“I met the landlord’s rep yesterday, and he said prices were going to be weak but Feb 2014 would be a great buying opportunity.”

“I rent a house in a very good area, and was told that it was worth 5 million a couple of months ago when I rented the property.
I was told prices in this area NEVER go down.
I met the landlord’s rep yesterday (he is elderly Chinese, landlord is a Chinese university student!), and he said prices were going to be weak but Feb 2014 would be a great buying opportunity.
I like how he has a very specific date; could be some Chinese astrology call.”
– from ‘T’, via e-mail, 27 Jun 2012

“As a long time tax paying bear bitter about subsidizing the largess lifestyles of those that could not afford it, I will bloody well be a “I told you so type” in the coming years.”

“Get ready and get defensive and don’t gloat and be paranoid. This is going to get ugly starting today.”
– Ham Solo at VCI 22 Jun 2012 4:04pm

“As a long time tax paying bear bitter about subsidizing the largess lifestyles of those that could not afford it, I will bloody well be a “I told you so type” in the coming years, albeit perhaps in a more strategic and tactful manner. My coming line will be, “well, if I make more than you, and I sat on the sidelines all these years, doesn’t that tell you something about your ability to afford these ridiculous prices and the sustainability of those prices.” Or maybe something softer like “you really should get in on renting – paying an underwater mortgage is really throwing your money away now with nothing to show for.”
As a six figure single earner, you can be damn straight I will be saying this and I will be bringing it up at every social event, as that would be keeping with the trend of talking about RE at pretty much every social event in Vancouver of the past umpteen years (and no RE is not raised at every event, but RE is a obsessed about topic in Vancouver).
Why should I have to take shit all those years as a stigmatized “poor renter” while prices climbed to the stratosphere, and every hairdresser and Home Depot associate making 50k a year was buying a condo, leasing a BMW, taking Mexican vacations, and buying multiple properties, and then not be able to be righteous when prices crumbled. These people were acknowledged as “investment geniuses” on the way up, so now they can be regarded openly as “investment morons” on the way down.
Payback is a bitch – but we all need to learn that to prevent another bubble in our lifetimes (however unlikely that really is).”
– Payback at VCI 22 Jun 2012 4:28pm

For The Record – e-mail From Mortgage Broker Regarding Rule Changes

“Here is an email I received from a mortgage broker who sends me spam emails in disguise of information….just though you may find it interesting…

Dear xxxx:

Last week the Ministry of Finance and OSFI (Office of the Superintendent of Financial Institutions) announced several new tougher guidelines for mortgage qualification. This week it’s apparent that many borrowers are unaware of 2 important details:

1. The Effective Date of the new rules is July 9th (in 7 business days). * Applications must be submitted before this date;
2. BOTH Insured and Conventional (Uninsured) mortgages are affected.

Briefly, the major changes are:

REFINANCE
* Maximum LTV (Loan-to-Value) reduced from 85% to 80%.
* Maximum Ammortization reduced from 30 to 25 Years.
* Maximum GDSR (Gross Debt Service Ratio) reduced from 44% to 39%

PURCHASE
* Maximum Ammortization reduced from 30 to 25 Years.
* Maximum GDSR (Gross Debt Service Ratio) reduced from 44% to 39%.
* Maximum Purchase Price now $1M.

Additional Changes:
* Line-of-Credit LTV reduced from 80% to 65%.
* Increased Qualifying Interest Rates.
* Increased income verification / reasonability tests for ‘Stated Income’
* Cash Back programs may no longer be used for Down Payment.

Some affects of the new rules are obvious, such as greatly reduced purchasing power. Example: A borrower with an annual income of $65K and 5% Down Payment can purchase a $500K home before July 9th and a $410K home after the deadline. However, many of the affects aren’t as apparent for existing borrowers. Example: If the same borrower with an annual income of $65K purchased a home 4 years ago at $500K with 10% Down Payment and Variable Rate Mortgage at Prime -.75% with 35 Yr. Ammortization, even with a 5% Property Value increase ($525K), the current Loan-to-Value is 83%. After July 9th, the borrower would Not qualify for their existing mortgage both because their service ratios and Loan-to-Value are exceeded. Therefore, they are unable to shop competitively for Refinance, Transfer, Debt Consolidation, Equity Take-Out etc. and most likely limited solely to the Conversion and/or Renewal offers (ie. Posted Rates) from their existing lender.

Considering the new rules are intended in part to cool the housing market (and possibly reduce values), an increasing number of borrowers could be affected.

Today’s Best Fixed Rates:

1 Year @ 2.89%
3 Year @ 2.69%
4 Year @ 2.95%
5 Year @ 3.05%
10 Year @ 3.83%

Very Best,
xxxx”

– too much debt at VREAA 28 Jun 2012 8:21pm

First Signs Of Buyer’s Remorse Among West Side Homeowners?‏ – “I foolishly bought into the Westside Vancouver housing market just a few months before the peak of it all and regret it immensely.”

“Reading how some people keep saying “Toronto is hot because it’s central”, “there’s only so much land”, “everyone wants to live here”…. sounds a lot like Vancouver circa 2011.
One year later, we are in a housing slump. Houses are not selling in west side Vancouver (still selling on the east side but that will slow down too), when it was hot hot hot a year ago. I foolishly bought into the west side Vancouver housing market (for only 1.5M at the time which was considered a steal for the property) just a few months before the peak of it all and regret it immensely.
All the naysayers are right. The market will crash and it will crash soon. For sale signs dot the landscape in my westside Vancouver neighborhood. Houses are selling for 100-300K BELOW asking. List prices are often BELOW assessed value.
It will happen in Toronto too folks. There’s nothing special about Toronto.”
– Cantor 12 at Globe and Mail, 26 Jun 2012 10:31pm [hat-tip Peter Pan, who asked: “First signs of buyer’s remorse among West Side homeowners?‏”]

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

“Here’s some bearish gossip for you as you wait for the decline. A friend of mine, who used to work in banking, called his old boss who is now in Alberta. He called her about the mortgage changes because he is gleefully waiting for prices to deflate and wanted to solicit her opinion. She said something along the lines of hang onto your hats. The banks (like hers) may choose to no longer offer 30 year mortgages on non-CMHC-insured mortgages. They are intending to comply not just with the letter of the OFSI guidelines but with the spirit of what Flaherty is trying to achieve. That’s because…
Apparently, the word on the street is Flaherty got wind that BMO was about to launch a 5-yr mortgage at 2.09% and he flipped. He was already pissed at the endless development he was seeing in the Toronto condo market and the high level of speculation. He called all the bank heads into a meeting and told them to cut out all the shenanigans. Then the next day, to everyone’s surprise, he announced the end of the 30-yr amortizations.
This nice-lady-at-the-bank has been declining HELOCs and mortgages ever since. Everything iffy that comes across her desk is getting kaiboshed. She thinks Alberta will get creamed if other banks are doing what she’s doing.”
– mac at VCI 25 Jun 2012 8:46pm

“He half-heartedly lamented that he had bought at the peak. But he also said it’s all relative, if his house goes down so do all the others, so it makes no difference if prices go down.”

“On a business trip with a colleague from Victoria, who I knew purchased last year at the peak of the market. I mentioned how Vancouver prices were coming down, and that the Victoria market had already dropped. He agreed, and half heartedly lamented that he had bought at the peak. But in the next breath, he said it’s all relative, because if his house goes down so do all the others, so it makes no difference if prices go down.
Amazing – so highly educated but failed to realize that with his 10% down, he would be underwater if he went to move or buy up.
This “its all relative” mantra is really prevalent, even my own father believes this.”
– Told Yous at VCI 27 Jun 2012 4:52pm

Illogical post-hoc rationalizations will abound.
– vreaa

“We went to look at a townhouse to rent in East Van. I asked the landlord if she planned on selling. She eagerly asked “Why, do you want to buy it?” I guess it’s been for sale for awhile. I think this woman has multiple properties.”

“We went to look at a townhouse to rent in East Van. The woman told us the address, we googled it and found out it’s on MLS listed for sale. I hate living in places like that, you’re always wondering if you’ll be out the next month. Anyway, I went to check it out anyway (with no intention of really renting it), and asked her if she planned on selling. She eagerly asked “Why, do you want to buy it?” I guess it’s been for sale for awhile. I think this woman has multiple properties (somewhat recent immigrant, maybe within 10 years), I googled her number and came up with many different properties for rent. At the end of the meeting, I wished her good luck, she told me to call her if I changed my mind about buying the unit. I could smell her desperation.”
– pricedoutfornow at VCI 27 Jun 2012 3:08pm
—

For the last 10 years in Vancouver, buying as many properties as you possibly could has been a recipe for success. When prices fall, owning multiple properties will be a recipe for personal financial disaster.
Momentum investors hate owning assets in a market that is falling.
When they buy, many set mental ‘stops’; price levels at which they’d want to bail out of their positions, such that they can minimize their losses.
There are many multiple property owners that will bring their properties to market in a falling price environment. Some don’t even know they’ll be doing this yet, but when faced with the unanticipated reality of leverage working the wrong way, they will act.
– vreaa

One Chart – Canada is “a country where house prices still haven’t found fair value.”

