“Let’s remember how we got here” – Looser and Looser CMHC Limits

Let’s remember how we got here:

• Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years. CMHC also had limits on how much you could buy with their insurance.

• Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 25 years. There would be no price limit on what they would insure if 10% or more was put down.

• By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased.

• In March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured.

• In March 2006 you had 0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year. Interest only payments were allowed for 10 years.

• In November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years.

• Canadian banks ramped this up by allowing up to 7% cash back offers if you would take on a mortgage with them. You could basically get paid if you bought a house.

• Not only were the rules surrounding the granting of money loosened, but CMHC’s cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion today.

– this fine summary from ‘golden_boy’ at VCI 11 Jun 2013 7:40am

Less Expensive Is Better – “So they’ll buy a less expensive home. Good. I consider that desirable.”

“It will mean that some people will not buy into the market. It will also mean that some people will buy less into the market… so they’ll buy a less expensive home, or less expensive condominium. … Good! I consider that desirable.”
– Jim Flaherty, Canadian Minister of Finance, April 2012 news conference regarding mortgage condition tightening, as recapped on Global TV News, 18 Dec 2012 [hat-tip Greenhorn for the archived video clip]

Not less of a home, note, but a less expensive home.
This is, indeed, desirable.
– vreaa

Mortgage Policy Decisions – “The pressures on the Minister of Finance are to do the wrong thing.”

Whatever happens in the housing market, former central bank governor David Dodge thinks there’s a bigger issue at stake. The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years.
Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations.
“There are different ways one can go at that, but you don’t want it all in the hands of the Minister of Finance. Because generally, the pressures on the Minister of Finance are to do the wrong thing,” he said.
Mr. Dodge also believes that the mortgage insurance system places too much emphasis on keeping banks healthy by protecting them from mortgage losses, rather than keeping the economy healthy by ensuring that housing supply is in line with demand.
Looking back on that angry meeting with CMHC executives in 2006, and with the benefit of seeing what has happened to the housing market, he stands by his criticism. “I have no reason to revise what I said at the time at all. I think [loosening the rules] was a mistake,” Mr. Dodge said.

Even some former CMHC insiders are now calling for a radical rethinking of what the institution does.
Gary Mooney, a former director on CMHC’s board, says “it is now time for root and branch reform,” including “an honest evaluation of CMHC’s relationship with our major financial institutions.” Private competitors – of which there are currently only two – could play a bigger role in providing mortgage insurance, he suggests.

Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks. In a recent interview with The Globe, he said he wants Ottawa to look at privatizing CMHC in the next five to 10 years. Proponents of that idea say one of the main benefits would be to reduce the taxpayer’s exposure to mortgages – and to a housing slump.

But Mr. Dodge argues that’s not really the case. Ottawa is already in too deep.
“The system as a whole is too big to fail,” he says.
“And when something is too big to fail, the government will come in.”

Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.

– from ‘Ottawa’s $800-billion housing problem’, Tara Perkins and Grant Robertson, The Globe and Mail, 26 Dec 2012

CMHC allowed the mis-pricing of the risk of lending capital, and this contributed to the massive speculative mania in Vancouver RE. Note how this opinion is now becoming mainstream.
By the time prices have crashed (in a year or three?) we’ll have certain individuals saying both “We all knew it was a bubble” and “Who could have possibly foreseen this?”, sometimes in the very same paragraph. Just watch.
Further point: As usual when markets go through one of these massive manias, policy rethink always happens after the fact, when the horse has long since bolted and the market is already looking after the problem.
– vreaa

“I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”

Sarah O’Brien and her husband Darryl Silva were able to buy a home a few years ago because their 35-year mortgage kept payments low.

