Erroneous Theories For Falling Prices #5 – Tightening Of Mortgage Rules Caused The Crash

“The value of home sales in B.C. declined more than 25 per cent last month compared to a year ago, according to a report from the B.C. Real Estate Association. That drop is steeper than in any other province, but reflects a broader housing slowdown stemming in part from stricter mortgage rules across the country.” …
“Consumer demand continued to trend lower in August,” said Cameron Muir, chief economist at the BCREA. He said tighter mortgage credit conditions introduced in July are taking a toll on an already tentative market.
“The real key thing for the ownership markets was the reduction in the maximum amortization from 30 years to 25 years,” he said.
That reduction is equivalent to having a full percentage-point increase in the mortgage rate, he added.
“Likely some first-time buyers have been squeezed out of the marketplace as their purchasing power has been eroded.”

– from ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012 [hat-tip allen]

What causes a hangover? Drinking, or finally having to stop drinking?
– vreaa

Regarding this series:
There is only one BIG reason for falling prices in Vancouver RE: the speculative mania is over.
That is all you need to know to explain the price action that will play out over the next few years.
On the way up we had people attributing price strength to all sorts of bizarre and invalid causes: the Olympics, running out of land, etc. On the way down we expect similarly bizarre arguments for price drops; commentators will offer many erroneous theories as to why prices are falling. We’re already beginning to see them, and the crash has barely commenced.
We’ll collect them; please submit new examples you come across. – vreaa

“Built into this situation is the eventual and inevitable fall. … Something, it matters little what – although it will always be much debated – triggers the ultimate reversal.”
– John Kenneth Galbraith, in ‘A Short History of Financial Euphoria’

#1 – Climate Change Caused The Crash
“Prices will continue to fall, as outside buyers from other Provinces such as Ontario, Alberta and Manitoba finally realize that climate change has now become an important issue in British Columbia. What was once an enviable temperature and small secret now has become a drag, as the winter, spring and summer months are now cooler and wetter than before.”
thinkandact, commenting at the Globe and Mail, 2 Aug 2012

#2 – The Conservatives Attacked The Vancouver Housing Market And Caused The Crash
“The reality is that because banks also own investment dealers, their CEOs would prefer to see more Canadian money flowing into the equity markets rather than into real estate. … I wouldn’t be surprised if Prime Minister Stephen Harper, a trained economist, has been influenced by a Zambian-born economist in crafting mortgage-amortization policies that may kill the Vancouver housing market and create significant hardship.”
Charlie Smith, Georgia Straight, 3 Aug 2012

#3 – Vancouver RE Bears Caused The Crash
“The common theme I see in your “anecdotes” is YOU! There is no shift in the “general mood”. YOU are the catalyst bringing down the mood among your friends. I can only hope you don’t have too many friends, or you will singlehandedly bring down the market.”
‘Anonymous’, at VCI 21 Aug 2012, in response to ‘Makaya’ posting two stories of people becoming bearish on the Vancouver market

#4 – An Invisible Force Caused The Crash
“An invisible force has guided Buyers and Sellers of Vancouver homes. An unprecedented number of Sellers have listed their homes for sale while at the same time many Vancouver home buyers have decided that they are ‘not buying now’. This collective behavior is often called a ‘murmuration’. It is fair to say that human behavior is at times shaped by invisible forces which lead us to behave in ways that may not be in our best interest.”
‘Invisible Force Guides Buyers and Sellers of Vancouver Real Estate?’, Larry Yatkowsky, 13 Sep 2012

#5 – Tightening Of Mortgage Rules Caused The Crash
“The real key thing for the [weakening of the] ownership markets was the reduction in the maximum amortization from 30 years to 25 years.”
Cameron Muir, chief economist at the BCREA, ‘Mortgage rules exacerbating B.C. housing sales slump’, Vancouver Sun, 17 Sep 2012

19 responses to “Erroneous Theories For Falling Prices #5 – Tightening Of Mortgage Rules Caused The Crash

  1. Indeed vreaa.

    Financing term changes stoked the fire but in the US relaxing terms did not prevent prices from declining anyways. Never mind asking what would happen if financing weren’t reined in. Maybe the bar owner doesn’t want puke over his floor.

  2. Here in Toronto, recent bimonthly market reports have noted lower year over year sales in the 416 proper, then gone on to blame our municipal land transfer tax (on top of the provincial one). Problem is, that tax was introduced in 2008! Few clearer examples of taking your audience for morons exist, but the media often parrots the line!

