Infographic Argues For A Soft Landing – “Just because it is in the form of a Tintin book, doesn’t make it true.”

– this infographic from ratehub.ca, a ‘mortgage blog’, 27 Mar 2012.
The link was kindly forwarded to us by frequent contributor ‘Zerodown’, who adds:
“I admit to being impressed with the thoroughness of this info graphic. However, just because it is in the form of a Tintin book, doesn’t make it true. An annotated version will be required.”

We think this infographic overstates the strength of Canadian borrowers: 5% has not been the minimum downpayment; 32% of income has not determined the ‘maximum affordability’; 153% debt-to-disposable-income ratio is a very significant level; “Long term low interest rates” do not “shield the market from a bubble burst”.
We personally can’t see a soft-landing (a coolly deflating balloon?) playing out.
Who do we expect to keep buying Vancouver RE at these extremely lofty price levels once the promise of future abnormally large price gains disappears? Because, that is what would be required for a ‘soft landing’; a steady stream of buyers prepared to take out ginormous loans to buy RE that is no longer appreciating, or is very likely dropping, in real terms.
Who do those calling for a ‘soft landing’ propose to be doing that buying?
– vreaa

44 responses to “Infographic Argues For A Soft Landing – “Just because it is in the form of a Tintin book, doesn’t make it true.”

  1. They get an E for effort

  2. Oh God. Don’t make me laugh so hard! Thanks Vreaa. I needed that for today’s amusement.

  3. it will START as a soft landing – but that changes a lot of the variables, and it’s time to run the simulation again

    that’s the interesting thing about complex systems, things can get non-linear very quickly

  4. Still laughing about all the “shields” in the above article. They are kidding, right? Never even mentioned garlic of crucifixes once. It was quite disappointing. Don’t they know we are up against vampires here?…….Hey Nem, you surely have some good vid for a response.

  5. I’m just about as bearish as they come re: local real estate. And yes, it’s clear the logic in this “infographic” seems flawed. But remember: It deals with Canada as a whole – not just the glorious, amazing, always sunny BPOE. Big, BIG, HUMONGOUS difference.

    • Good point; we’re not expecting as big a crash across the whole of Canada as we are in Vancouver.

    • Some of the info is flawed as well.

      WRT to interest only, my own bank offered me this product for a home purchase. Instead, a mortgage broker found a nice teaser rate mortgage for me since I was familiar with the product already having one for another RE investment at the time. I’m sure I’m not the only one out there.

      Furthermore, Canadian banks have huge MBS departments and these derivatives are not entirely composed of CMHC insured mortgages according to a bank trader I know in the big smoke.

      Finally, just because a loan is non-recourse doesn’t make the underlying asset any less prone to a price crash because of bad fundamentals – and the inability to deduct mortgage interest should increase the liklihood of foreclosure on the margin.

  6. Just FYI: Despite numerous recent anecdotes to the contrary, this report says US home prices are *still* dropping. That’s 6 years – 7 in some areas – of continued declines, and it’s only getting worse in cities (Seattle et al) that were late to the party.

    http://money.cnn.com/2012/03/27/real_estate/home-prices/index.htm?iid=Lead

    • As of this summer, it will be six years since prices in most US cities peaked. In the Pacific NW it was about a year later, so it will be five years of declines as of this summer.

  7. I simply don’t believe those statistics on the lack of sub-prime loans, at least in Vancouver. Prices are 11 times income. Two doctor households are leaving the city for lack of affordability. There is no way that all of these transations of $600,000 plus are taking place with high-quality loans.

    Regarding a 5% downpayment, that is hardly better than 0%. Even a minor correction will wipe out 5% in no time. Also, they need to consider that many of these “good” loans have HELOCs layered on top of them which have eliminated all equity and essentially turned them into bad loans.

    • Consider the source: ratehub.ca.

    • It’s interesting that you use the $600K figure. I had an informal conversation with a Burnaby accountant who has been very busy working as a debt manager. He said most of his clients are so ridiculously over-invested in GVRD real estate – significantly negative cash flow returns, average mortgage debt per client of $600K, etc – that he fully expects a hard landing for Vancouver.

  8. They should have a wee little asterisk that says:

    “This excludes both Vancouver and Toronto, these two cities are screwed beyond anything that the US could have produced.”

  9. Renters Revenge

    So we are in housing balloon rather than a bubble? Well that’s just a huge relief!