“In 2006, the new Conservative government in Ottawa allowed CMHC to tinker with its tried-and-true formula. One of the key changes was in mortgage length: CMHC would insure mortgages 35 and 40 years in length.
The measures helped people like Sarah O’Brien, who bought her first home at the age of 26. She and her husband, Darryl Silva, purchased a condo three years ago in Etobicoke, on the western side of Toronto, with a down payment of just 5 per cent. Mortgage rates were low, which helped. But so did the bank’s willingness to give them a CMHC-insured 35-year mortgage. The longer amortization held their biweekly payments to about $700.
“We’re young to be getting into the real estate market, so if the monthly amounts were significantly higher, we probably wouldn’t have,” Ms. O’Brien said. “We probably would have waited.”
The arrival of buyers like Ms. O’Brien and Mr. Silva has changed the market, however. Home buyers have responded to low rates and easy mortgage rules “by bidding up the price of houses,” said bank analyst Peter Routledge at National Bank Financial. Since 2000, the price of houses across Canada has risen 127 per cent; they’ve gone up nearly 50 per cent since 2006.
“You can never really provide cheap housing,” argues Moin Yahya, associate professor of law at the University of Alberta. “All you can really do is provide cheap cash, which of course then drives up the price of housing. You’re only distorting the market.”
—
“What is beyond dispute is that CMHC’s rules have enabled a change in behaviour among home buyers like Ashleigh Egerton. When she and her boyfriend bought a townhouse in Brampton, Ont., in May, 2008, they could have made a 5 per cent down payment – but opted to put nothing down instead.
“Instead of putting that money into the house, we felt like we’d be off to a better start if we had some money to furnish the house,” Ms. Egerton says. “I wasn’t under the impression that I would be paying this house off. This wasn’t the house that we would be staying in forever, it was just about getting into the market, getting a place.”
But the zero-down mortgages created a new problem in the housing market: Buyers who weren’t building any equity in their properties, since the payments were primarily covering the interest in the early stages of the loan. When Ms. Egerton moved out about two years later after splitting up with her boyfriend, the pair still didn’t have any equity in the home.”
—
– above two anecdotes excerpted from ‘Ottawa’s $800-billion housing problem’, Tara Perkins and Grant Robertson, The Globe and Mail, 26 Dec 2012

Examples of two couples who bought houses, but shouldn’t have; and who, under normal circumstances (and, ironically, at lower prices), wouldn’t have.
– vreaa

“The bank called us and offered us a $300K HELOC on the $315K leaky condo without us even asking for it.”

“Our personal experience in 2008 really shook my confidence in how mortgage and HELOC approvals are handled by banks.
We used to own a 1Bedroom 1 Bath 780 Sqft “Penthouse” in East Vancouver, one block to Commercial Drive.
It was a good location, we renovated it from the inside, great so far… However the building had major issues from the outside and needed a complete rainscreening job. The Strata members fought each other for a long time and renovations were postponed while the damage got worse. Our share when it finally got done $78K.
We had no mortgage on it at the time and were able to get a loan from CMHC for the repairs which we took because it was interest free. Anyways, we sold the place for 315K after the renovation was done and made a good profit as I had bought it very cheap, back in 2001 when everybody was afraid of leaky condos and there were no buyers for this even though the location was great and the unit was nice from the inside.
Here is the part that shows the recklessness of lending though: After we were approved for the CMHC funds one of the major 5 banks who we were banking with at the time called us and offered us a HELOC on the place without us even asking for it.
I asked them how much could they give us and the answer was that based on the location, size and age they can give us up to 300K if we wanted to.”
– Mike at VREAA 23 Dec 2012 2:14pm

“Five years ago my girlfriend and I were pre-approved for over 400k on a mortgage, without showing or proving any income.”

“Five years ago my girlfriend and I were approved for over 400k on a loan. You know, the kind that get pre-done before you shop. Well, that was without showing or proving any income. This was by word of mouth at a mortgage broker’s office. I said I have the papers to back my claims, she said doesn’t matter, we trust your word.
Why would phoney valuations made by a computer surprise anyone in today’s environment?
We never pulled the trigger on a place… good thing too!”
– kc at VREAA 23 Dec 2012 9:12am

G&M On Emili – “Everyone is getting nervous now. There is more and more potential of a downturn in the marketplace.”

