive who is skeptical of claims that wealthy Asians will rescue Vancouver –

“I seriously don’t understand how you can consistently believe that Vancouver and our relationship to Asia will make us immune to overall Canadian market forces. I am an executive at a company in Vancouver with an office in Toronto and I can assure you I don’t share your optimism. I hope your are correct but believe you are wrong.”

Oshawa – “My spouse is a financial planner, working almost exclusively with middle class working families, and the horror stories I hear are unbelievable.”

This anecdote from Oshawa is from somebody who sees ‘horror’ for some in the future. -vreaa

‘From Canada’ at G&M 15 Dec 2009 8:11 am writes –

“My spouse is a financial planner, working almost exclusively with middle class working families, and the horror stories I hear are unbelievable. People living in houses they bought 10 years ago owing more than they originally paid due to refinancing for one reason or another. Young couples buying homes with 5% down, 35 year amortization, with mortgages totalling 6 to 7 years total income because the interest rates are so low that they now qualify for larger monthly payments.”

“My wife and I recently sold a Vancouver (well Burnaby) special; now renting a great condo across False Creek from downtown.”

For every one owner who has done what ManfredSteyn has done there will be fifty who wished they had. -vreaa

This from ManfredSteyn at greaterfool.ca 15 Dec 2009 at 1:55 am –

“My wife and I recently sold a Vancouver (well Burnaby) special; now renting a great condo across False Creek from downtown. We’re sitting on a big chunk of change in our savings account.”

“Seems their bid of 502K may go through after all, as the other party has dropped out. She’s all jiggy with excitement.”

Bubbles keep inflating, until they pop. -vreaa

This from Boombust at greaterfool.ca 14 Dec 2009 11:29 pm –

“Today I spoke with a “twenties-something, soon-to-be-married” woman who is bound and determined to buy a ratty old house on Marmont St. in Coquitlam. It was listed at 488K. Seems their bid of 502K may go through after all, as the other party has dropped out. She’s all jiggy with excitement.”

“We could overextend ourselves, as many others have, and take on a ridiculously high mortgage, but we have decided not to.”

This from Let’sGetOurFactsStraight at vancouvercondo.info 14 Dec 2009 at 2:12 pm –

“My husband and I are both professionals, earn decent salaries, yet cannot afford a home in the Lower Mainland. I suppose we could overextend ourselves, as many others have, and take on a ridiculously high mortgage, but we have decided not to. We don’t want to put our family at risk, and we feel that the market is in a bubble because of easy credit made possible due to low interest rates and CMHC insurance.”

“The Sutton rate is almost impossible to qualify for, my agent told me he is very frustrated with this marketing gimmick.”

Is this a case of a lender trying to lure borrowers with unobtainable headline rates, a borrower with too large a downpayment to qualify for CMHC insurance, or a lender seeing higher risk in a RE portfolio than is immediately apparent? -vreaa

A poster at RE Talks made a comment 2 Dec 2009 about Sutton 5 year fixed rates of 3.6%. This was followed by this comprehensive revelation from westar99 13 Dec 2009 4:32 pm –

“The Sutton rate is almost impossible to qualify for, [even though] I had a Sutton agent last spring [2009] when I bought a new place. I had a great credit score, late thirties, no dependents, $160,000 per year upper management salary, employed for more than five years at the same company, a 50% $400,000 cash down payment from the sale of my paid off old property towards an $800,000 property, two cash flow positive investment properties with 30% of the value in equity and an investment portfolio/RRSP’s worth $300,000, nothing outstanding for any line of credit, and they still turned me down. But then they told me I could qualify for another “special” deal which was slightly worse than the rate I negotiated with RBC. My Sutton agent told me that he hasn’t had one client who qualified, and they even turned down a dentist client of his. He told me he is very frustrated with this marketing “gimmick”.

Is Real Estate The ONLY Sector In The Economy That Is Red Hot?

