Ben Rabidoux at Macleans – “Those who try to explain real estate prices in Canada without acknowledging the role of easy, accessible credit over the past ten years or so have completely missed the boat.”

“The next decade for real estate in Canada will be fundamentally different than the last. Our aging population, a mismatch between where our prices are and where they should be based on our economic performance, and rising interest rates are all reasons for this. However, the greatest difference will be in the availability of credit going forward, and those who try to explain real estate prices in Canada without acknowledging the role of easy, accessible credit over the past ten years or so have completely missed the boat.”

“Despite three rounds of mortgage rule changes since 2008 that largely corrected previous mistakes, we’ve seen a decade of extraordinarily loose lending in Canada. But the era of cheap credit may soon end–and possibly quite abruptly. News has come from Canada Mortgage and Housing Corporation and the Office of the Superintendent of Financial Institutions Canada, Canada’s chief financial regulator, that major changes are on the way, and it’s hard to understate how significant they may prove to be.”

[Ben then elaborates on] the three changes:
1) CMHC will drastically draw down on mortgage insurance.
2) OSFI targets HELOCs and conventional mortgages.
3) “Increased oversight of CMHC” coming.

– Ben Rabidoux of The Economic Analyst, now also an analyst at M Hanson Advisors, at Macleans.ca, 23 Apr 2012

A brief, ‘must read’ article.
Significant for it’s appearance at Macleans.
Thanks Ben.
We are in complete agreement that far and away the major force driving our speculative mania in housing has been cheap credit.
– vreaa

55 responses to “Ben Rabidoux at Macleans – “Those who try to explain real estate prices in Canada without acknowledging the role of easy, accessible credit over the past ten years or so have completely missed the boat.”

  1. Thats it.

    It was very simple to see. But to understand it you need to understand the purchasing power of variations to terms (increased), interest rates (emergency rates), and easy finance.

    Nobody in power wanted to admit it. But that is what caused your bubble, just as it did down in the US.

  2. Today is C day. We get to see how CMHC will be governed. I wait with breath abated…

  3. Basement Suite

    Yet interest rates will remain ultra low for years to come… Penny wise, pound foolish.

  4. i feel so cheap and abused … who am i, who am i?

    • “The war was being run by a bunch of four star clowns who were gonna end up giving the whole circus away. … Whatever was going to happen, it wasn’t gonna be the way they called it. … Everyone gets everything he wants. I wanted a mission, and for my sins, they gave me one. It was a real choice mission, and when it was over, I never wanted another.”
      (You’re Willard!)

  5. Three factors will affect on real estate in Canada in the future. These factors are population, placement of our economy and increasing interest rates.
    Visit ‘eps an group’ for buying and selling your property.

    [‘Epsan group’ is apparently a Toronto realtor/developer/contracting company.
    ‘Fery’ linked his handle to ‘Padika: Toronto Iranians Directory’.
    His desire to advertise both on a Vancouver blog very bearish the RE market noted.
    -ed.
    ]

    • I believe population itself will not be as significant as demographics. I am thinking (and hope) that my daughter will be able to afford a SFH in Vancouver without a renter or punishing mortgage.

      • The early boomers are now around 65. Do 65 year-old folks really feel much pressure to downsize? After all, their kids probably left home 15 years ago. My guess would be that most of them prefer living in their own SFH, with their garden, etc. I would guess that the pressure to move to a retirement home would be more around 75 or 80. So the demographic pressure is still years away…

      • Hi Jeff…yes, I think you are correct. Thankfully my daughter is years away from a home purchase. 🙂 The timing might be perfect!

  6. If you ever look at the Board of Directors of the CMHC you will be shocked. They have filled it with developers, a small town lawyer, a minor academic, to run a $600 Billion Organization.
    The IMF, Bloomberg and Nomura have called it badly governed and needing over-sight. We shall see soon how naked the emperor really is.

    The problem is – we will have to buy the clothes!

  7. Told-you-so-in-2007

    OSFI to supervise CMHC

    http://tinyurl.com/7c466zh

    “OTTAWA – The government introduced legislation on Thursday to give Canada’s banking regulator oversight powers on the federal housing agency for the first time in a bid to minimize risk in the heated domestic housing market.

    The bill also provides a legislative framework for covered bonds, which are mortgage-backed securities that are sold by banks and guaranteed by the housing agency, the Canada Mortgage and Housing Corp (CMHC). The legislation will also establish a registry for institutions that issue covered bonds and for covered bond programs.