“A chart that shows those countries where housing prices still haven’t found ‘fair value’.”

– chart and excerpt from ‘Of housing booms and busts’, David Keohane, ftalphaville.ft.com, 26 Jun 2012 [hat-tip Ralph Cramdown and JS]

[If you find charts eloquent, see also this post from two years back: ‘Two Charts: All You Need To Know About Canada’s Housing Bubble’, VREAA, 26 Aug 2010]

“We went to an Open House on West 33rd this weekend to gauge whether there was a rush to beat the July 9 deadline. Even the realtor admitted it was dead.”

“We went to an Open House this weekend to gauge whether there was a rush to beat the July 9 deadline. Open House was on West 33rd and it was dead. We attended with approximately 1/2 hour to go and we were only the second name on the sign in sheet. Even the realtor admitted it was dead and asked us if he could send us some similar listings as “he had lots of time on his hands”.
Nice change from the 30 pairs of shoes and multiple offers you would have seen not too long ago.”
– MEM at VCI 25 Jun 2012 at 1:52pm

Seller Psychology In A Falling Market – “While the market may have sags, don’t hold your breath for the $600K plus houses to return to $200K ever again. It simply won’t happen, because nobody will sell for that kind of loss.” [We Disagree]

From discussion at reddit.com (25 Jun 2012):

ionpulse: “Housing in Vancouver is overvalued (bubble!) so the value of homes will ‘diminish’, affordable housing or not.”

mike_sol: “That’s been said before, and it will be said again; but while the market may have sags, don’t hold your breath for the $600K plus houses to return to $200K ever again. It simply won’t happen, because nobody will sell for that kind of loss.”

incognito_crocoduck: “We’re seeing it in a micro fashion right now. The factors that should be causing a sag in the market are all in play, but that sag is being delayed and perhaps even lessened because people are simply refusing to lower their prices below what they think they should get.
People are perfectly willing to sit on the market for up to a year rather than go below their preferred price range. Eventually most of them find a buyer and prices stay relatively high – the market just moves slow as molasses.
The economy isn’t in the state where many people are truly desperate to sell, and unless that changes dramatically prices can only go down so much.”
—

We disagree with the last two commenters.
For one thing, 600K houses may very well become 200K houses again when the bubble completely unwinds.
And for another, we don’t by any means need a weakening economy for the speculative mania in housing to collapse (even though we are indeed at risk of an economic ‘squeeze’ by virtue of local and international factors).
Mostly, however, we disagree with these posters regarding the psychology of sellers in a falling market.
Many people seem to believe that, in a stagnant or falling market, sellers will simply take their homes off the market, or simply ‘sit’; even prospective sellers themselves seem to believe that’s what they’ll do. But they are speaking from their current perspective, where they have been conditioned over years of Vancouver RE price increases that homes are ‘worth’ ‘x’, and are soon to be worth ‘x + y’, and thus they can’t possibly imagine ‘giving them away’ for less, or ‘selling for a loss’, or even the idea of houses selling for the same prices they fetched a few short years ago.
Further, the very brief 2008-2009 drop conditioned market participants to believe that dips would be short-lived; that the market is ‘bullet-proof’.
None of these beliefs takes into account the market psychology that will exist when price drops clearly declare themselves. All it takes is for a handful of necessary sales at lower prices to establish new, lower price levels that are modestly but definitely below the levels at peak. Once prices show that they are dropping, a percentage of potential sellers will stir. Those who own multiple properties with leverage, those who are holding ‘flips’, those who had planned to sell to fund imminent retirement, those who had been waiting to ‘pull the trigger at the top’, and other subgroups, will come to market.
Greed for higher prices will be replaced by fear of lower ones.
There will then exist a situation where sellers are competing with other sellers for a smaller pool of buyers.
Anybody who has been a participant in a market which is unwinding from speculative heights knows the psychology that prevails as prices fall. The prevailing sentiment is very, very different from that on the way up and at the top. Seller confidence and patience becomes doubt and impatience, and then urgency.
We never expect the Vancouver RE market to move as rapidly as markets for stocks or commodities, RE always moves slower, but the factors at play in the unwinding of different types of speculative mania are the same, and the price charts for manias in all markets look remarkably similar after the fact.
– vreaa

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

In a weekly credit outlook report published Monday, Moody’s analysts William Burn and Andriy Stepanyants said shorter loan amortization periods should immediately cool home sales by requiring increased monthly payments.
“The government’s moves may have come too late, owing to the build-up in consumer debt that has already occurred.” In addition, slowing growth in household disposable income will be a challenge for consumers trying to pay down their debts, they said.
The analysts note that previous mortgage rule changes beginning in 2008 had “some effect” in countering the stimulus provided by historically lower interest rates, yet they “failed to stop Canadian household leverage from increasing.”
“Canadian consumers’ reliance on low interest rates to support high debt loads remains a risk.”
– from ‘Mortgage changes ‘may be too late’: Moody’s’, Financial Post, 25 Jun 2012 [hat-tip pennysaver]

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

Vancouver Island Financial Advisor – “I have met with a number of clients recently who are in over their head and underwater on their properties.”

“I have met with a number of clients recently who are in over their head and underwater on their properties… One common characteristic is their mind frames around finances are not reflective of our current economical environment and hold onto past advice that is no longer serving them!
For one client, even though they put 20% down a few years ago and made accelerated payments, they are looking to sell to use the equity to pay off credit card debt that has accrued… we crunched the numbers and after their massive IRD penalty $35K and $30K+HST Realtor fees mixed with a good 10% drop in Victoria Real estate they walk away with no equity to pay off any cards… Even if they had curtailed spending further and put additional money on their mortgage up until now they would have to sell their home to access it and that currently isn’t feasible.
Some common misconceptions are that your home is a form of savings… this is incorrect! It is either an investment or a shelter but not a form of savings… To be considered savings, it would need to be guaranteed and fully accessable.“
– Island Advisor at canadianmortgagetrends.com, 16 Jun 2012 12:52am. [hat-tip Told-you-so.]

“There are many, many homeowners whose financial security and that of their children are inextricably linked to their homes, and who regard the erosion of their biggest asset with real fear.”

Three months ago:
“And [28 years ago], as now, Vancouver’s real estate was unaffordable. Nothing in that regard has changed.
What has changed are expectations. There are those who feel that the lack of cheap housing in Vancouver is an abomination. They feel that the convenience of a short commute or the proximity to a really good Ethiopian restaurant should be the natural order of things. …
Vancouver, of course, will always be the centre of things in the Metro area. It has history and critical mass on its side.
And by its very nature, it is going to attract people who want to come here and live in the city.
… the market will propel any kind of property here into the stratosphere.”
– ‘Affordable housing in Vancouver? Why bother?’, Peter McMartin, Vancouver Sun, 22 Mar 2012

Last week:
“Be careful what you wish for. Real estate is a two-way street, and while the issue of high housing prices has been dominated by Yellow Peril alarmists and affordable housing advocates, and by those who despair at the effect high prices have had on their neighbourhoods, there are many, many more homeowners, I’d suggest, whose financial security and that of their children are inextricably linked to their homes, and who regard the erosion of their biggest asset with real fear. They won’t care who buys their home, as long as it’s for a good price. And if the projections of the TD Bank’s economist come true [Predicted price drops of 15%. -ed.], those days when an offshore Asian buyer came calling will be remembered wistfully.”
– ‘The housing market is teetering. Happy now?’, Peter McMartin, Vancouver Sun, 22 Jun 2012
—

The speculative mania in Vancouver RE has been caused by locals overextending themselves by overbidding on homes using cheap financing; paying prices far above those supported by fundamental values; speculating that those prices could only go up further.
Any situation where the “financial security” of a large percentage of the population becomes “inextricably linked to their homes” is deeply unhealthy, and should always sound alarms. Such alarms have indeed been ringing loudly in Vancouver, for a good many years, but very few have cared to listen to them.
There are now, unfortunately, many individuals and families at risk of future financial distress as a result of the inevitable unwinding of the resultant market conditions.
– vreaa

“I was living in San Diego in 2007 when the market had just started to fall. Once it starts, it is very hard to stop.”

“I was living in San Diego in 2007 when the market had just started to fall. Everyone said it was the best time to buy in years (I didn’t). A small home was going for around $1M. Within 2 years prices had fallen another 35-50%. Those in the most expensive homes said luxury houses wouldn’t drop, there were always wealthy buyers around; there weren’t.
You can now buy a home in SoCal for far less than in Vancouver, in 2007 it was the reverse. Many who bought for investment were wiped out, a lot were real estate agents caught in the downdraught.
Investors here won’t buy now if prices are going to drop, the smart ones are unloading already. All of this adds up to a spiraling drop in prices, same as the increases we’ve seen over 12 years.
It’s been stated Canadian (not Vancouver) prices will drop 15%. In the most overpriced Canadian market, we’re sure to drop by a lot more than 15%… my guess is prices will drop at least 30%. Once it starts, it is very hard to stop.”
– herewegoagain at vancouversun.com 22 Jun 2012 10:25pm

“I have a friend right now who is in serious financial trouble because his mother-in-law is demanding to be repaid the down payment she loaned them.”