    “Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.” – John Kenneth Galbraith

  10. so…. are there any graphs out there, any good evidence of an asset that has gone through an almost exponential rise in price, followed by a nice smooth decline back to the norm ? I would like to know… honest question…. So many graphs out there showing asset bubbles from the past (being the US RE bubble a great example) where the decline pretty much mirrors the rise… a very steep slope, with the end result being the trend stabilizing at the norm. Where do these analysts get the idea that there’s gonna be a soft landing here? I mean, I can see all their “facts” laid out –wishfully– explaining why… but has it ever happened somewhere else? Is there a clear example out there of an asset bubble with a “soft landing” ?

    By the way, I’m starting to hate the term “soft landing”. Same thing has happened with “balanced market”, “consumer confidence”, “starter home” , “character home” and my favourite….. “building equity”. Make me cringe…. Aaahhh building equity… the trademark of the responsible sheep.

    Man it was raining this morning, and now it’s snowing. Good thing I still have my winter tires on. Have a good day everybody !

    • There are lots of excellent graphs Yanz. None of them shows good outcomes on the heels of a period or exponential growth. Actually most of them are pretty scary because sharp declines are an outcome, if not outright crashes.

      So lets all go farming for a minute. The dynamics of the creature world creates analogies for real estate at every turn. Try to imagine that what you are really seeing in the markets is a predator/prey relationship as you look at the charts of Voles, Arctic Hares, Lemmings and Foxes and Lynx.

      Lender versus borrowers. It is a dangerous world.

      The best chart examples if not the most dramatic ones come from studies of Lemmings of all creatures as they go through population boom and bust cycles. We are in a similar kind of cycle unfortunately for too many buyers (prey) but the outcome is not much better for lenders (predators) as they too suffer a drought of kills as the food sources decline.

      Here is some good stuff from a local guy doing experiments with Voles.
      http://www.science.ca/scientists/scientistprofile.php?pID=11&pg=1

      I am a big fan of the Lynx and Hare Oscillation model myself.
      http://www.sonoma.edu/users/n/norwick/Classes/MODELING/How%20to%20Present%20a%20Model/Projectexample.htm

      Population growth is helpful in understanding urban overbuilding of condos.
      http://users.rcn.com/jkimball.ma.ultranet/BiologyPages/P/Populations2.html

      Yes, all this stuff really is about Real Estate and human nature.

      • That last post was all about Professor Charles Krebs “Fence effect” by the way. I thought the research had a striking application to Vancouver’s housing situation being as it is a populated area hemmed in on all sides.

        Mr Krebs is a UBC prof by the way. I don’t know why the media never interviews him for opinion on the future or real estate in Vancouver. The guy would have plenty of insights to offer, no doubt.

      • thanks farmer, quality links right there 🙂 Just read the first one and will save the other two for home.

        “The dynamics of the creature world creates analogies for real estate at every turn” –> Word !

        and to keep quoting, right at the bottom of the cute chart:

        ““…the facts on the ground send a much calmer message, the housing market currently looks well balanced, and is broadly moderating at its own accord” — Douglas Porter, DEPUTY CHIEF ECONOMIST BMO Financial Group

        well balanced? for real? unbelievable… it’s almost offensive. I mean you could’ve got away with it some time ago, when crackshacks in yyz and yvr were still under a million 😉 … but now , Mr. Deputy Chief Economist, even with mainstream media reporting on possible corrections and even daring to say the B word… Gimme a break !

  11. “Just because it is in the form of a Tintin book, doesn’t make it true.” – Zerodown.

    What a great quote on the advertising slick! So the result of this well constructed graphic— do I buy or do I wait? I’m getting the vibe that experts are now debating on the rate of depreciation. That housing will depreciate seems a given.

    Left brain says, “when renter can pay mortgage and all you need is a downy, then buy, cause it is the down payment that separates you.”

  12. Lots of misleading stuff in this infographic, in addition to the 5% down-payment issue.

    1. “Walk away” foreclosures — most US states are “recourse”, where you can’t just walk away from your home. Only about 20 are “non-recourse” (“foreclose and walk away”).

    2. Mortgage terms — the infographic doesn’t mention that in Canada, the vast majority of mortgage holders are on terms where the rates reset to market levels every five years or less. In the USA people can lock in for 30 years.

    3. Speculation — the infographic doesn’t mention price-to-rent ratios or “flipping” activity. Here in Toronto, 80% of new downtown condos are sold to investors, the vast majority of whom lose money when they rent them out.