“Where banks once sent human appraisers to assess a home’s value and determine whether to provide a mortgage for it, the banking industry – encouraged by the federal government’s own Canadian Mortgage and Housing Corporation (CMHC) – had largely converted to a faster and cheaper system of automated underwriting, using computerized models to determine how much money to safely lend. The models weren’t perfect, but they were close enough. And what did it matter? House prices always seemed to be going up in Canada anyway.”
—
CMHC’s automated underwriting program – called Emili – had been stamping its approval on millions of mortgages as safe. But in Emili-approved cases where the banks were forced to foreclose, the homes turned out to be worth much less than believed.
As the housing market in Canada begins to cool and the federal government talks of a soft landing for home prices, rather than a hard crash, attention is turning to the factors that fed record borrowing and contributed to overheated sales and price increases – and the risks that now lie within the financial system. Rock-bottom interest rates propelled Canadian real estate to undreamt-of heights, and Ottawa’s decision to loosen mortgage rules added to the froth, as marginal buyers flooded into the market.
That much is amply documented. But an investigation by The Globe and Mail has uncovered a hidden risk in Canada’s housing markets: The rise of automated lending approvals, which has created a rapid-fire system that has financial regulators worried about the foundations that underpin Canada’s housing market. There are worries that the true worth of Canadians’ homes could be lower than what computerized methods spit out. There are also worries that unscrupulous human appraisers can manipulate home values.
Those distortions matter less in a strong economy and a rising market, in which price appreciation covers up any errors. But the days of steady gains in real estate are gone: Almost all major metropolitan markets have plateaued, and in some, such as Vancouver, housing prices are falling at a worrying pace.
“Everyone is getting nervous now,” says Phil West, a veteran of the appraisal industry who is critical of Emili. “There is more and more potential of a downturn in the marketplace.”
—
An on-site visit to a suburban Vancouver home with Mr. Sieb illustrates the concern. As he begins walking through the house, the appraiser grows skeptical about the information the bank has been given about this home.
The listing says this house – a bungalow listed for $479,000 – was built in 1980 and is newly renovated. He notes some fresh carpet and a recently installed light switch, but the kitchen and other rooms show troubling signs of age. “This isn’t a renovation,” he says flatly. “You wouldn’t call it that unless you were stretching what you see for the purpose of getting the value up.”
Mr. Sieb checks the dates stamped on the plumbing. “This place was built in the 70s,” he says, shaking his head.
This, he explains, is the sort of thing that the computers miss.
Last month, Mr. Sieb appraised a home that turned out to be several hundred feet smaller than what the paperwork on the house claimed.
“In my career,” says Mr. Sieb, who has been appraising for 30 years and now runs Inter-City Appraisals of Coquitlam, B.C., “maybe five times have I had the exact same measurements as the realtor.”
—
– from ‘Shaky foundations: How Ottawa’s computers get Canadian home prices wrong’, Grant Robertson and Tara Perkins, Globe & Mail, 22 Dec 2012[hat-tip Ralph Cramdown]

An article that is worth the entire read.
We particularly like the way the description of the current state of the market is not sugar-coated, the thorough discussion of the clearly fudge-able Emili system, and, in particular, the observation that these kinds of rethinks of aspects of market ‘regulation’ are only questioned when a market begins to fail. As the authors say: “Those distortions matter less in a strong economy and a rising market, in which price appreciation covers up any errors.”
– vreaa