It seems that everywhere one turns there is news of very significant slowing of economic activity, yet RE sales remain unseasonably vigorous and RE price levels in Vancouver have effectively regained their July 2008 peak. At some point there has to be a reconciliation. -vreaa

The postal service is perhaps a local trade indicator in the same way that the Baltic Dry Index indicates strength of international trade. This from joycer at vancouvercondo.info 12 Dec 2009 10:44 pm –

“I was at dinner tonight with a friend who works for the post office, he is a supervisor there. He said they aren’t hiring casuals this year for the busy holiday season (first time ever since he started working there) and parcels are WAY down from last year (over 20 million less).”

Toronto – “Our search felt really irrational, at times, in terms of bidding. Just because money was available to people, it seemed that was artificially inflating the price of houses.”

This Toronto anecdote could very well be a story from Vancouver. -vreaa

An article from the National Post by Paul Vieria 10 Dec 2009 quotes Graham Withers, a film and TV editor in Toronto, who with his wife Heather Harding just bought a house. He described nearly a half-dozen failed bids in the prior month in which properties sold for at least 20% over asking price –

“It was kind of disappointing in the beginning because we were careful not to stretch ourselves further than we could handle. Our search felt really irrational, at times, in terms of bidding. Just because money was available to people, it seemed that was artificially inflating the price of houses.”

____

From Benjamin Tal, an economist at CIBC World Markets, earlier in the same article –

“What the Bank of Canada is saying is that there might be too much of a good thing going on. And I think the issue here is to what extent are extremely low interest rates blinding Canadians, and giving them a false sense of confidence to buy a bigger house.”

“I am in government relations. I vow that should the government contemplate any type of homeowner bailout, I will be organizing a ‘grass roots’ campaign to lobby against it.”

Sign me up. -vreaa

This from GR, the possible future leader of a grass roots movement, at vancouvercondo.info 11 Dec 2009 12:05 pm –

“I am in government relations, with experience at the federal, provincial, and local government levels. I have vowed for the past two years that should the federal government contemplate any type of homeowner bailout, I will be organizing a “grass roots” campaign to lobby against said type of bailout.”

Two New Yorkers Move to Vancouver – “We bought a place downtown, because we are real estate investors. Vancouver is a good place to invest.”

You would think that those who have first hand experience of the US RE debacle would be able to spot the identical precedents festering elsewhere. Think again. -vreaa

This from Re-diculous at vancouvercondo.info 11 Dec 2009 10:23 am –

“I was at a bit of a networking session last evening and met a pleasant enough woman (with MBA, etc.) who moved here with her husband from NYC 4 months ago. When we were comparing costs of the two cities I mentioned the word “rent”, to which she replied- “no, we bought a place downtown, because we are real estate investors etc, etc and were looking at California but didn’t think that was a good place to invest but Vancouver was…”  I guess they missed the “buy low, sell high” philosophy of investing. I’m proud to say that I did manage to bite my tongue throughout the conversation.”

David Rosenberg – “Is the Canadian housing market in a bubble? It sure looks that way.”

More and more mainstream commentators are declaring the Canadian housing market very significantly overvalued, and it is now commonplace to see the MSM use the term ‘bubble’ to describe it. -vreaa

David Rosenberg (Previously of BMO and Merrill Lynch, now at Gluskin Sheff + Associates) has been a sensible and moderate voice over the last decade, and is never moved to sensationalism. Here are extracts from an article by Rosenberg G&M 11 Dec 2009 –

“Is the Canadian housing market in a bubble? It sure looks that way… Looking at Canadian home prices in relation to personal incomes or residential rent, what we have found is that housing values are anywhere between 15 per cent and 35 per cent above levels we would label as being consistent with the fundamentals. If being 15-per-cent to 35-per-cent overvalued isn’t a bubble, then it’s the next closest thing.”

[UPDATE: In the Breakfast with Dave release from gluskinsheff.com 10 Dec 2009, Dave adds “We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows.”]

“You can’t have a home price bubble without a dramatic credit expansion. Over the past year, residential mortgage balances have risen 7 per cent, which …in the context of deflating personal incomes, is huge. ..Mortgage debt relative to Canadian household incomes just moved above 70 per cent for the very first time ever from just over 65 per cent a year ago.”