    Office of the Superintendent of Financial Institutions (OSFI) will monitor CMHC’s commercial activities and report to the minister of finance, the CMHC board of directors and the minister of human resources.

    Finance Minister Jim Flaherty will speak about the proposed changes at 11 a.m. (1500 GMT).

    • i’m not current on the details but several notes … horse is gone already … regulation and oversight of a bad idea won’t make it a good one … the proper solution is zero public backstop for private enterprise … this is where all the trouble comes from … ergo -> privatize cmhc, kill the backstop for genworth, push all the risk back to the lenders … then, kill the boc backstop (holy cow!) …. kill-kill-kill
      that is an ideal at least … reality? it’s beyond the scope of popular solutions … save yourselves … frontrun the consequences

  8. those who try to explain real estate prices in Canada without acknowledging the role of easy, accessible landed immigrant status and thus social benefits (health care, child tax, education, etc.) to wealthy foreigners have completely missed the boat.

    • oh formulaic one … was acknowledged … at most a minor monetary factor … however, perhaps a significant psychological factor (impossible to quantify, which in itself is a most important consideration) in the uptake of cheap credit … da peeps need da fantasy … it’s just one that manifested
      how does your fantasy explain prices in, say, winnipeg or hamilton?
      btw. are you and sidecheck now the dynamic duo of bliss? did not detect a mea stupida nowhere

      • “how does your fantasy explain prices in, say, winnipeg or hamilton”?

        These cities were undervalued to an enormous degree. I recommended a buy on Hamilton, Windsor and Ottawa 3 years ago for renters in Vancouver who wanted a property as part of their portfolio. Maybe some listened.
        BTW, price of a detached home in The ‘Peg is $228,000 – so I’m still recommending a buy on the 3 cities I mentioned above, now plus Winnipeg.

      • note to self …
        reads reply 932 … unable to answer q 940… hissy fitting 940-10… changes subject with claim of clairvoyance 10-1030… chants formulaic – yada-yada higher prices1030-1159 … recommends buy 12pm

    • But those people could come here and rent, as they did in the 1990’s when government spending was cut and this was a big issue. In fact, the people who want the benefits are less likely to afford high real estate. Why aren’t they driving up rents?

      In short, do you really think someone will pay 3 million dollars for a house because it has a better public school and they can get free medical care? Why wouldn’t they buy a nicer 1 million dollar house in the US and invest 2 million? Canada’s social programs can’t be worth 2 million dollars because the Canadian population couldn’t possibly afford to pay for them.

      • “Why wouldn’t they buy a nicer 1 million dollar house in the US and invest 2 million”?

        because we’re giving away citizenship with the home purchase, the US is not. US still has limit on residency of 5 years to foreign home buyers. After that it’s back to 6 month/year maximum stay in the country

    • 4SlicesofCheese

      That is exactly the point, everyone acknowledges immigration (basically HAM) but if you ask the average person on the street what has inflated house prices, they will not identify the role of easy, accessible credit over the past ten years as causes.

      Easy to point fingers at others and not yourself.

    • you are talking Vancouver not Canada in general.

  9. “News has come from Canada Mortgage and Housing Corporation and the Office of the Superintendent of Financial Institutions Canada, Canada’s chief financial regulator, that major changes are on the way, and it’s hard to understate how significant they may prove to be.”

    nothing will change until you change immigration policy

    • When you try to sell a hot-dog for $50, at some point people will stand around and watch, no matter how big the crowd, and regardless of whether the last guy paid $51. Especially when you can get a very similar hot-dog around the corner for (sane going rate for hot-dogs here).

      • Renters Revenge

        $50 will feed 8 in Seattle at the acclaimed Po Dog Hotdogs.
        http://seattletimes.nwsource.com/html/restaurants/2011968143_deal28.html

      • Renters Revenge

        And of course Vancouver is home of the Best Hotdogs On Earth:
        “A small storefront on Vancouver’s Granville Street is the home of a rare gourmet treat — the $100 hot dog.”

        http://www.cbc.ca/news/canada/british-columbia/story/2012/01/24/bc-100-dollar-hot-dog.html

      • Darn, beat me to it… but to amplify on RR’s scholarship… [DearReaders will be forgiven for snickering as they ponder the ironies, peruse the visuals and commend DougieDog’s proprietor for his astute choice of NomDeGuerre… Dougie Luv. How apt for a TubeSteak Mogul. As for marketing his SausageMagnumOpus as the “DragonDog”]…

        [MetroNews] – Vancouver Restaurant Claims World’s Most Expensive HotDog

        ..”The Dragon Dog is made up of a foot-long bratwurst infused with 100-year-old Louis XIII cognac ‘ which, on its own has a price tag of $2,000 ‘ Kobe beef seared in olive and truffle oil, fresh lobster, and picante sauce.”…

        http://tinyurl.com/d5ysqzb

      • And now it’s ‘Official’!… DearReaders, your Quote ‘O TheDay!