  13. Shiller: “Suburban house prices may not recover in our lifetime.”

    http://finance.yahoo.com/blogs/daily-ticker/shiller-housing-chance-bottom-suburban-prices-may-not-161914444.html

    Coming soon to a city near you…

  14. The graphic conveniently ignores:
    – Housing bubbles in Ireland, Spain, Japan, and other places that had different conditions than the US.
    – The 1981 housing bubble and collapse which occurred in Vancouver and perhaps other Canadian cities.

    You don’t need to have US-style conditions to have a bubble burst.

    • No kidding – just look at Calgary prices over the past 5 years. I dont think you will find too many 2006 -2007 buyers there who would agree that the subsequent price drop was a soft landing. Nothing like losing your 50K downpayment and having a mortgage that’s 50K more than the market value of your home 5 years later!

  15. So we’re better off because we have a minimum of 5% down? We had until recently 0% 40 year mortgages. Banks are also skirting the 5% down rule by offering cash-back mortgages. What makes us so different than the U.K, China, Portugal, Ireland too?

    Real estate worldwide skyrocketed because of low rates. The corrections that happened elsewhere will happen here. The 3 most dangerous words in real estate or investing, “It’s different here.”

    • The idea is that if you had 5% down you had real skin in the game and were less likely to walk on your debt. You know, because the money meant you were more committed. Over in China they had been insisting their market was immune to crashing because folks put 30% down by law.

      Stupidest argument in the world. At least in the States it was someone else’s money you were losing. In the case of China though the down payment was REAL money that the families worked for and saved. So when they lose it (like now) they really lose it.

    • I thought the 3 most dangerous words were “reversion to mean”

  16. Considering how low rates are right now, and considering that you can’t lock in for the duration of your amortization here, I think it’s fair to look at the current rates “normal” rates as “teaser” rates.

  17. Doesn’t price count for anything?

    Canada retained some advantages over the US, but our overvaluation is now larger relative to incomes and rents and housing as a share of the economy and employment is further from long term averages than they were. That counts. When I think of the advantages that Canada has, I would say a stronger social safety net, i.e. less extreme economic outcomes for households, and higher government spending as a share of the economy assuming that is maintained.

    This country *was* in better shape than the US in 2007. We could have had a soft landing *then*. But we have played our hand like a trump card when it’s not. The data suggests that a reversion to the mean will be similarly brutal here, and whether it plays out over 3 years or 5 years isn’t going to make that big of a difference. When 30% of GDP is housing and real estate is 30% overvalued versus bubble incomes, you are California more or less. Ask them how it went.

  18. Seems everyone and their monkey is a housing analyst today, and they all agree Vancouver/Toronto real estate is in a bubble and will crash. Yet, if everyone agrees and it’s in the headlines every day, it probably won’t happen.

    • No, I don’t think everyone believes that. Further, even those who do, are crossing their fingers and hoping for the best, rather than taking proactive action. In other words, they don’t believe it at all, or if they do, they think everything’s going to be peachy keen. Watch what they do, not what they say. You’re trying to be contrarian for the sake of being contrarian.

      If you’re looking at headlines, you’re looking at the wrong indicator. Yesterday’s headline was about bubbles bursting or deflating, today’s is about millionaire Asians coming in helicopters pushing everyone out and keeping prices high. Are you saying today everyone believes prices will keep going up, which means the opposite will happen and when will fall? What will you say based on tomorrow’s headlines?

  19. LandlordRescue.ca

    I don’t think it matters that a lot of mortgages here are recourse mortgages. In States that have recourse mortgages people are still walking away and the market is still diving.

    The real change will come in people’s attitudes. That’s what will dive the market. I saw this on the streets of Toronto in 2008 during the brief “correction” we had. People rented and were glad to rent. This is the same as the States. If you talk to people there they’re glad to get out from their mortgages and some swear they will never buy again.

  20. landlordrescue,
    This paper is a study that shows recourse is a significant deterrant to default. It’s quite lengthy but a good read. They also make reference to the provincial differences b/w Alberta and B.C.
    The article finds that defaults are used as a deliberate strategy in locations where there is no recourse for mortgages.

    “…evidence from Alberta, which does not permit deficiency judgements, and British Columbia, which does permit deficiency judgements, and finds that defaults in Alberta are more likely due to deliberate defaults, rather than trigger events in the borrower’s life”

    http://www.richmondfed.org/publications/research/working_papers/2009/pdf/wp09-10r.pdf

  21. Real estate in Vancouver is big business. Factors working against it now are situations in other countries , the US, EU and China, plus the high value of the Can $ on account of the resource boom. Manufacturing and jobs are going elsewhere, it is just too expensive in Canada. And the budget was resource-centric. Maybe the arrest of the Kwoks is the trigger.

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