“What is fascinating is that mortgages on the books of the chartered banks have actually declined over the last 12 months, while the issuance of securitized mortgage products has ballooned by nearly 40 per cent and 100 per cent of them been insured by the government (over the past two years, 90 per cent were insured).”

“I am Realtor. Nothing Realtorian is Alien to Me.”

Okay, only kidding, the quote is fabricated, there aren’t any Vancouver realtors who routinely paraphrase Terence. But the recently released National Film Board of Canada film series ‘GDP’, ‘Measuring the human side of the Canadian economic crisis’, does feature a raw and strangely poignant portrait of a  27 year old Vancouver Realtor named Keith Roy.  Keith is a former restaurant manager who is recently married. In the three short films (released Sept-Nov 2009), Keith, who works the Marpole area of South Vancouver, shows remarkable confidence and even more remarkable candidness as he describes his dreams & strategies, and tells us what it takes to muscle in as a RE ‘professional’.  Dressing for ‘gravitas’, becoming a celebrity, poaching assistants, ‘taking it up a notch’, quick profits, bribing tenants. As the NFB site itself puts it: “Did somebody say bubble?” -vreaa

Extracts from  1. Dressing for success:

[to his tailor] “I’m a pretty skinny looking guy, and I look rather young, so when I walk into a room and I am going to say to someone, “You know what, I want you to pay me tens of thousands of dollars to sell a multimillion dollar asset”, I need to have some gravitas.”

“My goal is to achieve local celebrity status. I want to walk into a coffee shop and have people say, “Hey, you’re the guy from the real estate sign”.”

Extracts from 2. Competitive edge:

“I have got a new assistant starting. I headhunted her from another real estate team in the city.”

“I do a lot of work with lawyers, accountant, doctors, engineers, basically six figure income earners under the age of 35 with professional degrees. I like working with that clientele for a couple of reasons. One, I am just like them.”

“I am very good at an open house. I’m on, I’m professional, I’m I would say better than 95% of people out there doing open houses so I get clients at open houses. And the 20% of us who sell 80% of properties do things a little different. We take it up a notch. We do things on a higher level. We do things more professionally.”

Extracts from 3. Hot property.

“A lot of my clients are lawyers and it’s because a lot of my friends are lawyers. I did a degree in political science. All my friends went to law school and I went on to become a real estate agent. So I am fairly used to lawyers as a type. M_ is also my lawyer and I got in a car accident a couple of years ago. He is a personal injury lawyer and he got me a great settlement, substantially more than I had initially been offered by the insurance company so we have a pretty trusting relationship.”

M_: “He [Keith Roy] told me in March when I bought a townhouse and at that point I was contemplating selling this existing property. He told me at that time that it was not a good time to sell. That is very trustworthy advice. If a realtor who was going to make a profit and commission, tells me it is not a good time to sell, that’s a guy I can trust. Today, when he tells me I should sell, I take his word for it. Frankly, I have made a lot of money in equity on that place already. We bought it at the very downturn of the market in March [2009] and we bought it for less than what it would have cost at that point. I think myself at least $100,00 more than I paid for it.”

“…in [marketing] a condo that’s mostly open houses and it is a matter of access and we will negotiate that with the tenant in such a way that it appeals to them. Now I have Canucks tickets, I have Giant’s tickets, I have a pretty good selection of stuff that I bribe tenants with.”

[Full transcripts of each segment posted in the comments section].

[Update 1 Jan 2010 – Realtor Larry Yatkowsky has a post at his blog YatterMatters 8 Dec 2009, discussing Keith Roy and the NFB production. Roy has himself added a comment, which is archived below.]