—
UPDATE: Further regarding the Emili discussion:
“Over portfolios with hundreds of thousands of properties, there will always be overvaluation and undervaluation, and the overwhelming majority of those cases fall within safe parameters. What the public needs to know is the tail risk of auto-valued applications, versus appraiser-evaluated apps. Unfortunately, we don’t have enough data to gauge that yet.
Inevitably, people will read the Globe’s story and think that CMHC is using some back-of-the-napkin formula to judge property risk. That’s so far from the truth. Emili is not some 100-line computer program written by a college intern. It is multi-million dollar mission critical technology benefiting from the best available data and over two decades of R&D.
CMHC knows the risk of it botching property valuations en masse. It has the public, press and regulators breathing down its neck around the clock. It knows the risks in automated valuations better than virtually anyone in the country because it’s processed millions of mortgage files since 1996. And it tirelessly optimizes its systems to statistically factor in and adjust for those risks. To imply that CMHC cannot account for “recent movements in home prices” is simply laughable.”
– from ’emili Criticisms Resurface’, Rob McLister, canadianmortgagetrends.com, 22 Dec 2012
[hat-tip Ralph Cramdown, added at the suggestion of jesse/YVR]

Okay, fair point. One has to do a careful analysis of the entire risk across the whole CMHC portfolio, agreed; it’s not enough to point to a few anecdotes of errors in valuation assessment and conclude that the entire system is at high risk. The anecdotes could be representative example of a systemic bias towards overvaluation, but they could also simply be outliers.
At the same time, when Rob McLister expresses high confidence in CMHCs risk modelling, refers to the “multi-million dollar mission critical technology”, and states that this criticism of CMHC is “laughable”, we are not immediately reassured. After all, he is the same guy who called the idea of 40% price drops “farcical”. Any market observer who lacks the imagination to see the possibility of such an outcome is at risk of being blinkered in their analysis.
When we hear market participants calling the idea of certain outcomes “laughable” and “farcical”, we’d strongly suggest one give serious thought to the possibility of those outcomes coming to pass. Why? Because their high confidence reflects the strong probability that a very substantial percentage of market participants are not prepared for that outcome, and that is the very mechanism by which such outcomes come to pass! This is closely related to the analysis of sentiment, and is Contrarianism 101.
When market participants are 100% convinced that stock ‘x’ can only go up, where does it go?
At 125, the thought of Nortel trading at 50 was “farcical”, and “multi-million dollar mission critical technology” showed that such a drop was impossible.
– vreaa

“The lax lending standards, combined with low interest rates, opened the way for easy money to flow. Average home prices in Canada have doubled over the past decade.”

“Then one day the government woke up and realized that what was once the Veterans’ Housing Shoppe was now backing the mortgages of anyone, for nearly anything. Five per cent down? No problem. Forty-year mortgages, investment properties and highly leveraged $2-million mansions by the water? Yes, yes and yes. Bring ‘em on. The lax standards, combined with low interest rates, opened the way for easy money to flow. Average home prices in Canada have doubled over the past decade. A federal institution whose mission was to make houses more affordable has managed to do the opposite–make them unaffordable.”
– from ‘CMHC outlived its mandate – now it’s just meddling’, Derek DeCloet, G&M, 25 Oct 2012

Opinions previously held only by lunatic bears-on-blogs are being expressed mainstream.
All part of the swell of sentiment change washing over the RE markets nationwide.
– vreaa

“73% of homeowners can’t afford their own homes”; “Mark Carney admits to ‘droning on in public about the dangers of household debt'”; “They offered me close to a million last year (25 years old) just because I’m in Fort McMurray.”

