Froogle Scott – “Some interesting comments from our banker this morning. They’re wondering what might happen if prices go down 20 or 30 percent.”

“Some interesting comments from our banker this morning. My wife and I were in the bank switching our variable rate mortgage to one of the low fixed rate mortgages the banks began offering last week. (The switch is a bit of a gamble, but not one with a lot of downside risk.) Our banker said that because we have a good credit rating, we could also apply to have our HELOC credit limit raised and we’d be approved. But as of two weeks ago, customers with a ‘C’ rating, if they want a raised limit, must have their house reappraised, at their expense, and also provide a proof-of-income letter from their employer. I asked if this was because the bank was getting worried about house prices. Our banker said, “Yes. They’re wondering what might happen if prices go down 20 or 30 percent.” She then went on to say that my wife and I are among the few clients who have been significantly paying down the principal on their mortgage. A number of her clients have been “bumping up,” and she feels some of them could be caught if the market drops.”
“Interesting on several levels. The bank quietly enacting some defensive measures. Clients with good credit and steadily shrinking mortgage balances — i.e., ‘safer’ — invited to increase their credit limit. 20 or 30 percent – her numbers, the ones that I assume are circulating in the bank at the moment. Plenty of people still increasing their debt, fiddling while elsewhere Rome burns, assuming the flames will never reach them, or not even aware there’s a fire. As for credit rating, apparently all it takes to get on the bank’s shit list is a couple of missed credit card payments.”

– from Froogle Scott, via e-mail to vreaa, 24 Jan 2012

Interesting. Many thanks for the story, Froogle.
If prices do fall 30%, what’s to stop them falling 50%?
Do we expect there to be buyers stepping in at 30%-off levels given what such a fall is likely to do to wages, the economy, lending criteria, and sentiment? We will have lost all momentum buyers, of course. And would we expect value buyers to step in when prices, albeit lower, would still be significantly overvalued by fundamental measures?


PS: All Froogle Scott fans will be pleased to hear that he is, in his characteristic painstakingly thorough fashion, putting together an analysis of the actual cost of home ownership. He plans to share this with us soon. We eagerly await it.
– vreaa

39 responses to “Froogle Scott – “Some interesting comments from our banker this morning. They’re wondering what might happen if prices go down 20 or 30 percent.”

  1. Hard to know what’s up with banks, they are displaying their normal Jekyll-Hyde approach to lending. What a dirty business.

    • Jekyll & Hyde indeed. These same banks will turn around and offer “cash back” mortgages deliberately designed to circumvent CMHC’s already absurdly low 5% down payment requirement. And they are obviously reaching out to realtors to help market these things.

      http://www.sellingbc.ca/BUY_WITH_NO_MONEY_DOWN/page_2400172.html

      [Thanks, RR. Yes, who said no sub-prime here, eh?
      This ad was also previously archived, for posterity.
      ‘0-Down Lending In Vancouver, circa June 2011’, VREAA 5 July 2011.
      Now we can add ‘circa Jan 2012’
      – ed.
      ]

      • Basement Suite

        Oh I LOVE it, US market pre-bubble popping anyone? We are truly nearing the collapse 😀

      • Oops. I’ve been following the blog for only a few weeks now, so I didn’t realize the lady had already starred in her very own entry.

        The scary thing about these cashbacks is that the bank had to claw the money back somehow. They do this by charging a much higher rate of interest for at least the first 5-yr term of the mortgage. So not only is the buyer leveraged to infinity with ZERO margin, but he’s paying a much higher rate of interest.

        It gets worse. RBC is offering 7% cashback (someone posted that link recently), which means the actual down payment is -2%, instead of CMHC’s mandated 5%. Other than that, I’ve got no concerns whatsoever. 🙂

      • Basement Suite

        “RBC is offering 7% cashback (someone posted that link recently), which means the actual down payment is -2%”

        Oh stop, I’m getting giddy and gleeful 😀

    • “A number of her clients have been “bumping up,” and she feels some of them could be caught if the market drops.””

      Strange that she seems to see this as the clients problem, but not the bank’s. These defensive measures won’t be nearly enough. Not when there are so few borrowers actually paying off their loans that she knows who they are.

  2. relevant to the folklorish savvy unlimited offshore bid for vanRE. vendor financed component of the export model in terminal phase. china is out of untapped rural labor to absorb paper issuance and main export markets (eu, jp, usa) all hitting their own structural limits. the heavy lifting behind the economic miracle now begins.
    http://tinyurl.com/7jmasp5

  3. Generally if these guys publicly say 10-15% downturn they are really whispering among themselves of a 20-30% downturn.