“I have a friend right now who is in serious financial trouble because his mother-in-law is demanding to be repaid the down payment she loaned to them (they thought it was more of a gift). This amount is basically all the equity they have so, if they are even able to sell the house for what they paid for it, they’ll be screwed. It has also ruined the relationship between the siblings. I can imagine this playing out more frequently if house prices take a significant hit.”
– Observer at VREAA 23 Jun 2012 3:08pm

“I know three different couples who have bought detached SFH in the past few weeks. Two out of three settled for junk simply to “make the numbers work”. All are over-extended.”

“I know three different couples who have bought detached SFH in the past few WEEKS – two moving up following recent condo sales and one thanks to down payment from parents. Two out of three settled for junk simply to “make the numbers work.”. All are over-extended. Their excitement at being new home owners seems tempered by the stress of realizing what they’ve all just taken on, not to mention the timing, just prior to the new tightening rules which are sure to further soften prices.”
– harden at VREAA 23 Jun 2012 1:45pm

“I have a relative that used a HELOC on her parents’ home to purchase a Coquitlam home in 2010.”

“I have a relative that purchased a Coquitlam home in 2010. She and her husband took a heloc on her parents home. Parents home bought for $520K and now worth $925K. There was about $300K mortgage on the home. Well, not anymore. They borrowed $130K for the Coquitlam home. Purchase price %60K, put down $80K, and $40K went to reno’s and other home costs. They bought in pressure times. Paid $40k over asking too. They’re left with massive debt and put risk to the parents as well. The loc they borrowed, they have only paid interest on it. So that loan is still the same at $130k. So basically, the home was purchased with 100% financing. The home is worth about the same as the price they paid in 2010.”
– Van east guy at VREAA 22 Jun 2012

Summary:
Vancouver home: Market Value $925K; Debt (Mortgage + HELOC) $430K
Coquitlam home: Market Value $650K; Mortgage $560K
Total Market Value: $1.575M
Total Debt: $990K

Classic intergenerational wealth destruction scenario.
An extended family goes from holding fairly safe equity in one home, to leveraged RE speculators.
The parents had the incredible good fortune of holding a home through a housing boom that had increased the home’s market value by $405K. They had the option to realize that $405K after-tax gain but did not take it. One can only surmise how that windfall may have altered their future financial health and their retirement plans. Instead, they decided to leverage the paper gain into more RE.
A 40% drop in housing prices will completely wipe out all the equity this extended family has in RE. And this is by no means an extreme example.
– vreaa

“My parents, who bought their place in North Van about 25 years ago, have used Helocs several times to pay for scientology training.”

“My parents have used Helocs several times to pay for scientology training. Yes, they are full on couch jumpers. They bought their place in North Van about 25 years ago.”
– midnight toker at VREAA 17 Jun 2012 2:45pm
—

People have dipped into the RE_ATM for all sorts of things they previously wouldn’t have been able to ‘afford’, increasing their leverage to the RE market as they do so.
This spending will come to an abrupt halt when prices stall and reverse course.
– vreaa

What It Now Takes To Afford These Vancouver Homes

Richmond house priced at $1,019,100: With a 5% down payment of $53,650.90 you need a minimum annual income of $200,000 to qualify for a high-ratio 25-year mortgage. Monthly payment: $4,871.31.
—

Vancouver east side house priced at: $862,200: With a 5% down payment of $43,110 you need a minimum annual income of $156,000 to qualify for a high-ratio 25-year mortgage. Monthly payment: $3,914.23.
—

Average-priced Metro condo: $460,671: With a 5% down payment of $23,033.55 you need a minimum annual income of $84,000 to qualify for a high-ratio 25-year mortgage. Monthly payment: $2,091.36.
—
– from ‘New mortgage rules: Can you afford these Metro Vancouver homes?’, Vancouver Sun, 22 Jun 2012

Notary Poll – “More than half of B.C. homeowners have refinanced their home or property.”

More than half of B.C. homeowners have refinanced their home or property, a new survey by Mustel Group for the Society of Notaries Public found.
Of those who have refinanced, 49 per cent used the money for renovations; 23 per cent to buy other real estate; 23 per cent for other investments; 10 per cent to purchase a new car; and 8 per cent to consolidate or pay off other debts.
“B.C.’s homeowners have enjoyed a healthy real estate market in most areas of the province,” said John Eastwood, president of the Society of Notaries Public of B.C. and a South Delta notary. “Many homeowners find themselves in the fortunate position where the current value of the house or property has far surpassed the price they initially paid, meaning a significant amount of their equity is tied up in the home. Mortgage refinancing allows them to access this equity without having to sell or downsize.”
Homeowners were split on whether the value of their homes would go up in 2012, with 44 per cent saying they expect an increase and 52 per cent expecting prices to stay the same.
In Metro Vancouver, 54 per cent said they expect prices to go up, with 34 per cent not expecting increases in the next year.
“There’s always a lot of interest in house prices and market forecasts here in B.C.,” said Akash Sablok, a Vancouver notary. “The reality is that most people live in their homes and those homes are their biggest investment and equity holding so it’s important to understand both the implications and opportunities this presents whether you’re looking to buy, sell or refinance.”
– ‘More than half of B.C. homeowners have refinanced: poll’, Vancouver Sun, 30 May 2012

HELOCs are common. They result in increased leverage to the RE market; an increased vulnerability to falling prices.
Note how this poll suggests that 96% of BC owners believe that in 2012 prices will either go up or stay unchanged. Which means only 4% say prices will drop. (Freaks!)
Also, note the universal “homes are an investment” belief.
– vreaa

Impact On ‘Luxury’ Market – “Last week, he secured a mortgage approval for more than $1.25-million for a couple that he worries can’t afford the home, a situation he sees often.”

The measures announced by Mr. Flaherty will also have an effect on the higher end of the market, because homes at $1-million or more will no longer be eligible for mortgage insurance, meaning the buyer must have a down-payment of at least 20 per cent.
“I think that the luxury home market will be significantly impacted by it,” said Calum Ross, a mortgage planner who works with many buyers in Toronto’s high-end market.
He thinks that’s a good thing. “It’s ridiculous that these people have ever been allowed to get high-ratio mortgage insurance,” he said. Last week, he secured a mortgage approval for more than $1.25-million for a couple that he worries can’t afford the home, a situation he sees often.
“I told them they were taking on too much risk,” he said.
– from ‘Tightened lending for mortgages will cool market – but by how much?’, Globe and Mail, 22 Jun 2012 [hat-tip fatjay]

Of course, in Vancouver, ‘luxury’ is your average SFH.
We anticipate the mortgage tightening rules will affect the market at all price levels.
– vreaa

“Thanks, Flaherty, you’ve just put millions of Canadians ‘underwater’. Thanks for making my home worth less than what I paid for it 6 months ago.”

“Thanks Flaherty, you’ve just put millions of Canadians ‘underwater’. Thanks for making my home worth less than what I paid for it 6 months ago. I have no problem affording my mortgage no matter if rates went up or whatever. I waited years and years to buy a home, people keep telling me to wait and wait, so I did but there seemed to be no end in sight to the prices. After waiting 7 years I decided to just do it. I don’t have any regrets but I fail to see how changing mortgage laws is going to help people, it only serves to help corps renting out to people making home ownership even further out of reach. In the past 7 years of renting and waiting I’ve spent nearly 100,000 on rent. What a waste. You [bears] are always telling others to wait…do you even own a home yourselves?”
– Jasonn in two comments at the Globe and Mail, 21 Jun 2012

“..people keep telling me to wait and wait, so I did..”
No, you didn’t, you bought.
“I fail to see how changing mortgage laws is going to help people.”
Easy: prices will drop, then drop more, and eventually come vaguely into line with underlying fundamental values (plus, of course, the modest Vancouver-warm-weather-premium). Then people will be able to purchase homes at remotely reasonable prices.
“In the past 7 years of renting and waiting I’ve spent nearly 100,000 on rent. What a waste.”
How much have you wasted on food during that same period?
“I don’t have any regrets..”
(translation: “I have regrets..”)
– vreaa

Mortgage Rule Changes – “Wealthy people can borrow whatever they want from banks, and they can work that out from banks. That is not my concern.”