“Canadians will learn an ugly lesson if they keep piling on debt the way they are at the moment.
The Bank of Montreal report that came out Monday and noted that almost three-quarters of homeowners would feel a significant squeeze from even a small rise in interest rates shows just how close Canadians are to falling over the edge of their finances. What it means, in essence, is that 73% of the people surveyed can’t afford their own homes. And a lot of them are already feeling the pinch.”
—
“This is at a time when interest rates are at historic lows, which means they can only go up from here. That they will rise, eventually, is inevitable. Yet 16% of the people in the survey said they might not be able to make their payments if rates rose by even a tenth.
You don’t have to think hard to imagine what the fallout would be from an event like that. You can picture the headlines — “Canadians driven from their homes by rise in interest rates” – and the panic in Ottawa. The papers – well, some of them, anyway – would be full of stories about innocent families who insist they had no idea they were getting into such a mess when they took out the mortgage on their “dream home.”
—
“Mark Carney, the Bank of Canada governor, has wagged his finger at big borrowers so often he seems almost sheepish about it.
“Me droning on in public about the dangers of household debt is a way of reminding households that: don’t assume that current levels and the current situation will be there forever,” he said on one recent address.
—
“As the housing market cools and home prices slip, a lot of people could find themselves making monthly payments they can barely cover for a house that isn’t worth what they thought it was. If you can’t cover the mortgage, you just have to pray the roof doesn’t start leaking or the furnace fail.
And borrowers won’t really have anyone to blame but themselves. The warnings are out there. The examples are rife: all anyone has to do is examine the experience of U.S. homeowners over the past few years. The dangers aren’t a secret, they’re just being ignored.
But people keep borrowing, because it makes them feel good to spend, because they’re too busy to think about it, because they figure they can cover the payments in the short term and will deal with the future when it comes. And because they can always blame it on someone else when the roof caves in.”
—
– from ‘Hard-pressed homeowners just close their eyes and borrow some more’, Kelly McParland, National Post, 24 Oct 2012

And from the comment section below that article:

“When I was shopping for a house in 2010, the bank told me I could afford $850k. I am a compulsive budgeter, with detailed spreadsheets, played with various amortizations, and incorporated all of my expensive, housing-related and otherwise, and the amount I concluded that I could afford was $500k. That’s a huge difference.” – Jc

“They offered me close to a million last year (25 years old) just because I’m in Fort McMurray. Didn’t go anywhere near that mark.” – doodles

“I was also offered a $750K loan 10 years ago, and only borrowed $500K upon my own analysis (based on property costs < 30% of gross income). The Scotia loan officer told me that I was smart, and that she feared for others that were borrowing all they could get." – cash0

“We wanted to move a year ago and decided we could afford about $400K. Bank offered us $750K. We spent $362K fully expecting to pay higher interest rates eventually.” – chmilz

—

No surprises; Lenders have allowed borrowers to overextend.
Headlined for the record.
– vreaa

Almost All Buyers Are Very Leveraged – “41% have less than 10% down-payment, a further 21% less than 20% DP. Only 39% put down more than 20%.”

“According to the latest data from Will Dunning, Chief Economist of CAAMP, less than 4 in 10 buyers have 20% down payments.
For those purchasing from 2010 through spring 2012:
41% had less than a 10% down-payment
21% had a 10-19.99% down-payment
Only 39% put down 20% or more.
(This survey included both first-time and repeat buyers. First-time buyers accounted for 56% of the dataset. Totals don’t add to 100% due to rounding.)”
– jesse (‘YVR Housing Analyst’) at VREAA 8 Oct 2012 10:55am, quoting from a Canadian Mortgage Trends article on the recent CAAMP released figures.

Headlined for the chronological record.
The vast majority of buyers are very leveraged to RE prices.
The Vancouver subgroup is likely worse, given our price levels.
This flies in the face of those who claim that Vancouver is supported by vast numbers of cash buyers.
And, as we all know, if an owner has less than 20% equity in a house, they lose it all when prices drop 20%.
– vreaa

“It allows people to pay too much for a property. The lender still lends the money, the guy still buys it, and the only person hurt in the whole deal is the person who paid too much.”