  3. Of all the theories put forward so far, this one is as close to explaining a catalyst as any you’ll find. It shouldn’t be lost on us that sales in the high end of the market died at roughly the same time that 1) OSFI leaned on banks to tighten up stated income (BFS) lending, and 2) CMHC curtailed bulk portfolio insurance on conventional mortgages. The banks aren’t stupid. They know the risk in lending uninsured mortgages in the Vancouver market. When the option to insure these low ratio loans was removed, the banks quickly balked, and for good reason.

    Now we have rules tightening credit for first timers via CMHC, which people have blamed for the recent sales weakness. They’re a bit behind the 8 ball. Sales were dying well in advance of the new rule changes, but they did understand that general credit tightening and procyclical lending is one catalyst that can quickly burst a bubble.

    • We’d agree, Ben.
      Credit tightening definitely can trigger and/or help along a bubble collapse.
      The point of the post, as I’m sure you see, is that the credit tightening is (as you say) a catalyst, not a primary cause (and thus the alcohol/hangover metaphor, too). The bubble collapse, as we all know, is baked into the bubble once it starts: it’s the inflation of the bubble that is the primary cause for the ultimate crash.
      We’ve set this series up because we anticipate that, as prices in Vancouver descend, many will point to extraneous factors and claim they caused the downdraft (really caused it, not just triggered it or helped it along), whereas students of the bubble know that the downdraft was going to be coming along, regardless.

      • Well, the credit tightening could not trigger the collapse just because the downturn started to be obvious well in advance the rules were changed. It may be speed it up but was not the cause. The train has already stopped when our finance minister run over with the Stop sign, just to be there for the final picture and to appear being in control.

      • “What causes a hangover? Drinking, or finally having to stop drinking?”

        “The bubble collapse, as we all know, is baked into the bubble once it starts: it’s the inflation of the bubble that is the primary cause for the ultimate crash.”

        Is the hangover the bubble or the bubble collapse?

      • The hangover is the bubble collapse.

      • Yes, but death is also baked into life, regardless.

      • angry mortgage holder

        derp?

      • morgan -> “Yes, but death is also baked into life, regardless.”

        Cute, but, on reflection, not a good analogy.
        Most lives are not built on artifice and irrational fantasy, and death therefore comes as the end of a story, not as the collapse of something with feet of clay.

      • Not so cute.
        Life is also fragile, death is baked into it, regardless we all die from something.

        The bubble will burst because it is a bubble, that is not the interesting part.

        What story? Unless you’re talking about the end of the world, something is always left behind.

  4. “The real key thing for the ownership markets was the reduction in the maximum amortization from 30 years to 25 years,” he said. That reduction is equivalent to having a full percentage-point increase in the mortgage rate, he added.

    If the reduction from 30 to 25 years is the “real key”, why did the market not register even a bump, and prices continue to climb, when amortizations were reduced from 40 to 35 years, and then again from 35 years to 30 years? Yes, there are a number of other important changes to mortgage regulations that went along with the reduction to 25 years, but the equivalent of a 1% increase in interest rates — which would mean they are still historically very low — and a certain number of undercapitalized first-time buyers being shut out, are not the main story. Bubbles are unsustainable, so at some point they must, because of their very nature, come to an end. I suspect the local RE industry will continue to be loath to admit ‘bubble’ because they’ll want to try to control public opinion as prices deflate. If you make your living from RE, it’s better to have at least some people buying on the way down (catching falling knives), than it is for everyone to admit it was a bubble, and have buyers go on strike for two or three years until a significant correction has completed itself.

  5. don’t have any affiliation … just think they’re lol^3 and have awesome names … http://tinyurl.com/9fj3vqu

  6. Erroneous Theories for FallingPrices #6 – It was the NHL LockOut wot done it.*

    *MortgageLenders ‘front-running’ rumours of a LostSeason have executed MarginCalls on the highly leveraged MURB holdings of a plethora ‘o Vancouver NHL players – inadvertantly causing a massive bulge in YVR inventory/MOI and, predictably, plunging prices [e.g. – does anyone here remember Vancouver Island’s notoriously ‘popular’ “BearMountain” development? Hint: Receivership]

    [BloomBerg] – BCE-Rogers Biggest Losers From Hockey Lockout

    http://tinyurl.com/97vlvs6

    [NoteToEd: I am genuinely surprised this particular erroneous theory has yet to gain popular traction… although it has occurred to me that CamMcNeill’s purported “long lineups” of ‘prospective condo tenants’ were actually Canucks SeasonTicket holders queueing for refunds.]

  7. @chubster

    Both.

  8. If I just didn’t wake up, I could avoid those damn hangovers.

  9. Pingback: Deputy Minister Of Finance – “The housing market is cooling and slowing. We read a lot of press commentary saying it’s because of the government’s changes to mortgage insurance rules. I think it’s actually too early to make the direct link.

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