        “Taking the title away from New York, I feel like we just won the Stanley Cup!” – Dougie Luv

        [PR NewsWire] – $100 “Dragon Dog” Officially Recognized as World’s Most Expensive Hot Dog

        http://tinyurl.com/c22bmun

      • “try to sell a hot-dog for $50”

        For the avg person $50 seems like a lot to pay for a hot dog. But I acknowledge that there are some people who feel $50 is a fair price to pay and they can afford it. You can still buy wieners at the grocery store and prepare them in your home to a very comparable standard to the $50 wiener. The problem here is that the new $50 wiener has boosted the price of the hot dog at the stand you liked to frequent.

      • Renters Revenge

        “The problem here is that the new $50 wiener has boosted the price of the hot dog at the stand you liked to frequent.”
        At some point, even the most profligate will take their fiat bearer notes to Po Dog Hotdogs instead of DougieDogs.

      • Trouble is, F1, you are trying to sustain 70% ownership rates. That’s a lot of hot dog buyers.

      • “Trouble is, F1, you are trying to sustain 70% ownership rates. That’s a lot of hot dog buyers”.

        AG,
        We are actually adding more (absolute #) homeowners even if we stay stable at 70% ownership. Actually, our home ownership rate would need to decrease in order for the # of buyers to remain stable. Do you know how?

      • Abstracted from the MetroNews DougieDog advertorial…

        “No one has ordered the pricey wiener yet, but Luv said it will remain a permanent feature on the menu.”

        Delicious. Rather like certain listings, wouldn’t you agree DRs?

      • felt left out not having a dog in this race … rockabilly is truly a universal solution …

      • Renters Revenge

        Thanks Chubster, that was doggone funny!

      • Am I the only one who thinks it’s the stupidest thing ever to go through Ikea for a hot dog when you can just enter through the exit and bypass the showroom and warehouse entirely?

        Or maybe I don’t get the joke.

        And in another fit of Vancouverism, Ikea was offering free gift cards yesterday for their grand opening of a slightly bigger Ikea across the parking lot from the old one. Traffic was backed up into Vancouver over the Knight St. bridge. Not sure if the gift card could be used to buy hot dogs.

  10. “For the avg person $50 seems like a lot to pay for a hot dog. But I acknowledge that there are some people who feel $50 is a fair price to pay and they can afford it. You can still buy wieners at the grocery store and prepare them in your home to a very comparable standard to the $50 wiener. The problem here is that the new $50 wiener has boosted the price of the hot dog at the stand you liked to frequent.”

    This is called building a castle in the sky. It is a widely documentated phenomenon in investment literature – you cannot justify a price with a price, there is more to value than that.

    It makes me sick to think that someone with your somewhat convincing but wholly wrong perception of vancouver real estate is out there walking the streets and influencing the plebs.

    • so what is the value of a home if not the price that competing buyers are willing to pay? The price and value of any item is set at what the market will bear. The intrinsic value to you is lower than someone willing to buy – therefore you rent.
      If you’re arguing income to price then Calgary prices would be more expensive than Vancouver.
      You simply don’t get the most basic rules of business; supply and demand

  11. Told-you-so-in-2007

    Res tantum valet quantum vendi potest.
    (A thing is worth only what someone else will pay for it.)

    For F1, any price will do as long as others may be willing to pay more. There is no reason, no fundemental value, only mass psychology.

    This like of thinking will bite many “investors” in the a$$, as they discover mass psychology can turn on a dime.

    • The market is set by sales. If the demand for item being sold is greater than supply the prices goes up. If demand is less than supply the price goes down. It’s pretty obvious that the demand for land is far far greater than the supply. I can’t see this changing.

      “any price will do as long as others may be willing to pay more”

      wrong wording TYSin2007
      should be “whatever price is needed to secure the asset”
      Bidding wars on detached homes are the norm in this city – doesn’t that tell you something?