“Flaws in a national databank that helps determine the value of houses across Canada have helped fuel inflation in home prices, putting mortgage lenders and borrowers at greater risk, key players in the housing sector have warned.
Documents obtained by The Globe and Mail detailing confidential statements from banks, appraisers and mortgage insurers show rising worry over the use of a database operated by the Canada Mortgage and Housing Corporation (CMHC). The documents suggest the data are flawed and help push home prices up. …
Introduced in 1996 as a way for the CMHC, banks and other lenders to quickly and inexpensively determine how much money can be lent against a residential property, the database known as Emili is relied upon too heavily by lenders, the documents suggest.For home buyers, or homeowners with home-equity lines of credit, an inaccurate valuation by the database could allow them to overpay or borrow much too heavily for the home, industry members argue.” …
“It allows people to pay too much for a property,” Rick Sieb, president of Intercity Appraisals Ltd. in Vancouver, said in an interview. “If the property is worth $300, and somebody comes through and the realtor has convinced him to pay $330, so he’s 10 per cent out, and they submit it through Emili or another AVM, it will just say ‘yeah, that’s fine for that area,” Mr. Sieb said. “So the lender still lends the money, the guy still buys it, and the only person hurt in the whole deal is the person who paid too much.”
The Canadian housing market has been on a tear for much of the past decade but is now showing signs of petering out.” …
“During a hot housing market, a wider margin of error on estimated values was less of a concern, since there is smaller likelihood a mortgage or loan refinancing will end up under water. But if the market starts to fall, as some economists expect, the accuracy of appraisals becomes paramount. When a lender is forced to liquidate a home in the event of a default, it could incur a loss. In the case of CMHC, the federal government would be left picking up the tab.”
– from ‘Potentially flawed data used by banks and lenders bump up house prices’, G&M, 10 Oct 2012

Yup.
One relatively minor facet of the ‘people-overextended-themselves’ story.
As predicted, when a market turns, the strain starts showing all over the place.
‘Virtuous’ cycle turns vicious.
– vreaa

CMHC – Profits fall; Claim losses “jump”.

“Canada Mortgage and Housing Corp. saw profits at its mortgage insurance business fall sharply in the second quarter largely due to a jump in losses from claims. The rise in claims losses suggests that an increasing number of borrowers whose mortgages were insured by CMHC have been unable to make their payments and have lost their homes. Mortgage insurance pays the bank back when a borrower defaults.
In its second-quarter results, released Wednesday, CMHC said that its losses on mortgage insurance claims rose to $168-million for the three months ended in June, up from $144-million in the same period of 2011 and $154-million in the first quarter of this year.
That’s part of the reason why profits from CMHC’s core mortgage insurance business fell to $255-million, down from $341-million. The earnings were also hurt by paper losses on a mutual fund investment that suffered when international stock markets fell.
Part of the reason for the growing claims losses of late has been the dramatic increase in the amount of insurance that the Crown corporation has in force.”
– from ‘Jump in claims pinches CMHC’s insurance business’, The Globe and Mail, 29 Aug 2012 [hat-tip allen]

Infographic: Vancouver Detached Home Price vs Government Intervention.

‘Infographic: Vancouver Detached Home Price vs Government Intervention’, care of Canadian Watchdog, 18 Aug 2012

Globe & Mail – “Canada’s Housing Market At Tipping Point”

Canada’s housing market is now at a “tipping point,” with some cities still showing strong growth and others cooling down, Royal LePage says.
The study released today by the brokerage backs up anecdotal evidence from across the country, suggesting an inevitable slowdown for the housing boom.
It also comes amid fears of overheating in some regions, notably Toronto and Vancouver, and moves by the federal government to slow the fevered pace of borrowing among Canadians who have embraced record low interest rates.
“We have had three years of solid house price appreciation in almost all regions of the country,” chief executive officer Phil Soper said in the report.
“Confidence in Canada’s real estate market is sound, but home prices cannot grow faster than salaries and the underlying economy indefinitely,” he added.
…
“The most recent set of mortgage changes, the fourth in four years, is also the most aggressive,” Mr. Soper said. “The cumulative impact of these new regulations has created a significantly higher hurdle for young buyers seeking their first home and comes at a time when the market was slowing of its own accord.”
Mr. Soper described the timing of Finance Minister Jim Flaherty’s latest move as “unfortunate.”
Toronto-Dominion Bank also sees the housing boom likely ending next year, with “more pronounced declines” in British Columbia and Ontario, according to a study released yesterday.
“The expected housing pause will reflect stricter regulations on mortgages and lending and what we expect to be a gradual rise in interest rates,” said economists Derek Burleton and Jacques Marcil.
Separately today, Canada Mortgage and Housing Corp. said construction starts across the country climbed in June, largely because of condo development in Quebec and British Columbia.
– from ‘Canada’s housing market at ‘tipping point’, Michael Babad, Globe and Mail, 10 Jul 2012 [thanks to the readers who quoted, cited and e-mailed this article.]