The mortgage changes are all over the news today:

‘Ottawa caps insured mortgages at 25 years’
– CBC, 21 Jun 2012

‘Flaherty clamps down on mortgage rules to cool overheating market’
– G&M, 21 Jun 2012

‘How Jim Flaherty’s new mortgage rules will sink house prices’
– G&M, 21 Jun 2012

‘Canada toughens borrowing rules to cool housing market’
– Reuters, 21 Jun 2012

‘Finance Minister Jim Flaherty tightens mortgage rules’
– Vancouver Sun, 21 Jun 2012

‘Canada Tightens Mortgage-Financing Rules’
– Wall Street Journal, 21 Jun 2012
[“Canadian Finance Minister Jim Flaherty dramatically tightened the country’s mortgage-financing rules—the fourth time in four years—as officials here struggle with what they have increasingly worried is an overwrought housing market.”]

‘Canada’s Flaherty Tightens Mortgage Rules to Avert Bubble’
– Bloomberg, 21 Jun 2012

‘Ottawa’s new mortgage rules will lead to ‘long-term stability’: Carney’
– G&M, 21 Jun 2012

‘Shrinking CMHC, the beast at the centre of housing market’
– G&M 21 Jun 2012
—

“Flaherty also moved to cap the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent in order to get CMHC insurance. Those two ratios are technical limits on how much debt a borrower is allowed to take on as a percentage of their overall income. This move, too, is aimed at making sure a borrower can’t bite off more than he or she can chew.
The final change was to limit CMHC insurance to homes priced under $1 million. In addition to not being able to access CMHC insurance, Flaherty said the new rule will be that a buyer of a home priced higher than $1 million must have 20 per cent or at least $200,000 down.
“Wealthy people can borrow whatever they want from banks, and they can work that out from banks,” Flaherty said. “That is not my concern.””
– CBC news, 21 Jun 2012
—

Some find the moves surprising, but we don’t. This is an attempt at using the ‘scalpel’ that many have called for. The BoC is unable to raise headline interest rates to curb RE borrowing, so the mortgage tools have to be used. Canadians were not listening to the calls for prudence, and RE continued to run up in fashion that we know those in Ottawa know is a speculative mania. They are trying to rein this in, and, perhaps as important, they are wanting to be able to say they acted. When Flaherty says “Our government has encouraged Canadians to borrow responsibly; most Canadians have done so”, he wants to now be seen as having stepped in to curb those who were incapable of curbing themselves.
—
Overall we agree with the moves, they are in the right direction, they will make it harder for people to overextend themselves into mortgage debt, and there will be downward pressure on prices. Any moves that bring housing prices more in line with fundamental values are to be encouraged.
—
We also see the irony (pointed out by the majority of commenters at sites like the CBC!) of Flaherty now wanting to look prudent when he is in actual fact simply reversing his own prior imprudent moves. It was he who increased amortization length to 40 years in the belly of the mania. He got his timing wrong, as Governments almost always do during manias, and we suspect history will prove this to be true.
—
The $1M cap is of interest to those watching the SFH markets in Vancouver.
Of course, the average SFH price here has yet to drop below $1M.
Even prior to the introduction of this rule, most SFH buyers over $1M in Vancouver have had >20% downpayment, but a minority haven’t. (We don’t know the exact break-down and we’re not sure if they’ve ever been published anywhere).
But, despite this, we expect this new rule to now spook both the ‘low-ratio’ buyers (those with over 20% to put down), and, more important, the banks. We suspect they realize the market is vulnerable, and they’ll get stricter with everybody, even the person trying to buy a $2.4M west-side Vancouver home with $800K or $1.2M down. Perhaps especially that kind of buyer. So it’ll be of interest to watch the effect of this change on the high-end areas.
We’d also expect the rule to offer some temporary support for Vancouver SFHs in the $800K-$1M range, as one will assume there will be buyers at those levels who previously could have stretched to >$1M but now can’t. We have previously predicted that the most likely trajectory for Vancouver prices would be a drop to 2009 lows, a bounce, and then a plunge through to a trough target of 50%-66%-off the highs. These new rules may speed the drop to below $1M, offer some transitory support just below $1M, but not make a big difference to the ultimate price targets.
—
These mortgage changes will likely speed the demise of the Vancouver RE bubble, and we suspect they will give some folks something to blame on the way down. Prices were set to collapse of their own accord, regardless, but most people like to be able to point to a cause.
– vreaa

“My sister in law, a hair stylist with a small income, just sold her home in order to buy a larger one. She is oblivious to what will happen if prices drop. If her $450,000 home becomes a $350,000 home she will have no choice but to walk away with nothing.”

“My sister in law just sold her home in order to buy a larger one. She has a small income as a hair stylist but has seen her property value rise so she views buying a large home as an opportunity she just can’t say no to. She is oblivious to what will happen if prices drop. She had absolutely no idea that in her position the bank will come knocking for every dollar of lost value. If her $450,000 home becomes a $350,000 home she will have no choice but to walk away with nothing.”
– j.bean commenting at CBC News 18 April 2012 11:34am

Mortgage Rules Tighten

“The federal Finance Department is moving to further tighter mortgage rules to address concerns over high Canadian household debt. The government announced Wednesday it will reduce the maximum amortization period for a government-insured mortgage, lowering it from 30 to 25 years, and also drop the upper limit that Canadians can borrow against their home equity from 85 per cent to 80 per cent. …
Under the new rules, mortgages amortized over a period longer than 25 years will no longer qualify for CMHC insurance, making it effectively impossible to get a highly leveraged mortgage of more than 25 years in Canada. …
Canadian mortgage rates have been near record lows for months. …
CMHC first introduced insurance for 40-year-amortizations in 2006, when it also moved to provide mortgage insurance on 100 per cent financing.”
– from ‘Mortgage rules to be tightened further by Ottawa’, CBC News, 20 Jun 2012 [hat-tips to Told-you-so and Dimitri Tishchenko]

White Rock – “Who the hell do they think will buy this stuff at these prices? Especially when so much more is being readied every single week? “Overbuilt” doesn’t begin to describe it.”

“It was so interesting biking through White Rock the other day. Even if I wasn’t an ardent bear, it would have been hard to miss the sheer number of For Sale sings. I have no idea if the official totals reflect it, but there sure seems like a ton of them when you’re on the street, sometimes several in the same block. Three or four carried the “New Price” message.

But on top of that, the flood of new product and new developments just…doesn’t…stop. We rode past at least a half-dozen new condo/townhouse/SFH developments that day alone. Meanwhile, back here in my own between-the-border-crossing neighbourhood, construction continues unabated. They’ve opened up a whole new section of land since my photo essay a couple months ago (building roads, infrastructure, etc) that looks big enough to handle a hundred townhouses and dozens of row houses.

You gotta remember that there are already 90 (!!!!) listings just in this mini-neighbourhood alone, nearly all of which are new. And unloved, apparently. These places were being snapped up a year ago, but not now. The weekend open houses here are seemingly drawing nothing but flies.

There’s one house in particular that bears mentioning. It’s situated where prospective buyers can’t miss it when they drive into the area, and it’s been in a constant state of “open house” for the last two months. Yet there it sits today, un-purchased, while dozens more just like it are nearing the final stages of completion.

Honestly, who the hell do they think will buy this stuff at these prices? Especially when so much more is being readied every single week? “Overbuilt” doesn’t begin to describe it.”

– Gord at VREAA 20 Jun 2012 9:33am

Same Property Sale/Resale Price Drops

Example 1:

“Land Value Property for sale – 5038 Arbutus Street [V955311; 52×108 lot; Quilchena area of Westside]– listed for $998,000 now 13.2% below last sale price of $1.15 million on April 15, 2011- assessed value is $1,227,900.
This is where you will see the 1st cracks in the Westside housing market – big lot on busy street in Westside. In a few years, this lot will be worth $300,000+. Is this a speculator who is bailing, perhaps someone who put 5% down last year, never made a payment and is walking away? It definitely sounds like a foreclosure but I have not confirmed that. Is this the Canary in the Coal Mine?”
– airborne canine at VCI 19 Jun 2012 10:53am

Regarding 5038 Arbutus. Listing agent is one of the owners.
Should know soon how their Offer Party on June 18 went.
Definitely priced below “market” to get the buyer in. Should sell for over asking based on current market. Still – this is a big loss in 12 months. Could be $200,000 after all costs and taxes are factored in.
– ZRH2YVR at VCI 19 Jun 2012 at 11:26am
—

Example 2:

“59 West 21st. Livable house
Paid $1.303M. May 2011
Sold $1.281M Jun 2012.”
– BubbleBoy at VREAA 19 Jun 2012, quoting gse36 at RE Talks 18 Jun 2012 10:33am

“Confirmed – was a failed flip at 1.49M asking.
Seller is a relative of the Listing Realtor that sold.”
– zrh2yvr at VREAA 19 Jun 2012 6:38am

‘Something Is Not Working Here’ – “The median after-tax income for families of two or more people in B.C. have remained unchanged at about $67,000.”