Keith Roy at YatterMatters 12 Jan 2010 8:56 pm – “Happy to see that people are watching the videos and in some cases enjoying them – whether for real interest, comical value or just killing time. I will say, this is not a commercial – it is an actual documentary. We don’t do outtakes and there are errors that occur. A camera follows me around and offers the public insight into what I do as a realtor and a community member, day to day. I was approached by the NFB and offered myself up for their project. I would be happy to take a call from any of the anonymous bloggers to discuss the matter further. And – as for the suits… The suits I get at Samson’s tailors are usually $600 – $800. For a hard fit like me (tall and skinny) that is a great deal. Previously, I would buy a $500 suit at the Bay, spent $150 on alterations and still not have a well fitting suit. So, the really lesson here is for a great deal on a suit, visit Samson’s tailors.”

“I paid a guy $200 to wait overnight for me so that my clients would be at the front of the line to buy condos at the Mark.”

This from MikeStewartRealtor at RE Talks 9 Dec 2009 5:59 pm & 10 Dec 2009 8:04 am –

“I paid a guy $200 to wait overnight for me so that my clients would be at the front of the line to buy condos at the Mark. Money well spent based on the amount of deals I put together there.”

It seems that the BOC wants people to overextend with free money, but also wants to be able to later say that they warned against that.

The Bank of Canada AGAIN issued a statement that announced ongoing rock bottom low interest rates, and AGAIN asked Canadians to be prudent in their borrowing and lending. Isn’t there an inherent contradiction in this statement? Aren’t Canadians naturally going to take advantage of free money? Aren’t some going to be imprudent? It seems that the BOC wants people to overextend with  free money, but also wants to be able to later say that they warned against that.  -vreaa

This from the BOC statement, a quoted at the G&M 10 Dec 2009 –

“Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates.”

“Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.”

“[The] upward trend [in Canadian household debt as a share of personal disposable income] implies that households have a growing vulnerability to additional adverse shocks.” [such as rising interest rates? -ed.]

$35K Olympic Rental – Hail Mary Pass? …or Excellent Prank?

Stories about Vancouver RE, and some around the 2010 Winter Olympics, at times get so bizarre that it can be challenging to differentiate fact from fiction. This ad on craigslist (vancouver > housing > apts/housing for rent) dated 7 Dec 2009 2:42 pm reads like any other homeowner making a Hail Mary pass for a big score from the Games, until you get to the last photo. This is probably just a good prank, but, in Vancouver, you never know. -vreaa

Here’s an excerpt –

$35,000 / 6br – Spacious Bright Hse by Olympic Venues (Vancouver Westside Central-Shaughnessy )

Furnished Character HOUSE  in Beautiful Safe and Centrally located Shaughnessy Neighborhood, double lot property has is trees and greenery surrounded Available NOW for the 2010 Olympics in Vancouver. Wealthy safe neighbourhood is one of the most picturesque in Vancouver and boasts shopping, movie theatres, library, banks restaurants a short walk away. Home is conveniently located 15 minutes between Olympic venues both downtown and at UBC Thunderbird stadium.

Update 12 Dec 2009 (hat-tip to garth at vancouvercondo.info)

Still from craigslist, this rental now available as a 3BR, for $15,000.

Now with an apparent  jaguar (the animal) climbing out of the fireplace, in addition to the previously-noted no-extra-charge corpse on the bed –

“It seems that the banks have the same perspective on this R/E bubble as most bears. 40% to 50% price drops are to be expected.”

What do the bankers really think of the future of Vancouver RE? Some commentators see recent subtle statements of caution from the major Canadian banks as the closest we’ll see to them openly warning of coming trouble. Rumors of what bankers are saying behind closed doors seems to support that notion. -vreaa

A prior anecdote was from a friend of a senior official at TD. The one below is from the uncle of someone who works for a big Canadian bank. Here’s robert james at RE Talks 7 Dec 2009 11:56 am –

“We spent the week-end in Victoria and I had a chance to talk to my nephew. He works for a big bank in Victoria. It seems that the banks have the same perspective on this R/E bubble as most bears. When the recent buyer’s rates reset within the next 5 years, things are going to get very ugly. Of course, the banks are having a chuckle over it thanks mainly to CHMC. He did mention that 40% to 50% drops in R/E prices are to be expected.”

“You want to essentially NEVER have anything paid off. You should always borrow as much as you can for as long as you can.”