Naïve Buyer Logic – “We probably wouldn’t have been able to afford to mortgage a house, or at least not the house we wanted, if we hadn’t jumped on it.”

“Bruce and Denise Perrett, of Port Coquitlam, B.C., got married last year and wanted to buy a house, but they weren’t in a rush.
That all changed when the couple heard Ottawa was tightening mortgage rules.
For the Perretts, locking into a 30-year term as opposed to 25 years meant an extra $300 a month that could go to strata fees or property taxes.
They sprang into action and called their mortgage broker.
“She was right on it, she got us the approval and the next day we were rolling,” said Denise Perrett. “Then we found out we had to have an accepted offer by [July 9] and then we panicked and called our realtor.” …
The Perretts spent 48 hours looking at homes and put an offer that was accepted last week on a property in Maple Ridge that has everything they want.
The best part is that they qualify for a 30-year mortgage.
“We probably wouldn’t have been able to afford to mortgage a house, or at least not the house we wanted, if we hadn’t jumped on it,” Bruce Perrett said.”
– from ‘Home buyers scramble before mortgage rules change’, CBC News, 7 Jul 2012 [hat-tip specialfx3000 at VCI, and jesse]

1. When market rules tighten, you won’t be able to afford ‘x’.
Why stop thinking at that point? ->
2. Others like you won’t be able to afford ‘x’, either.
Therefore ->
3. Prices will have to drop to ‘x-y’.
– vreaa

“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

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]

Easy Money Fuelled The Vancouver RE Mania – “Suddenly in about 2006 or so, we were able to borrow as much money as we wanted and didn’t have to prove anything.”; “I work in the financial industry and I see people with huge loans their incomes can’t justify all the time.”

“A lot of first time buyers don’t realize how qualification for a mortgage has worked historically since the about 1950. We have had multiple mortgages since 1987. In order to qualify for a mortgage between 1987 and 2006 (approx.), we had to prove income as follows:
1. three most recent tax returns
2. they averaged our income over those three years
3. provision of pay stubs
If you were self employed:
1. three most recent sets of financial statements
2. they averaged the income from those three years
3. provision of pay stubs for any supplementary income
We were never able to borrow more money than proven income could justify. With our last mortgage before all the EASY credit, the bank didn’t even want to give us a 25 year amortization, since we were approaching 50 years of age.
Suddenly in about 2006 or so, we were able to borrow as much money as we wanted and didn’t have to prove anything. In addition, we were able to change our amortization in the middle of our mortgage term, without penalty (reduce our monthly payment). No income verification took place and we were offered a 30 year amortization automatically.
Now everyone wonders how we got here? Lending money to people who can’t afford to pay it back is a recipe for disaster. Welcome to disaster.
We don’t own a house anymore, we are sitting on a pile of cash and renting…happily.”
– Canayjun at VREAA 5 Jun 2012 10:24am

“I work in the financial industry and I see people with huge loans their incomes can’t justify all the time. It astounds me. I spoke with a mortgage broker who told me that in recent years, people would apply for a mortgage and show their notice of assessment from their tax returns. The income on the NOA would be about $10k, however they would state their income much higher, and the mortgage would be approved based on this higher amount. It was ridiculous. A mortgage broker from a bank also called me to verify that one of my clients was self-employed “Sure,” I said, “but he’s never actually made a dime from this business, in fact he’s always had losses.” The mortgage broker assured me that that was no problem, they just needed to know he was “self-employed.” And I know for a fact that this individual was not rolling in unreported income either, maybe a little ($10k at most) but not a lot. He and his wife are essentially living on credit. There is big trouble coming.”
– pricedoutfornow at VREAA 5 Jun 2012 10:59am

Robert Shiller – “We should be hoping not for price increases, but for prices that are formed in markets in which all people participate with realistic expectations, prices that reflect contracts that treat everyone fairly and that reward good behaviour.”