“The median after-tax income for families of two or more people in B.C. remained unchanged between 2008, 2009 and 2010, after adjusting for inflation, said Wendy Pyper, analyst at Statistics Canada. There was a slight increase between 2007 and 2008, from $66,400 to $69,900, but since then incomes have remained unchanged at about $67,000.”
…
“Something is not working here [in the Canadian economy], this is not a positive report,” said Benjamin Tal of CIBC World Markets.
…
Canadians are spending beyond their means and it’s starting to catch up with them, said Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada, Inc. “It’s going to be even more of a problem if they continue these behaviours if their incomes are not rising,” Schwartz said. “If we see everything else go up in price, then they’re going to have trouble affording much of anything. It’s really important for Canadians to get their spending in order and reduce their debt.”
– from ‘Despite economic growth and job gains, family incomes remain stagnant’, Vancouver Sun, 18 Jun 2012

Housing prices ultimately follow incomes; if they go through a period of decoupling from rates of income growth, they will eventually reconcile. – vreaa

Spokesman for Homebuilders of BC: “This industry is a massive contributor to British Columbia’s well-being and future success, as well as a huge indicator of the province’s economic climate.”

“Here are some facts about residential construction.
Nine per cent of all employment in British Columbia is in the residential construction field. That’s 192,400 jobs related to new home construction, home renovation and home repair. The home building and renovation community earned $10 billion in wages last year, while $22.7 billion in investment value was created by residential construction.” …
“We can easily see that this industry is a massive contributor to British Columbia’s well-being and future success, as well as a huge indicator of the province’s economic climate. Just think: For every single home we build, 3.5 person years of employment are created and more than $60,000 is generated in spinoff spending.” …
“The next time the housing market in B.C. comes up in conversation – and we know it will – let’s try to remember that without such a successful industry, our economy would be in much rougher shape.”
– excerpts from ‘Benefits of home buying’, M.J. Whitemarsh [CEO of the Canadian Home Builders’ Association of B.C.], The Province, 17 Jun 2012

We fully acknowledge BC’s dependence on residential construction — when you add in other aspects of the RE industry, and knock-on spending in household goods, a very substantial percentage of our economy is driven by real estate. Under normal circumstances we would celebrate a robust construction industry, and we certainly wouldn’t wish for anything other than prosperity for BC Homebuilders.
It must be realized, however, that this sector of the economy has ballooned unnaturally with the speculative mania in housing; an example of the misallocation of resources that results from a massive asset bubble. In BC, if 9% of employment is in residential construction (as Mr Whitemarsh reports), this is strikingly large compared with 7.5% for the whole of Canada, and 3.5% for the US currently (they hit 6% at the peak of their bubble) [see chart below].
This overgrowth will shrink back with the demise of the bubble. We don’t ‘wish’ for this, and we don’t point to it to be difficult to the builders; it simply is part of the inevitable boom-bust cycle that comes when speculative manias in RE develop and then dissolve. Unemployment as a result of loss of jobs in this sector will be part of the unfortunate fallout.
– vreaa

[Chart source: BNN interview with David Lepoidevin, 8 Jun 2012.]

More Social Isolation In Vancouver Than Other Cities? – “Residents feel increasingly estranged from their friends, their neighbours and their communities. More than half of respondents agreed that Vancouver is becoming a resort town for the wealthy.”

“A survey conducted by the Vancouver Foundation and released today found Metro Vancouver residents feel increasingly estranged from their friends, their neighbours and their communities.” …
“Affordability factored heavily in the survey results, with roughly equal numbers of people reporting living comfortably and finding it difficult to get by.
Significantly, more than half of respondents agreed that Vancouver is becoming a resort town for the wealthy and that there is too much foreign ownership of real estate. This view was particularly common among people aged 25-34, a group whose responses to many survey questions revealed a marked cynicism about the state of their communities compared with other age groups.”
– excerpt from ‘Social isolation has far-reaching effects on us and our neighbours, survey says’, Tara Carman, Vancouver Sun, 18 Jun 2012

“I am in that age group and this accurately describes how I feel.”
– joe_blown_away_by_high_housing_costs at VREAA, 18 Jun 2012 9:25am [Thanks for the link to the article, joe. -ed.]

The Vancouver Foundation survey itself available from their website as a pdf:
Connections and Engagements, A survey of metro Vancouver, June 2012, Vancouver Foundation

More from the Sun article:
“Bob Cowin spoke about losing a sense of connection with his neighbours over the years. Cowin moved into a new subdivision in Coquitlam in the mid-’80s where the developer had landscaped the front yards, but the backyards were nothing but mud. Neighbours got to know each other creating their back gardens and building the retaining walls that were necessary because most properties backed onto a mountain slope.
“Swinging a sledge hammer and dashing down to the local building supplies store for a different drill bit resulted not only in walls but also relationships,” Cowin wrote in an email.
A year after the retaining walls were finished, Cowin noticed a new kind of wall going up: cedar fences between properties that made the neighbourly conversations that used to happen over the fence impossible.
A burst of young children brought the adults in the community together in a different way, forming child-minding co-ops and walking school buses, Cowin recalled. The elementary school became a social hub, and the neighbourhood held yearly block parties.
Then the children started middle school and didn’t need their parents as much, he said.
“The street was extended, and the sense of a local place disappeared. Houses started being sold, and a different, and increasingly multicultural, demographic moved in.”
Cowin feels the increasing ethnic diversity was a mixed blessing for his neighbourhood.
“It has been great for our kids, who, thanks in large measure to the schools, have developed a tolerance and intercultural competence that I admire,” he said. “For the adults, language and other barriers have made it tougher. My new neighbours are still fine people, but it takes more effort and intentionality to maintain relationships.”
—

The entire Sun article is worth the read, as is the comments section below it.
The phenomenon of “isolation in the city” (“water water all around but not a drop to drink”) is by no means new. Is Vancouver really any different from other big cities in this regard?
We don’t know of any data that could allow one to objectively compare. Are the findings in this survey very different from similar surveys elsewhere?
We are certain, however, that there is a substantial subgroup of locals who feel strained by Vancouver’s housing prices: either by the financial burden of ownership, or from the distress of feeling ‘priced out’ and (for many, but not all) the consequent sense of ‘not belonging’. And we know that such strain is not good for the health of individuals, families and communities.
Also, the very high cost of housing creates an implied large wealth disparity across the owner/non-owner divide that would not be present in times of more normal housing markets. Such a disparity is closely correlated with dissatisfaction within a community.
– vreaa

“She and her husband have been spending the money that their house “made” for the past 7 years. They now owe double the mortgage that they originally put on the house, but the house is “worth” three times as much.”

“A nice lady told me that she and her husband have been spending the money that their house “made” for the past 7 years. They now owe double the mortgage that they originally put on the house, but the house is “worth” three times as much. Based on the area and date of purchase, I estimate that they mortgaged 300k, spent another 300k of their equity, and now sit on 900k of nominal equity (and of course owe 600k). They used the income so she could stay home with kids, and he could set up his own business.
However, the wife has recently had to take a job… because the husband is getting very worried that values may contract soon, and this means they will need to start paying down the mortgage… and means no more HELOCing.”
– ‘The Poster Formerly Known as Anonymous’, at VREAA, 17 Jun 2012 11:54am

If you have a $300K mortgage on a $900K house, and housing prices drop 33%, you lose half your equity.
If you have a $600K mortgage on a $900K house, and housing prices drop 33%, you lose all your equity.
– vreaa

Blogger From South Of The Border – “There’s no question that Canada’s gigantic housing bubble is going to burst. It’s just a matter of when.”

“There’s no question that Canada’s gigantic housing bubble is going to burst. It’s just a matter of when.
Housing prices in Canada have more than doubled in the last 10 years, and in cities like Toronto and Vancouver, prices are up more than 140 per cent. But the soaring prices have nothing to do with wages which have remained relatively flat during the same period. What’s really driving housing prices is debt. Low interest rates and lax lending standards have created a speculative frenzy that’s pumped up a monstrous asset-price bubble that threatens to crash the economy and send unemployment skyrocketing.”
…
“We’ve seen it all before, right, in Ireland, Spain, UK, the US and now Canada. And every time, the government twiddled its thumbs while the little guys were ripped off by speculators. 


On May 22, 2012, the Organization for Economic Co-operation and Development (OECD) called on the Bank of Canada to raise interest rates saying that “negative real short-term rates are stoking a housing bubble.” 
 
Naturally, the recommendation has been shrugged off, as has any attempt to stiffen lending rules to put a damper on speculation. So, what should we make of this? Why are policymakers–who have access to the same data as us– refusing do anything to mitigate the effects of what is likely to be a very excruciating meltdown? 
 
Could it be that it’s all part of a plan to use the crisis as a means to dismantle the welfare state and reduce Canada to 3rd world poverty? 
 