    • If they are telling customers 20-30% perhaps they secretly believe we are in for a 40-60% down turn.

      • Basement Suite

        At 60% off I start to get a little bit intererested. Like to see a bigger discount tbh but 60% is a good start.

      • Part of me thinks I might be interested at 60% off. But, by then, our economy will be so ruined, I might lose my desire to commit to a piece of dirt. Its good to be mobile in hard times.

      • Basement Suite

        I understand that. Myself, I like fire sale prices, especially if I find a place I might stay in for a couple decades or more. I will be in no hurry to buy though, after all this. I’m looking for a very long term bottom, and am in no rush to pile in while the house is still collapsing.

  4. considering all the economic uncertainties and headwinds, expecting trough valuations to eventually reach all-time lows. most true value buyers likely to want very significant discounts to ‘fair’ before step in to bottom out prices. they’re also likely to be in very short supply given the extent of local excesses.

  5. “And would we expect value buyers to step in [?]…” – VREAA….

    Funny you should say that, IllustriousEd… because, as it happens, the braoder ‘industry’ is more than a tad concerned about that, too.

    Accordingly, in the ProudTradition! of Yanqui AstroTurfing PsyOps – the Canadian Homebuilders Association is hosting a little ‘Symposium’, “Housing Affordability Symposium: February 2 – 3, 2012”.

    Without further comment…

    http://withinyourmeans.ca/index.html

    PS – Is ‘Nem’ the only one who senses a supreme irony in their choice of URL?

    • Afterthought, for those who enjoy LogLines/Slogans….

      “Making market housing within the means of all British Columbians”

    • The irony is weak if you consider that organizations like that are purely PR and lobbying. They have no other skills or purview. Within Your Means are words for lobbyists to get the attention of pols and to make homebuyers feel better. It’s not advice.

      Looking at the TOC, I see there is nothing on excessive access to credit driven by financial industry risk distortions, so I think they might have wasted their time. They can build 10,000 condos next year, but until speculators stop buying 4-5 apiece and leaving them empty, the price will never become affordable.

      I just looked at the taxation section. Nothing on “taxing empty housing to reduce underuse of existing housing stock” instead there is “Create an award for the most small business friendly municipality.” LOL

      There is really no way out of this mess, at this point, that doesn’t involve some pain.

  6. If market falls 30%, value buyers will not have access to credit. Here in Cali the market crashed and value buyers with 50% cash could not find financing for the other half. The market essentially shut down.

    • seems ex-yvr’s, bubble watchers et al are perhaps all beginning now to tune in anticipating the slaughter. marks my exit from the comment space, for a while at least. i have what i came for, thanks a bunch!
      did i read someone just bought a $20M on belmont? why? jen lowballs it, sort of:
      http://tinyurl.com/7y3z5f3

      @gatsby. gatsby, if that is you, ciao bella, ciao figlio e ciao roma. while we weren’t paying attention, mom was abducted by the vanREaliens. i had appointed myself assistant deprogrammer in charge of research, as the others are not so inclined. this blog is a good virtual boot on the ground. of course, there is the usual lack of self-editing while at keyboard. glad you are now present to check these transgressions. ciao out 🙂

      ps. capitals will be scarce. so, i use them but sparingly.

  7. FYI you guys might enjoy my last post completely unrelated to Vancouver housing. 🙂

    http://landlordrescue.ca/petas-killer-resources-landlords-2/

  8. I miss you Froogle! Not that VREAA isn’t doing yeoman work. Thanks, both of you.

    Something that really jumped out at me, in a conversation over at a mortgage broker blog. Someone claiming to be a TD employee said (while defending collateral charges on title):
    One of the things we found out was that customers are 20 times more likely to want to refinance their mortgage with us, than they are likely to switch to another lender using an assignment of mortgage. Since most of our customers want the option to refinance with us, and since most choose to increase their borrowing when they do,[…]” — at http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/10/td-mortgages-to-become-collateral-charges.html#comment-6a00d8341c74cb53ef0133f53f5f48970b

    I wonder how many mortgages get extended at renewal time (i.e. if you had a 25 year am, 5 year term, and you sign up for the same, you’ve extended to 30). Is there anywhere that has stats on this?

    Maybe we need a tip jar to fund a FOIA request for CMHC. Would they even have the numbers?