  12. I will not argue with you there – the price of an item will always be what the highest bidder is willing to pay. The value, however (especially for items that take 30-40 years to buy) is what the highest bidder can sustainably afford while saving for retirement, sending the kids to school, eating etc. When price and value are the same, it is likely that you have an efficient market operating in equilibrium. Innappropriate/ excessive lending, low interest rates, an oversuply of money and irrational exuberance are all factors that pull prices above long term values and all are currently in play. These factors allow borrowrs to pay prices they cannot afford sustainably but they do so because their time horizon is short. Eventually, interest rates will go up, people will have kids that need schooling, people will need to start saving for retirement, the novelty of houses will wear off and prices will return to sustainable levels, where people can work, live, eat, retire.

    I am not arguing the basic forces of supply and demand, just that the factors that currently impact demand are non sustainable.

    I’ve said this before and I’ll say it again: you will regret it if you

    A. Are a young realtor/ mortgage broker/ appraiser/ construction worker and don’t have another career picked for yourself
    B. Currently hold a substantial amount of your net worth in real estate.

    • please show the evidence that detached home buyers are unable to sustain the mortgages they’ve qualified for. Defaults? GDS? I’ve been looking for this data for many years

      • that’s the whole point! When defaults are zero you should expect an increase. When credit spreads are virtually non-existant, expect that the market will move toward efficiency and spreads will blow out. It’s a cycle and all bubbles eventually pop. Every boom has a bust and the longer Vancouver buyers/holders deny it the harder the landing. Any half-wit can recognize a bubble after 12 years!

  13. I am a home buyer who hasn’t bought yet. How can I default?

  14. F1 said: “please show the evidence that detached home buyers are unable to sustain the mortgages they’ve qualified for.”
    —-
    That’s not what will crash the market; what’ll crash it is falling prices, evaporating equity, and home owners (who can still afford their mortgages payments!) rushing to sell in attempts to realize what’s left of their paper gains. It’ll only take a small percentage of owners to cause a price crescendo.

    • Vreaa, that is not what happened when prices fell at the beginning of the 2008 recession. Prices dropped a bit but I didn’t see people rushing for the door to get rid of their house. People held on and prices began to rise once again. Don’t forget that when the economy recovers and interest rates rise, people will starting getting raises particularly those people in the top 10% of income earners and those are the people that buy.

      • Convexity fail. An E for effort.

      • I remember putting an offer on a house in late 2008. The seller had bought it for x amount two years earlier. I made an offer 40K below the asking price – a pretty good offer considering the market was in the tank, bad news all around. The seller would not drop the price below the asking price – why? Because this is the amount they paid for the home. Same story for many of the homes I looked at during a six month period; the worst real estate market in two generations.
        If the stats showed a loss in price during this period it was only because cheaper homes in a greater state of disrepair were sold rather than the higher quality examples.
        So sorry vreaa, you probably will not see much of a discount when you finally enter the market.

      • In 2008-2009, the drop and re-bound was so rapid that Vancouver home-owners barely had chance to process what was happening.
        Housing prices are sticky on the downside, as we always hear.
        Let’s wait and see what happens when prices next drop, 10%, then 15%, then don’t bounce.
        (f1, we know you’re on record saying that SFHs won’t drop more than 10%, and that, if they do, they’ll be snapped up… so, as we’ve said, we’ll get to test our respective hypotheses.)

      • LandlordRescue.ca

        If you look at the graph of the house prices monthly in 2008 the price drop of 16% happened in three months. Then the market went up from there to stabilize. That’s mania in reverse and thats what markets do.

        Public sentiment and momentum of the masses is what is going to crash this market. There is no such thing as a flat market. There is always a direction.

  15. f1 touts that the price of a property is what somebody is willing to pay. The vendor to no longer have the use of the property and the buyer to receive the benefit and risk and reward of owning. Pretty simple stuff. But he ignores where the money comes from

    So I pose the question.

    If canadian banks were responsible for all the risk and reward (instead of flicking all the risk of to CHMC), what would be their terms, conditions and interest rates.

    Interest rates? +3.5%-4.5% over base?
    deposit 20%-25%?
    Term 25 years?
    Borrower with excellent credit and long term secure income – anybody else no.

    Im hearing that a number of banks wont even loan in certain regions.

    What are you hearing on the ground?

    Anecdotally i hear they dont want to take on loans which isnt insured by CHMC. A loan to CHMC is a zero risk loan. No wonder the banks want to lend money on that basis. And no wonder as soon as that insurance is removed, you have banks jumping on people, calling in different types of loans which isnt covered by the insurance.

  16. Pingback: Property Management Application in Real Estate | CompaqCenteratSanJose.com

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