Yup. That sounds about right to me.”
…
– excerpts from ‘Canada’s Housing Market Smackdown’, Mike Whitney, eurasiareview.com, 15 Jun 2012 The author “writes on politics and finances and lives in Washington state.”
[hat-tip to S, who sent this link via e-mail]
—

We are in agreement that there is a large bubble, agree it will inevitably burst, but disagree that there is a “plan” to induce a “crisis” and then use it for political advantage. Policymakers have far less control than people imagine. We believe the BoC and the politicians would dearly love to organize a soft landing (they benefit from the status quo, after all) but that they’ll be unable to do it.
Also, in Canada, the little guys have been the speculators, too… every housing market participant has been a speculator.
– vreaa

“Their combined family income is just over $200K per year. They could buy a SFH but don’t want to, because, in her words, it would be a dump and they’d be elbow-deep in mouseshit and stucco for 3 years. Should have seen her eyes when I told her she is in the top 1%.”

“Met a nice fellow today at an event who said he and wife make just over six figures (combined) and were just pre-approved for $1.2 mil. He said he knows they can’t afford more than $400K at present rates. But nice lady at the bank said not to worry – rates aren’t going up soon. Wonder where she heard that from, and what “soon” is in the context of a 30 year shackle. A friend sells mortgages at same bank. Nice gal. Earns $46,000 a year, dropped out of general arts in her 3rd year of undergrad, took a mandatory 5 day combined mortgage/financial advising course at the bank, rehashes one page flatsheet talking points to existing bank customers.”

“I work with a very nice gal whose combined family income is just over $200K per year. They own a 2 bdrm condo in East Van and can’t afford a SFH but desperately want one because of growing family. Actually that’s not true – they could buy a SFH but don’t want to, because, in her words, it would be a dump and they’d be elbow-deep in mousesh!t and stucco for 3 years, and they actually want to buy vegetables and contribute to an RESP for their kid but couldn’t afford to with an $800K mortgage. Should have seen her eyes when I told her she is the 1% – she figured you needed at least $500K per year. Nope… $230K. What’s 35% of that? After tax: $3,500 per month. With rates up 200 bps in 3-4 years… that’s probably getting you a $500K mortgage or a bit better by my math. Yeah, that’s a healthy market… the 1% can only buy half of the “average” house without a hefty DP.”

“This is what sickens me and drives me to post my useless rants on [RE Talks] – not (just) that I want to buy a reasonably priced SFH in the LM. I’m not some bitter lefty renter – I’m a fiscal conservative to the core, and own property outside the LM. I just can’t stand to see the lies and deceit that will harm so many people while the insiders make out like bandits once again.”

– Arthur Fonzarelli at RE Talks, 15 Jun 2012 10:08pm

Four stories in one here:
1. Couple earning $100K+ pre-approved for $1.2M.
2. In-house bank salesperson selling mortgages with minimal training.
3. Family earning $200K+ reluctant to move up because of perceived low value in SFHs.
4. Fiscal conservative RE owner seeking a “reasonably priced SFH” in the lower mainland.
Common themes?
Readily available cheap credit resulting in elevated home prices reflecting very poor value.
– vreaa

“I never like hearing distressed anecdotes but here’s another. Imagine some slightly more severe distressed situation and instead of daycare being the casualty of rebudgeting it’s the mortgage into an illiquid housing market.”

“I never like hearing distressed anecdotes but here’s another. Two teachers (full time, part time) with 3 pre-school-age kids, mortgage, car broke down and they bought another (more expensive) one. Now grandmother is on 5 days/week (up from 3) daycare duty because 1) they lost a few days from the strike 2) the part-time teacher converted to full-time to make the difference. Gran’s in her late-60s, and she’s feeling the stress. This was because of a single random foreseeable event.
I do not wish hardship on anyone but hardship is going to happen and this was, luckily, a manageable case. Imagine some slightly more severe distressed situation and instead of daycare being the casualty of rebudgeting it’s the mortgage into an illiquid housing market. The lines of defense will be increasing earnings (more hours), borrowing from parents, borrowing from the bank, liquidation of assets, and finally…”
– jesse at VREAA 11 Jun 2012 8:48am

“Today’s consumers are better informed, connected and tech-savvy. And they expect the same from their realtors.”

“When Ashley Smith, a 27-year-old realtor in Vancouver, gets a new listing she tweets out the details to her followers and posts the property’s profile on her Facebook page.
And shortly, once her new website is up and running, Smith, who previously worked in the Langley/Surrey property market, will also run a blog to promote her listings and broadcast her thoughts on trends and housing opportunities in the Greater Vancouver area.
A few years ago, a For Sale sign on the property and some New Listing flyers dropped on the doorways of neighbours might have sufficed. But today’s consumers are better informed, connected and tech-savvy. And they expect the same from their realtors.”
– from ‘B.C. Realtors increasingly embracing social media and the web to stay ahead of the pack’, Cassidy Oliver, The Province, 15 Jun 2012 [hat-tip paul S]

It is natural that realtors should be using social media to promote business.
In fact, it would be welcome for BC realtors to use technology to inform consumers even more, in particular, to share data that they have on the market, such as the sales history of each specific property, a la Zillow in the US.
This article is also a reminder that young people continue to be attracted to realty as a career; this is understandable given the strength of the market over the last decade, but it is also an example of the misallocation of resources caused by the speculative mania in housing. There are more than 11,000 realtors in the Greater Vancouver area, up from 6,500 in 2002, and the highest number on record.
– vreaa

A chart from 2010. Membership is now >11,000 [as per REBGV]:

“I live in Hastings-Sunrise and pay a lot of attention to what things are listed and sell for; at the moment things seem to be moving for prices that are similar to last summer.”

“I live in Hastings-Sunrise and pay a lot of attention to what things are listed and sell for…. and things are listing and selling for about what they were last year. People trying to get over a million for their places? They are out of luck – but there is a limited amount of stuff in that neighbourhood, and it’s selling for between $700,000 and $900,000, generally close to list prices. Even tear-downs on tiny lots are selling for $650,000. I’m not saying that’s going to continue, but at the moment things seem to be moving and for prices that are similar to last summer.”
– Megan Eliza at VREAA 15 Jun 2012 10:15am

Our observations are similar to Megan’s. Although sales are down and inventory up in most areas, and despite the fact that there are many examples of prices reduced from original ask, we have not yet witnessed a very definite step down in same property sale/resale (“time1 to time2”) prices. In other words, a property that sold in 2011 or 2010 (or before) for ‘x’, now selling/sold for ‘x-10%’ or ‘x-15%’, etc.
Such reports will be unequivocal evidence that the descent is underway, and we fully expect these stories to be heard in the near future.
– vreaa

Bank of Canada – “Price corrections in the housing market and the risk of mutually reinforcing declines”

Prayer may be advisable

“The high indebtedness of the household sector and elevated valuations in the housing market require continued vigilance.”
—
“The contagion effects on global financial conditions could be significant. … These conditions make households especially vulnerable to adverse shock … high household debt levels continue to be the most important domestic risk to financial stability in Canada.”
—
“Households need to be cognizant of the fact that borrowing rates will eventually normalize and ensure that they will be able to service new and existing debt over the duration of their loans.”
—
“Housing assets have become increasingly important for the net worth of Canadian households, currently accounting for about 40 per cent of their total assets, up from 34 per cent 10 years ago.”
—
“Price corrections in important segments of the housing market can have adverse effects on the financial system through contagion, which could arise, for example, from a retrenchment in market confidence or a reduction in the availability of credit as financial institutions come under increased stress. The initial decrease in house prices may be amplified by the links with the real sectors of the economy as lower confidence and lower household net worth lead to reduced household spending and employment. These interrelated factors would reduce economic activity and increase strains on household balance sheets.
A sharp and persistent rise in the unemployment rate would reduce aggregate income growth, making it more difficult for some households to meet their debt payments. The resulting increase in loan-loss provisions for financial institutions and the reduced quality of the remaining loans would lead to tighter credit conditions and, in turn, to mutually reinforcing declines in real activity and in the overall health of the financial sector.”
—
– excerpts from Financial System Review, Bank of Canada, June 2012, reported on in media, for instance 14 Jun 2012
—

The risk of “mutually reinforcing declines” are what many of the Vancouver RE bears have been on about for years now. This is where the superficially ‘virtuous’ cycle of debt-fuelled housing price increases suddenly turns ‘vicious’, and, by virtue of many effects (including drop in sentiment, and reduced credit, and reduced spending, and reduced employment) lower prices beget lower prices beget lower prices still. This is the process whereby we believe that Vancouver RE prices will drop far more than the average market participant is anticipating.
– vreaa

“My in-laws have now lost, based on average prices, just over $80K on their 2011 purchase. They claim, however, that they could get about $100K more for their place today than when they bought it. Strange.”

“My in-laws (who purchased a modest place in the Sunrise-Hastings area of East Vancouver just over a year ago, have now lost (based on average prices) just over $80K. They claim, however, that they could get about 100K more for their place today than when they bought it. Strange.”
– oneangryslav2 at VCI 12 Jun 2012 4:19pm

“I know people in my own neighborhood that funded a 3 week trip to Europe for four people through a HELOC this spring.”