  9. In other news, the GVREB, having consulted their resident Geomancer – has concluded, unsurprisingly, that there’s never been a better time to buy…

    [CBC] – Year of Dragon heats B.C. real estate market

    “The fact that 2012 is the Year of the Dragon is likely also stoking the market, according to Duanduan Li, an Asian Studies professor at the University of B.C. “People like to choose an auspicious moment, dates and years to do big things because they think this will be more successful,” said Li. “I think the Year of the Dragon is regarded as a very good year to do anything big.” “Big” in this context could include career changes, having children, said Li. And perhaps spending millions of dollars on real estate [!]”…

    http://tinyurl.com/74ej8am

    • Ugh. That article left a grease stain on my eyeballs.

      • For some reason, Absinthe – when I parsed that PressRelease masquerading as journalism, I was immediately minded to think of Jesse’s superb, prior allusion to DungBeatles, “rubbing their eyes in disbelief at the stupendous ‘treasure’ they had chanced upon” [to paraphrase the Master]…

      • “You’re so full of crap dung beetles have to rub their eyes in awe.”

  10. Great news about Froogle’s next project! If I had to put money on the person most likely to give a thorough and complete treatment of a subject, my pick would be Froogle every time. Well, him and Noam Chomsky, but their fields do not intersect as far as I’m aware.

  11. $25M sales in Point Grey, gotta be a new record for Vancouver? I think you have to make $100K in regular salary just to cover the property tax bill!

    http://www.manyeelui.com/ActiveListings.php/Details/975/4803-belmont-avenue-vancouver-bc#viewdetail

  12. “At 60% off I start to get a little bit intererested. Like to see a bigger discount tbh but 60% is a good start”.

    not sure why I find this comment so amusing.
    Some perspective…at The Bay a 50% off sale would garner sales to most people. The difference here is that the seller (store) probably paid far less than even the 50% sales price when they bought the inventory. How many current owners paid far less than the 60% discount for their detached homes – not many I would guess.

    • Not sure why I find this poster so amusing.

      Some perspective…posting vacuous, ill-written comments doesn’t satisfy your contractual requirements F1. In order to get your sockpuppet bonus you need to say something that might actually be a valid point. Otherwise you are just a troll wasting our time and your employers money.

    • That’s their problem, F1. No one forced them to pay 2 million for that 1960’s one-story dump. Doesn’t mean I want to pay more than 600k for the same place, and that is even assuming it’s in a decent part of town. That’s why I say 60% is a good start. Many places are overpriced worse than that.

    • Renters Revenge

      “How many current owners paid far less than the 60% discount for their detached homes?”
      Enough to make a 75% discount likely.

  13. >The bank quietly enacting some defensive measures.

    And only three or four years too late too. Who said banks can’t self-regulate?

  14. Here’s an email I dug up from a Vancouver co-worker (I’m in Wpg) from 2009. “I just bought a house and my mortgage broker told me that since I had no debt other than my other mortgage my credit report is falling and getting worse. He suggested that I take out a loan or get a credit card. Figure that out.”

    If that isn’t the definition of insanity, I don’t know what is. Bad enough he had to become a life-long debt slave to own a home in Vancouver, he needed even more unsustainable debt to maintain his credit rating!

    • Renters Revenge

      Surprisingly that is actually how it works. Your credit score is boosted by having a high amount of available credit. If you have a credit card with a $40,000 limit and a $100 balance, that does more for your credit score than $40,000 cash in the bank and no credit card. Its most Important to have a low percentage outstanding of your total available credit.
      The real insanity is our debt based monetary system that requires exponential debt growth just to remain solvent.

    • I had a broker who said something similar as I am only the secondary card holder of a 1 card family. Then he said I could still get 700K so the point was a little lost on me.

  15. Off topic, but I had to post this somewhere:

    “Clearly, the Fed will do whatever it takes to reboot economic activity, particularly housing,” said Sherry Cooper, chief economist at BMO Nesbitt Burns. “Now, let’s see if the ECB will have the guts to follow suit.”

    Read it here.

    This is cheerleading by bank economists for continued low interest rates is getting on my nerves. Of course low Fed rates keep the pressure on the Bank of Canada to maintain low rates up here. And who does that benefit? The chartered banks of course, who can borrow money at less than 1% from the BoC, and turn around and use it to offer mortgages at 2.99%, thus pumping the final few breaths of air into the Canadian housing bubble.

    Interestingly, as someone recently posted here at VREAA, Ms. Cooper is selling her own Toronto Bridal Path home for a cool $3.25 million. Her motivations for selling could be entirely personal. But maybe she’s selling because she’s not so confident those low rates will work the magic she wants the rest of us to believe in.

  16. Calgary just sold a condo (5000 sq feet) for 8.3 million!! – to an oil and gas executive. I can only imagine what the condo fees are!!

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