Bull-markets, and especially bubbles, reward those who invest with leverage. The rise in the general stock-markets, commodities, and Vancouver RE, through most of 2009, has again encouraged risk taking and expectations of ongoing high returns.  -vreaa

At RE Talks, 7 Dec 2009, posters discuss mortgage strategies –

unicas 7 Dec 2009 2:08 pm – “I would delay my payment as much as I can so I can use the cheap money for other investment opportunities.”

Marco911 7 Dec 2009 2:14 pm – “I would tend to agree. In fact, that is the only way to make some serious money in the long run. You want to essentially NEVER have anything paid off. You should always borrow as much as you can for as long as you can. The trick of course is to make sure that you’re returns on investment are higher than the interest you’re paying.” Marco911 continues 2:57 pm – “I will give you a personal example. My current residence is mortgaged to the max. I was paying 0% through my previously employer but now I’m forced to pay prime which is still not a bad deal since prime is only 2.25%. I have yet switched my loan so it is an interest only loan. I am not suggesting everyone run out and do this but I’m giving you my exact situation. I could pay the loan off in full right now and have no mortgage but why would I do that? If I am earning 10% return on my money (which is a really pathetic return) and my income keeps pace with inflation, why would I want to pay off my loan? If anything, I would want to find more ways to dump money into my 10% growth. That may be with more loans or by dumping the money in directly. So what if interest rates go to 20%? Well, if that happened, I’m pretty sure I’d be able to find an investment that would give me even better returns so the idea of paying off my home would still be pointless. However, let us assume all hell broke out and there was nowhere to put my money. Well, I’d simply pay off the loan.”

“We bought a home in Vancouver’s hideous inflated west side in 2005. When the markets starting tanking in October 2008 we stupidly panicked, put the house up for sale and essentially gave it away for about $1,000,000”

Bubbles stir the emotions, and even those who have profited by selling may feel confused. This Vancouverite, who has $600K equity in hand after selling her house in 2008,  expresses regret, sheepishness, dismay, fear, greed, depression and resentment – all in one paragraph. This anecdote is also noteworthy in that it shows that supply does indeed come into the market as prices drop and owners begin to sell out of  fear. How many Vancouver properties will enter the market when prices next descend?  -vreaa

This from the body of Garth Turner’s latest post at greaterfool.ca, 4 Dec 2009, quoting am e-mail from Vancouverite ‘Elaine’ –

“I ended up making a huge mistake and frankly, feel like a pretty great fool. We bought a home in Vancouver’s hideous inflated west side in 2005. We had a  $375,000 mortgage on a nice home we had reno’d. I thought the mortgage was huge (in hindsight I see it wasn’t!). When the markets starting tanking in October 2008 we stupidly panicked, put the house up for sale and essentially gave it away for about $1,000,000, and then rented a home for a hideous monthly fee and intended to buy again when values “stabilized”. Well to our dismay, the average house price one year later in the same area is $1,400,000. Needless to say we have been unceremoniously turfed out of the Vancouver housing market due to our unfounded fear about a housing crash that never happened. I am not challenging you [Garth Turner], I know in time this market cannot sustain itself, but in the meantime we have to live somewhere in Vancouver and with a 70% increase in house value in 10 years, and a steady stream of  strong Asian cashflows, it seems a correction will never come.  I don’t want to lose out on equity, and our lease is up, and what the heck do we do next?  We are in our mid-forties, our combined income is about $150,000 p.a., and we have about $600,000 to put down. Luckily no debt otherwise. The thought of going to a cramped condo after living in a nice home is depressing, not to mention the  resentment over the mountain of equity we lost.”

Foreign Buying Confirmed – “Mainland Chinese buyers are by far the majority of the luxury condo buyers this year.”

A useful anecdote from a realtor in the luxury trenches. Questions: How hot is this money? Meaning, how skittish are these owners? Are they here for the long-haul, or would these properties be put back on the market if the Chinese stock market tanks, or if global rates rise, or if Vancouver RE pulls back, or if the loonie weakens? -vreaa

This from Maggie Chandler, reported as a comment at VREAA5 Dec 2009 5:04 pm –

“Mainland Chinese buyers are by far the majority of the luxury condo buyers this year.”

