Monthly Archives: May 2020

Wow! – CMHC CEO Evan Siddall Points To Unsustainable Debt & Calls For 18% Drop In Housing Prices – [which of course would mean a lot more off]

According to CMHC estimates, the ratio of household debt to GDP in Canada could reach 130 per cent in the third quarter of this year, a sharp increase from around 99 per cent before the pandemic. Debt as a share of disposable income, meanwhile, could also rise precipitously to 230 per cent in the third quarter, up from 176 per cent.

Siddall said those ratios are well over a critical 80 per cent threshold, above which “the Bank for International Settlements has demonstrated that national debt intensifies the drag on GDP growth.” Such high debts risk future economic growth by “effectively converting future consumption into debt service payments,” he said, at a time when households and governments are increasingly leveraged.

Adding to real estate concerns amid COVID-19, the agency also sees housing prices plummeting in the next calendar year.

“The resulting combination of higher mortgage debt, declining housing prices and increased unemployment is cause for concern for Canada’s longer term financial stability,” Siddall said.

The CMHC sees housing prices declining between nine and 18 per cent over the next 12 months. Those estimates are loosely in line with an earlier projection by DBRS Morningstar, a credit rating agency, says which says housing prices could fall between 10 and 15 per cent by 2022.

By way of comparison, the owner of a $300,000 home at a five per cent down payment could lose around $45,000 if housing prices fell by 10 per cent, Siddall said.

He said the agency is “debating whether we should change our underwriting policies” as a result of the pandemic, potentially restricting the future lending environment as debt levels soar.

“Our support for home ownership cannot be unlimited,” he said. “It’s like blood pressure, you can have too much, [but] you need some.”

– excerpt from ‘Bloody terrifying’: COVID-19 will raise household debt levels and ‘drag on GDP growth,’ CMHC warns’, Jesse Snyder, 19 May 2020, National Post

Remarkably straight talk from the organization that has played such a large part in extending rope to participants over the last 20 years. And we’d guess that ‘18%’ is just a best guess estimate of the first step. As we’ve postulated over the years, when the bubble bursts, few are going to step in and overextend themselves to go into debt to buy assets that are falling in value yet still very overpriced by every metric. The Vancouver market has been predicated on prices that only go up, and the result has been prices that are about three times those determined by fundamental utility value. Once the drops start, we see no way of this all bottoming at 18%-off. In Vancouver, the direct and indirect economic effects of a drop of 18% in RE would alone almost definitely guarantee a larger drop.
– vreaa

Prediction: Vancouver RE Prices Will Not Crash… Unless They Crash

“If homeowners can just hold off selling, the Canadian housing market will emerge fine from its current “deep freeze”.
According to a recent TD Economics housing forecast update, the market is expected to gradually recover from the effects of the COVID-19 pandemic.
After an anticipated “historic” plunge in sales in the month of April 2020, a “much stronger activity” is seen next year.
A lot of that depends on whether homeowners can avoid distressed selling during this pandemic.
“Absolutely key to our forecasts is the assumption that listings mirror sales by dropping substantially in the near-term and recovering gradually thereafter,” Rishi Sondhi, an economist with TD Economics, wrote.
By holding off on selling, homeowners can do one thing for the market.
“This puts a floor on prices and sustains relatively tight-supply demand balances across most markets, allowing for the resumption of positive price growth as provincial economies are re-opened,” Sondhi explained.”
– excerpt from ‘Homeowners avoiding distressed selling key to Canadian housing market recovery: TD Economics’, Carlito Pablo, 1 May 2020, Georgia Straight

No, folks, that ‘analysis’ is not from ‘The Onion’.
Seems like the TD analysts have found a sure fire way of maintaining every bull market, forever… (it’s easy: just get sellers not to sell).
It’s remarkable that this kind of ‘analysis’ can get parroted on & on without getting called out.
Remember: Sellers aren’t competing with Buyers, they’re competing with other Sellers. How many Vancouver RE speculators (essentially each and every buyer for the last 10-15 years) are going to realize their thus-far-paper profits? We are already seeing many anecdotal examples of people who bought in 2016 or later taking losses on resales.
– vreaa

Pre-Existing Disease – COVID Economic Stress Uncovers Longstanding Vulnerability in Vancouver RE Market

Urban planner Andy Yan, director of the City Program at SFU, thinks the pandemic has exposed Vancouver’s economic fragility. Besides real estate, Yan explains, the economy is driven by service industries such as tourism, which has been clobbered by COVID-19. Not only do tourists help fuel short-term rentals like Airbnb, but many long-term renters work in tourism and hospitality. “If you were either counting on Airbnb or on a renter living in your secondary suite helping pay for your mortgage, and now they can’t, what do you do?” Yan asks.

Add in the fact that international travel is now very difficult, and things could get much uglier. “You have the local economy not doing well, and now you’re cut off from the global economy,” Yan says. “So it feels like it’s 1978,” when Metro Vancouver resembled what he calls Detroit by the Pacific. His summary of that era: “It wasn’t good.”

When it comes to retail and office real estate, the future looks uncertain, too, Yan reckons. It’s easy to blame Amazon, but storefront retail was already struggling before the crisis, he says. “You know how COVID takes out people with pre-existing health conditions? Well, we have pre-existing economic conditions.”

As for the office property market, Yan says that before people started staying home, 20 to 30 percent of Metro Vancouver’s labour force already worked there. “If you accelerate that and it goes into now 40 or 45, maybe even 50, how much are they going to stay at home?”

Bryan Yu, deputy chief economist with Central 1 Credit Union, also sees uncertainty ahead. “Commercial is probably a little bit problematic, especially the retail side, and even for some of the commercial product as work from home becomes much more normalized,” he says. “Will companies go back to requiring that large footprint they have now, or are they moving to a more nimble, work-from-home type of environment?”

Either way, creating a new local economy won’t be easy. Given what the pandemic has revealed about the risks of relying on global supply chains, one possible scenario is that manufacturing returns to the region. But as Yan points out, the City of Vancouver converted much of its industrial land to residential in the 1980s and ’90s. “Now where does that industrial perhaps go?” he asks. “It either goes to, say, Surrey or Abbotsford, or it goes to Calgary or Winnipeg.”

For the province as a whole, the fact that tourism, retail and other service industries dominate spells trouble in a deglobalized world, Yan warns. In food service alone, more than 120,000 B.C. workers have lost their jobs, at least temporarily, Restaurants Canada estimates. “There are these green shoots in technology or highly specialized manufacturing, but they can’t generate a mass of employment,” Yan says.

– excerpt from ‘For B.C. real estate, will COVID-19 bring down the house?’ Nick Rockel, BCBusiness, Apr 23, 2020

Apt metaphors include Biblical ‘feet of clay’ and Buffett’s “when the tide goes out you discover who has been swimming naked”.
– vreaa