“I know people in my own neighborhood that funded a 3 week trip to Europe for four people through a HELOC this spring. Can you imagine how long it would have taken to *save* for that trip with all the other expenses they have going with a family of four? It would have taken them YEARS. In this instance, though, the HELOC money was akin to winning the lottery, and yes, they were far less prudent with the spending. I doubt that it occurs to them that they are just amortizing that trip to Europe over the next couple of decades or so.
People tend to be much, much more cautious with money they’ve actually earned, rather than have fall into their lapsfrom the HELOC gods, so to speak.”
– Told-you-so at VREAA 11 Jun 2012 8:47am

“We sold the townhouse in Richmond in July 2011. We realized that it was time to get out if we want to realize the equity growth. The urge to buy something next – a SFH – was tremendous after we sold.”

“We sold the townhouse in Richmond last July 2011 – we realized that it is a time to go out if we want to capitalize the equity growth. Since then the prices in our segment are only going down. Slowly though. The urge to buy something next – a SFH – was tremendous after we sold. The anxiety that we would loose the opportunity and all the media hype around it etc. I am so glad that we resisted and renting now. We rent a new (expensive) home in the best area that we would not be able to buy in. I found the experience of renting to be very beneficial for my overall understanding of the house we would need, it is like we got to try different type of houses before we get into the “no turn back” purchase contract. I already see that I would not want the house like the one we are renting now although it is new and my understanding improved of the necessary features our family needs. I am looking forward to move out for the next home experience. Some people would try to scare us by “renters forever” – well, it is better than to be forever in debt, when the bank owns part of your home.”
– olga62 at VREAA 12 Jun 2012 9:09am

‘The Starbucks Factor’ – Vancouver RE Prices Explained

“When you are buying your first house, you may want to pay special attention to where the closest Starbucks is located. ‘The Starbucks Factor’ is a remarkably accurate qualitative measure that is great at predicting where the next hot neighbourhood will be. Where Starbucks goes, that’s where real estate values are on their way up… They put massive amounts of money into researching that area to make sure they have a solid location. … The way to get the most out of this factor is to buy in a neighbourhood where there isn’t a Starbucks yet, but where there is likely to be one soon. It’s not exactly easy to figure out, but, if you understand neighbourhood trends and you have a realtor on your side who knows the areas that are appreciating at a faster rate than others, you can find the next up and coming area.”
– Andrew la Fluer, Toronto Realtor, self-posted video at youtube, 18 April 2012

This explains EVERYTHING about the Vancouver RE price run-up…
Joking aside, using this strategy may still result in you buying a house that then proceeds to plunge in price, but, at least you’ll have the consolation of knowing you have a large variety of refreshing coffee-based beverages close at hand.
– vreaa

Edward Glaeser – The Benefits Of Modest Housing Prices – “There is plenty to like in low and stable housing prices, and that’s what we should now expect in a world free from bubbly delusions of constant price appreciation.”

“…the seasonally adjusted figures illustrate that since March 2009, we in the US have been bumping along the bottom of the housing market, just as we did for six years after the last housing bubble burst in 1991.
Although a new surge in housing prices might improve the macroeconomy, there is plenty to like in low and stable housing prices, and that’s what we should now expect in a world free from bubbly delusions of constant price appreciation.” …

“Homeowners, like myself, have lost from the drop in prices, But homebuyers have benefited an equal and offsetting amount.
Cheap homes make it easier for young families to buy. Given that our public policies tend to be rigged against the young, who will have to pay the cost for our current deficit and extraordinary spending on Medicare, I can’t begrudge them the benefit of lower housing prices.
In the long run, we should expect to see prices stay low in most of the U.S. We have an abundance of land. The U.S Census reports that there were 117 million households in 2010. So every U.S. household could have more than an acre of land and we’d all still fit into Texas.” …

“I hope that housing prices continue to be modest for decades so that ordinary Americans can afford to buy, and I see little good in government policies, like the homebuyer tax credit, intended to artificially boost housing prices.
My greatest hope, however, is that prospective buyers have learned the lesson of the past decade: Housing prices go down as well as up. The right reason to buy a home is not as an investment, but as a place to live a fulfilling life.”

– excerpts from ‘What’s Not to Like About Stable Housing Prices’, Edward Glaeser, Bloomberg News, 29 May 2012

Our thanks to ‘Zerodown’ for alerting us to this article, and who adds: “A smart, contemplative article. Even in 2006 I heard the view that expensive real estate is a drag on the real economy because it hogs capital itself and encourages capital intensive projects like trains and roads to suburbs (where people seek affordability). All this capital should be put to more productive use.”

“I know a young couple who bought a 400K condo assignment in Vancouver. In discussion they generally deflected, avoided or otherwise tried to bury their heads in the sand. If it wasn’t so sad, it would have been amusing. However, I came to observe a few things…”

“I know a young couple who bought a condo assignment (for a 400k condo in Vancouver). The condo will be finished sometime next year. They are both moving to rural Alberta for a year or two to earn a lot more money to pay off the wife’s student loans for dentist school and the mortgage. They leased another car (SUV) recently so they can drive there. They are not going to rent out the condo when it’s finished because they wanted a new place. They have also extracted all their RRSPs (with maybe help from parents) for a down payment.

In the discussion with the husband and family that followed, (as expected) they generally deflected, avoided or otherwise tried to bury their heads in the sand. If it wasn’t so sad, it would have been amusing. However, I came to observe a few things.

1) They have no idea how the market works.

When I told them that house prices may be down, and listings were up, the responses were:

“I don’t care about house prices, of course those are going down, but condos are still going up or holding their value.” Huh??

“The reason there are so many listings are that people are just seeing what they can get for their houses, they’re not trying to sell.” Uhh? Apparently it’s free to list. (Both in time and money.)

2) They have no clear idea how debt works.

The counter to “when prices correct to 50%..”, was that at that point, it would just be cheaper to “upgrade”. I was shocked. In a debt-equity relationship, when “equity” goes down, you first lose value in your equity, not in your debt. In fact, you never “lose” your debt. I used 5% down as an example, and he didn’t realize that at the end of 5 years, unless everything they both earn are paying for the mortgage, that a 50% drop would mean that they’re probably 30% underwater. They will have NO equity to “upgrade” if they can even renew their mortgage. At this point, he disregarded that and went back to his example of how if his condo was worth 200k, he could still…

3) They use select anecdotal evidence only, with no statistics or any other information to back their opinions.

Sometimes these pieces contradict themselves — I don’t see how they could not see it.

“My friend works at the RBC and approves of mortgages. There’s a lot of cash only buyers from China.” … I thought cash-only meant they didn’t need a mortgage…

And of course the standard “housing prices always go up”. Anything that shocks them, just gets deflected and any statistics are ignored and rationalized by some made-up opinion.

4) They don’t understand the relationship between “home” and “equity”.

“We don’t see this as an investment. We plan to stay there long term, at least 5 years. If you want to start a family, you will have to buy a place, you won’t be able to time it.”

Yup, the standard arguments. It’s almost like they all have the same script. Anyhow, I wasn’t cruel enough to break it to them, but they ARE using it and treating it as an investment. If not, they would not talk about using the “equity” in the condo to upgrade. At the end of the day, they do plan for their place to have “value” in it. Otherwise, what’s wrong with renting? (See next observation…)

5) Any alternative is seen as impossible.

No no no… no talking about renting. “Well, if I were to rent, I’ll have to deal w/ having to find a new place when the landlord kicks me out. That’s a hassle and represents time. And time is money.”

I really wish no one coined the “time is money” bit, it’s always misused. Time represents sweat equity (maybe) which maybe translates into money.

I was also not cruel enough to point out that the inconvenience of renting is probably a lot lower than the inconvenience of being homeless, but I kept it zipped.

I’ve shown them graphs and blog entries and videos already. I’ve done my good turn already. I don’t expect them to change their minds on the spot, I am just hoping it’ll give them something to reflect on — that doesn’t fit in their current world view. Perhaps that difference might mean being poor compared being homeless.

As has been said here before, speculative mania can turn regular people into crazies…”

– RE Lurker at VREAA 11 Jun 2012 3:35pm

Globe & Mail Poll – 84% Say That Vancouver Is In A “Housing Price Bubble”

– Poll at the Globe and Mail, 12 Jun 2012 [hat-tip patriotz at VCI]

There were 1004 respondents by the time we took the above snap-shot.
A remarkable 84% of respondents voiced the opinion that Vancouver is in a bubble.
Even with a caveat concerning the validity of online polls of this nature, it is fair to say that this represents a significant change in general public opinion and sentiment.
– vreaa

Musing About Living Elsewhere – “Vancouver is nice, but it sure ain’t worth the cost.”