Vacant Downtown Units – “I expected at least 1/4 of the units to be lit up, and there were hardly any.”

The percentage of downtown condo units standing empty, and their possible meaning to the RE market, remains a hotly debated topic. Vacation homes for wealthy out-of-towners? Speculative vehicles? Owned by locals or foreigners? And, perhaps the most important question: – How many of these units would come on the market if we start seeing substantial price drops and/or if the economy shows a double dip? -vreaa

This observation from davers as reported in a comment at VREAA 5 Dec 2009 4:07 pm –

“A friend of mine works at a certain high rise downtown very close to the Shangri-la. He got us access to the roof, and we had a great view of the whole city, as well as the top 30 or so floors of the Shangri-la. In the top 27 floors (I counted) there were 9 places lit up on the 2 sides we could see [less than 5%]. Maybe 14 at most because it is tough to tell where one unit ends and one begins. I know those are all high class places and many owners may not live there full time, but I expected at least 1/4 of the units to be lit up, and there were hardly any. This was at 9:00 pm on a weeknight, when I would expect most people to be home. Maybe there really is an endless supply of rich people buying Vancouver real estate. Or maybe they are stretched to the limit and can’t afford to light their home, who knows?”

MSM Continue To Pump RE – “What’s next? “Cigarettes found to extend lifetime: Marlboro?”

We continue to register that the local mainstream media largely remains in the comfy pockets of their advertisers from the real estate industry.

An ‘article’, ‘Housing market to remain strong in 2010: Re/Max’, 3 Dec 2009, from the Vancouver Sun ‘by’ Kim Covert [joke ghost pseudonym? -ed.] is essentially written by Re/Max. (Full article reproduced in comment section.) Gobal Canwest Channel 2/7 news also ran this as ‘news’.

These relevant posts from discussion at vancouvercondo.info –

Limey 4 Dec 2009 2:16 am – “I don’t want to start picking on the Canadian mainstream media, or the state of BC journalism in general. But in other parts of the world, if you wrote an article about RE, and where it’s going in the next year, and only used one source, and that source had a suspiciously high level of investment in the RE industry, it would be regarded as some sort of joke. What’s next? “Cigarettes found to extend lifetime: Marlboro”? I mean, for christ’s sake – it’s pathetic. Where’s the objective discussion questioning the status quo? Am I being naive? I thought this is what newspapers are supposed to do – not re-write advertisements for large corporations.”

Carioca Canuck 4 Dec 2009 10:05 am – “Last night we were watching GLOBAL/Canwest Channel 2/7 news, which is sponsored be REMAX. Their latest fluff piece that is linked here was front and centre masquerading as a “news” article. ROFL !!! The wife looks at me and says “This is bullshit….” Pretty interesting comment coming from someone who just moved here 6 years ago from a foreign country, and has only started closely watching the mess that is our RE market, over the last 24 months.”

“No Brainer… or Madness?”

This from realtor Maggie Chandler’s blog 1 Dec 2009 (hat-tip to Starving Artist at vancouvercondo.info)-

“If memory serves me right, it’s been early 2007 since we’ve seen lineups for Vancouver condo pre-sales but that changed on Saturday as the investors lined up (in the rain) to take advantage of the low prices at The Mark, on Seymour and Pacific. Onni’s new building will be 41 storeys and prices started at $325,000. Given that completion will be 2013, it’s a no brainer that investors can only win as this is one of the final sites available in Yaletown and we assume prices will be higher in 2013 than they are now. Is this madness? Given the current economic conditions around the world, should Vancouver real estate be moving at such a pace? The problem is lack of supply and lots of International buyers – from what I have observed Mainland Chinese are all over West Side homes and luxury condos and the word is they’re here for a while. In my 28 year career I have never seen such a quick downturn or such a fast recovery. Some buyers are expecting a downturn after 2010 Olympics and some are expecting prices to continue to rise. We shall have to wait and see.”