Erroneous Theories For Falling Prices #6 – Toronto Bankers Caused The Crash

“But what if on the way to try to address the housing crisis, Mayor Gregor Robertson and council overlooked a key consideration? Housing isn’t built in a vacuum. It invariably requires financing. And according to several people contacted by the Straight this month, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed to the Straight by phone.”

– from ‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012 [hat-tip ‘allen’ and ‘Where’s the HAM?’]

The argument is a slight variant of blaming ‘the Conservatives’ and ‘the tightening of mortgage rules’, but it’s a variant nonetheless.
– 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

#6 – Toronto Bankers Caused The Crash
“According to several people, it appears that Toronto bankers are far less keen to underwrite projects unless developers can pony up more money up front to justify the risk.
So no matter how much the city tries to encourage the construction of homes for sale to middle-income home buyers, it won’t happen if financiers aren’t prepared to open up their wallets to developers. “The banks are holding their feet to the fire,” Cameron McNeill, president of MAC Marketing Solutions, revealed.”
‘Toronto bankers put the squeeze on Vancouver real-estate developers’, Charlie Smith, Georgia Straight, 11 Oct 2012

32 responses to “Erroneous Theories For Falling Prices #6 – Toronto Bankers Caused The Crash

  1. What, small Chinese investors are flocking to Vancouver to invest, but large Asian financial institutions aren’t? Where’s HSBC? And nevermind that, if Vancouver’s so world class, plenty of American and European bulge bracket banks should be more than willing to lend, right?

    Toronto banker’s viewpoint: “I tried to do an appraisal of your project out the window with binoculars, but the Rockies got in the way. Have you considered doing this project in Red Deer?”

  2. Great compilation…

  3. I’ll take #4 the “invisible force”. It’s called gravity.

  4. Not on the boat

    And again getting comments from a Condo shill.. he has no vested interest in bringing back the free money hey days..

  5. This one is sort of true, if bankers were employing better risk management they would have curtailed lending a while ago. But in their defence it’s not their job.

    • Correct me if I’m wrong, but CMHC doesn’t guarantee anything regarding multi-unit residential until the units are built, registered and individually mortgaged. If a developer goes bust before completion and registration, it can leave a smokin’ hole in a bank’s balance sheet along with tough loss mitigation decisions.

  6. Charlie Smith from the Georgia Straight should win an award for greatest Vancouver real estate media apologist and syncophant… he shows up twice on this list. (I always thought Global BC would take that one).
    Then again, if you had a much RE advertising as he does, you would strap on the industrial-grade kneepads as well…

    • Renters Revenge

      The Georgia Straight really surprises me on this issue, especially given the paper’s counter cultural roots. Charlie Smith must have a great big huge mortgage.

      • Joe Mainlander

        You’d think. But, Charlie claims he doesn’t own real estate: he rents. From his reply to one of the comments in his previous article;

        “I’ve resisted doing this for a bunch of reasons. There’s a part of me that thinks that when reporters have mortgages, it has the potential to change their behaviour and make them less likely to take risks. If I’m in hock to a bank or a credit union for hundreds of thousands of dollars, what’s going to be my top priority at the end of the day?”

      • The Straight has gone from “burning bras” in 1967 to “Miele dishwashers and Wolf gas ranges” in 2011. How sad.
        Just goes to show who pays the piper calls the tune.

  7. Gotta love their choice of words: “Toronto bankers”. Pitting city against city. Oh, those greedy easterners. As opposed to us totally blameless, unselfish Vancouverites.

  8. Renters Revenge

    Can you imagine?!!! Actually verifying the real identity of the consumers! With real money deposited! Talk about onerous!

    From the article…

    “Half of them have to be sold to legitimate consumers who reside in Canada and who have ID,” he insisted. “They will actually scrutinize every contract and look at the IDs. And every single contract must stipulate that the consumer must put down 15 to 20 percent cash. That money has to be sitting in a third-party trust account—and the banks will actually check all of those details before they’ll lend a penny to that developer.”

  9. Reason # 7 – Bloggers & the media conspiracy scaring buyers away!

  10. If the banks doing the lending for real estate were regional and they were somehow constrained to lend from their local regional deposits, then you might have a housing market that is more in balance with the local economy. Of course the bankers hate the concept of regional banks, they would much rather be huge too big to fail monsters, that way they can get whatever they want.

    What the georgia straight is missing is that the Toronto banks using deposits from all of Canada have lit the Vancouver housing market on fire over the past decade. So why blame the toronto bankers now, they should have blamed them 10 years ago for starting the fire.

    • You can look to the US for a similar example of what happens with regional banks; the region experiences a decline (maybe the dominant local industry declined?) and the bank goes broke. Now you’ve got TWO problems.

      The analogy isn’t exact because in the US, most residential mortgage lending was bought up and securitized out of NYC, which led the regionals to focus more on commercial real estate lending, which is even more pro-cyclical. But still…

      Calculated Risk Blog runs a regular “Bank Failure Friday” feature — insolvent regionals are usually closed down by the regulator on Friday evening, and a banner announcing the new owner (typically another nearby regional with a subsidy from the government deposit insurer) goes up Saturday morning.