“I’m originally from here but moved away to study. Came back with a wife and a professional degree this past December. Between the two of us (both healthcare professionals) we make far more than the average family in Vancouver. However, we think of leaving every day due to the cost of housing. It’s a constant debate. I’m not sure how much longer we will hang around. We “could” buy a house if we felt the need but the fundamentals are just ridiculous – this can’t go on forever. Since I arrived our department has lost two colleagues to the high cost of living in Vancouver.
My wife is from Edmonton where we could get higher paying jobs, lower cost of living and cheaper real estate. Then again we’d be in Edmonton.”
– EST at VREAA 1 Jun 2012 11:17pm

“If our families weren’t here I suspect that both of us would be more inclined to pick up and leave. The second component is the fact that the rest of Canada is not extremely desirable – to us. You have Calgary,Ottawa, Montreal and Toronto. Hardly a plethora of choices, and all come with punishing winters.
Often these days I find myself in envy of our Southern neighbours. While things are certainly not all rosy down there, the US remains the land of opportunity for those willing to seek it. Add to that the amazing variety of locales to live in, and constantly decreasing costs of living and it makes it exceedingly difficult to want to stay in Vancouver. Too bad that for the majority of us living in the US is nothing but a pipe dream, myself included.”
– Burt at VREAA 2 Jun 2012 9:05pm

“I moved away a little more than a year ago. My preconceived notions of how much I would miss Vancouver turned out to be nothing like reality. Sure I miss my good friends and family that live there, but everytime I go to visit I’m so glad to leave and return home. Vancouver is nice, but it sure ain’t worth the cost.”
– Escapee at VCI 6 Jun 2012 9:20pm

Lifestyles Of The Rich And Famous, Cheap By Vancouver Standards

7039 Senalda Rd, LA
3,535sqft SFH, 10,308sqft lot, 4Bed/5Bath
Ask Price: $1,995,000

The Vancouver Sun today featured the fact that ‘TV’s Dexter puts ultra-cool L.A. home on the market’, with no less than 20 photos of the house (samples above). This kind of celebrity-housing porn is usually designed to induce gasps of awe at both the property and the price tag. We’ll bet that only in Vancouver does the average citizen, when viewing pictures of this $2M-ask property, respond “Hmmm, not bad; pretty good deal!”.
– vreaa

Obligatory Vancouver same-price property comparison:

4632 W 11th Ave, Vancouver Westside
2,362sqft SFH, 46x122lot
Ask Price $1,998,000

Richmond Listings iPhone Images

“These pictures attached show the number of listings in Richmond. All courtesy of an app on my iPhone. Each red balloon indicates a single listing. The green balloons, with the numbers, indicate that there are multiple listings in that small area. We always talk about how many listings there are in Richmond, but seeing it in pictures is much different. The number of listings on a single block amazes me.”
– BubbleBoy, via e-mail, 12 Jun 2012

From the REBGV Stats Package May 2012, looking at detached:
Richmond detached benchmark price: $1,019,100 (Up 50% in 5 years)
Richmond detached sales, March-May: 2011 540; 2012 319 (-40.9%)
Richmond detached listings: May 2011 344, May 2012 383 (+11.3%)
Sales List May: 2011 39%, 2012 26%

“If I sold now, I would be in a position of weakness – I’d have to rent.”

“It’s a sunny afternoon in a Toronto industrial park, and a group of about 60 laid-off factory workers are gathered for a farewell barbeque.
The Honeywell workers lost their jobs 15 months ago as the valve and parts maker shifted production to lower-cost factories in Hungary, China and Mexico.
But it isn’t as easy as picking up and moving. “I have to take care of my father – he’s 82,” says Brendan Andrews, a machine operator, who lives in Belleville, Ont.
Instead, he’s accepting an $11-an-hour job – a wage reduction of 50 per cent – that is non-unionized. He started on a 7 am to 7 pm shift last week.
Mario Garofalo also can’t move. The 42-year-old assembler, who worked at Honeywell for 14 years, doesn’t want to sell his house and leave his parents, girlfriend and nieces and nephews behind. “If I sold now, it would be in a position of weakness – I’d have to rent. I would use up money for other things, and on living expenses,” he says.”
– from ‘Stuck in place: Canada’s mobility problem’, G&M, 6 Jun 2012 [hat-tip KC via e-mail, and Makaya at VCI]

Years of RE-cultism blurs the thinking.
– vreaa

“The Canadian approach is what the world needs.”

“[Avoid the politically motivated false choice of assuming that you have only one option to rescue your faltering economies: austerity or prosperity.] The Canadian approach is what the world needs. A practical approach, an approach that works. An approach that includes both fiscal discipline and other growth measures. … Canada’s strong record of fiscal discipline is one reason we have weathered the economic crisis so much better than many others.”
– Stephen Harper, Prime Minister of Canada, Ottawa, 11 Jun 2012
—

“We also recommend that you have a very large country, with massive amounts of natural resources per capita. And we recommend that you let your citizens run up their household debt to more than 150% disposable income, and give them free money, so that they can all prosper by selling houses to each other… and let them borrow more money on those houses, so they can spend some more, perhaps buying even more houses with the proceeds.. and let their sons and daughters get jobs, in house building industries, so that they too can buy houses…”
Oh, wait, you all tried the that five years ago…
– vreaa

“I work in the software industry. I’m preparing to move away. Other high tech employees with the skills and talent to get better work opportunities elsewhere are leaving the company due to the stupid cost of living here.”

“I’m one of those so called bitter renters. I have chosen to rent because I believe that living close to work is important for family health reasons. Our household is also loosely budgeted with the idea that the wife can stay home if she chooses. As we have a young child now, she is choosing to do that for the near future.
An opportunity came up at work for a company transfer to the US of A. Company transfers are pretty sweet. Most expenses are covered. Moving to a state with 0% state income tax, and homes cost oh, 75% less than they do here.
It’s a tough decision, lol. But you know, sacrifices have to be made.
I work in the software industry, and as I’m preparing to move away, I’ve been in informal discussions with some of the higher ups in my company, and in the discussions I’ve heard that other high tech employees are leaving the company (and the lower mainland) due to the stupid cost of living here. These are the shining star employees that are fleeing, as they are the ones with the skills and talent to get better work opportunities elsewhere.
Just in regular meetings, it’s come up with the upper level management, that the housing in vancouver is just CRAZY, and they worry for their children’s futures. Not only do they consider the housing to be CRAZY, but the also point out that salaries are out-of-proportion low. (Those two are likely related.) Also other general feelings that commutes are taking longer. Commutes from white rock to richmond used to be 30 minutes outside of rush hour, but in the past few years, it’s consistently been 45 minutes instead. (outside of rush hour)
VREAA I know you’re reading this, and I’d likely be interested in contributing to a series about my experiences in this new place outside of the ‘Best Place on Earth’, if you deem my writing style and content worthy of publishing.
In any case, after waiting so long and quite a large amount of marital stress over housing, we’re moving away.
I gotta say, at first it was a hard sell with the spouse. She didn’t want to leave her friends, but then she saw the shopping, the beaches (wow!) and um, the housing down there. And she came around.
There’s a lot more to write about. Differences in taxes, health care, car insurance, property taxes, and those HOA fees. Bottom line though, I’ll be paying a LOT less interest when I purchase down there. Credit ratings may be a bit of a challenge. Seems even with large DP’s you need a good credit rating for the best mortgages.
Good luck to all intelligent posters. I’ll still be hanging around these forums. I’ll just have to observe from a distance as the meltdown progresses.” …
“I think we will choose to rent for at least the first year.
It just makes sense to take a little bit of time to get familiar with the area before committing to buying a place we have to live in for a long time. It does seem that monthly costs are really high in the area we are moving too.
Maybe we won’t like it down there. Who knows, leaving may open our eyes to the truth that Vancouver really is the BPOE. I’m thinking likely not. I’m looking forward to the adventure of being someplace new and different. Life should be fun and exciting. 30+ years of debt is just not for me. It’s really amazing how much Vancouver demonstrates the ‘emperor has no clothes’ children’s story.”
– ‘curious lurker’ at VCI 6 Jun 2012 5:27pmand 8:12pm
—

Thanks for the story, curious lurker. All the very best for the move and with future endeavours. We’d certainly welcome hearing more of your experience living away from Vancouver. Send updates via your own blog (see White Rock renter’s suggestion below) or by e-mail to us (see ‘contact’ above) and we’ll post them here.
Needless to say, we are saddened by the ongoing process of skilled individuals being pushed away from Vancouver due to housing costs, and we look forward to a time when housing here becomes more reasonably priced and less of a hinderance to the health and growth of the city.
– vreaa

—

“CuriousLurker – If you blog about your experiences moving stateside, I know I’d be interested. My family is in the exact same position as you, except husband hasn’t formally started applying for jobs there yet (software engineer). The only thing that keeps us here is family, really. I would love to know how education and health care measure up from someone actually making the switch. I think too often we dismiss the US as a non-option because of the assumption that schooling is terrible and health care is too expensive. I’m betting with better salaries, cheaper cost of living, and affordable housing that maybe healthcare costs and even private school costs would balance out and maybe we’d still come out ahead. I don’t know. I’m just sick of it here, the rain, and the attitude that somehow its different here. Let us know if you start a blog.” – White Rock renter at VCI 8 Jun 2012 3:05pm