  11. Ah… So that’s it then. It Was The Evil&Greedy BankingElites ‘o HogTown Wot Done It…

    Bankers who doubtless – when they start lining up at CMHC ‘caps in hand’, ‘a tugging at their forelocks to cash in their ‘insurance policies’ re: PublicRestitution of PrivateRiskGoneWrong – will blame those Evil&Greedy YVR Brokers, agents, appraisers, builders… [insert favourite FolkDevil/BogeyMan]…

    I suggest we tear a page out of the UFC broadcasting ‘playbook’ and suspend the ‘contestants’ in a cage over the audience… where they can ‘work out’ the blame amongst themselves whilst simultaneously entertaining the multitudes. Well, it’s a thought.

    And now, DearReaders – it’s time for your IllustratedSundayFunnies, Quote ‘O TheWeekend!…

    “There are various ways of signaling scarcity and uniqueness, and then slicing and dicing this, and real-estate agents are great at this.” – Prof. Ravi Dhar, Director Yale’s Center for Customer Insights

    [WSJ] – Can’t Sell? Try Asking More: In a bid to attract trophy hunters, some high-end sellers are taking a counterintuitive and risky step: raising the price.

    …”Amid signs of a rebound in the luxury-housing market, some sellers are trying a bold, if risky, tactic: raising their prices. According to online housing tracker, Z -3.38%436 listings priced over $1 million in the New York metro area on the market as of late August had raised their prices over the prior 12 months, compared with 266 for the same period two years prior. In the Miami-Fort Lauderdale metro area, 5% of listings priced above a million dollars had an increase in the recent period, compared with 2.3% two years prior.

    In cities like New York, London and Miami, record-breaking purchases by ultrawealthy overseas buyers have boosted confidence at the very top end of the market. Earlier this year, a Manhattan real-estate record was broken when a trust linked to a Russian billionaire’s daughter paid $88 million for a penthouse owned by former Citigroup C -2.17%chief Sanford I. Weill. This summer, a house on Indian Creek, a private island off Miami Beach, sold for $47 million, also to a Russian buyer, setting a record for Miami/Dade County.”….

    [NoteToEd: Etymologically speaking, the origins of “BogeyMan” trace to a particularly savage band of IndonesianPirates… Personally, I always found the idea of ‘BoogerMan’ more terrifying.]

  12. Q: Are Toronto bankers putting the squeeze on the Vancouver housing market?

    A: No. The Vancouver housing market is putting the squeeze on the Vancouver housing market.

    • Precisely.
      The collapse was ‘baked in’ once prices veered away from values determined by fundamentals.
      When did that happen? I’d say by 2003, perhaps even earlier.

      • At least in Summer 2011 it became rather obvious, in Richmond prices are going down since then, not when the mortgage rules where changed.

  13. collapse baked in once prices diverge from fundamentals … but the recognition phase begins when flow of OPM is chopped … hey, opm disney-style! … … ps. denouement taster …

  14. Re #5……….

    Hey Cameron……..

    How come the previous tightening from 40-35 years did not cause the crash ?

    How come the previous tightening from 35-30 years did not cause the crash ?

    How come the prsent tightening from 35-30 years suddenly caused the crash ?

    Inquiring minds want to know eh ?

    • Now first, get with the program. The party line is that the market was already cooling when the latest changes were brought in.

      Second, regarding amortizations:
      Paying in 35 instead of 40 is 12.5% faster.
      Paying in 30 instead of 35 is 14.3% faster.
      Paying in 25 instead of 30 is 16.7% faster.
      I’d have come up with some actual payment examples, but all the online Canadian mortgage calculators seem to now max out at 25 or 30, and I can’t be bothered firing up a spreadsheet. Suffice to say that going from 30 to 25 makes a much bigger difference to your payments than going from 40 to 35, all other things being equal, which they aren’t of course.

      I don’t believe the industry theory that the party could have kept going indefinitely absent meddling, but we do need our facts in order.

  15. last time I checked, I was out of debt completely. You guys can fight about the reasons.

    • Cheap shot, SmartyPantz! You’re an Astrologer, after all… Evidently… A good one. Try to avoid Necromancy and/or Alchemy [better known to some CentralBankers as Nuclear Transmutation], though. It wouldn’t behoove you.

    • but PS, how was your debt to society extinguished? 😮
      ps. @naj – got a fun story to share? come’on, the horse is soooo dead already … you must be onto other things

  16. #3 is true in the sense that since emotion helped inflate the bubble, emotion will also help deflate it.

  17. Regarding the Georgia Strait article linked in #2, Charlie Smith seems to think the Liberals have a real chance to peel support away from the Conservatives by opposing a return to their own more responsible mortgage rules. That would leave the Liberals making pitch something like this:

    “The Conservatives were wrong to bring back Liberal mortgage policies. In 2015, vote Liberal, and bring back the Conservative’s mortgage policies. We want our old Stephen Harper back!!!!”

    Of course, they probably wouldn’t word it exactly like that.

  18. Of course this article in the ‘Straight has nothing to do with the pages and pages of new condo ads inside… Take ’em away and what do you have?

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