“…we should be hoping for better financial arrangements, a democratised and humanised financial capitalism, not for some price increase. We should be hoping for prices that are formed in markets in which all people participate with realistic expectations, prices that reflect contracts that treat everyone fairly and that reward good behaviour.
Thinking that large home price increases would be a good thing seems very widespread. But the effects of any such future price boom would not be so clearly beneficial, and would depend on the causes of the price increase and the financial arrangements that were made for them. The issues are much more complex than most people seem to imagine.”
…
“Price increases were related to a loosening of credit standards and weakening of the banking system due to complacency about the possibility of price falls. The result has been serious trouble in the banking sector, and the necessity for government bailouts.”
…
“Home price increases were also related to unrestrained and unrealistic public expectations for future price increases. In a survey of homebuyers in four US cities that Karl Case and I carried out in 2004, at the peak of the housing expectations, we found that the (trimmed) mean home price increase expected for the succeeding 10 years was 12.6 per cent a year. Maybe our respondents didn’t quite understand what they were implying: that would mean more than a tripling of home prices in the succeeding 10 years from an already high level.
At the least, home buyers must have thought they would make a ton of money: those who borrowed 90 per cent of the money to buy their house in effect saw their investment levered up 10 to one, and so these high expected price increases would be magnified 10-fold for their investment. No wonder people felt so pleased with the boom while it lasted.
Already eight of those 10 years have passed, and the actual rate of increase in US nominal home prices on average for the eight years was minus 3.6 per cent a year. Long-term public expectations were way off. And yet, even in the fact of this evidence, expectations have come down only slowly and gradually. Expectations for annualised 10-year price increases dropped to 5.6 per cent a year by 2011, though that is still high: it would imply a doubling of home prices in about a dozen years.”
…
“We should also hope for some fundamental change in our mortgage institutions so that the problem that got us into this housing crisis will not be repeated. In my book I talk about new types of privately issued mortgage that would go a long way towards preventing the kind of financial crisis we have just been through. I have proposed a continuous workout mortgage that has a pre-planned and continually adjusted workout written into the original mortgage contract. Issuers of such mortgages would be in effect selling insurance on home price declines as part of their mortgage package.
[My colleagues and I] have shown how these mortgages should be priced to yield a normal profit for private issuers. By creating such mortgages, issuers would be bringing the financial theory of risk management to the broader public, thereby helping to democratise finance.
We should also hope for better liquid markets for home price risk that would provide price discovery for future home prices, and a hedging vehicle to help mortgage originators to better kinds of mortgages without overburdening themselves with home price risk. That would be more good news.
Ultimately, what we really should be hoping for is not home price increases but democratisation and humanisation of the financial infrastructure. Such improvements are unambiguously good, and are things we can make happen. It need not be just a hope.”
…
– excerpts from ‘The property predicament’, by Robert Shiller, Financial Times, 21 Apr 2012 Shiller is a professor of economics and finance at Yale University,
[Image from same article]
—

Shiller’s suggestions may seem irrelevant to those desiring ‘affordable housing’ in Vancouver but they are not. Our bubble is the result of the same mispriced risk (too easy lending) and “unrestrained and unrealistic public expectations for future price increases” to which Shiller refers.
The particular problem for us is that we are at a different stage of the cycle, our bubble remains inflated. We believe that far and away the most probable outcome is very large price drops.
Perhaps some of the suggestions that Shiller and his colleagues make could be incorporated into our Canadian mortgage system, but we anticipate there will be little appetite for this until our housing markets suffer very severe setbacks.
– vreaa

Reader Question – “What Percentage Of Residential RE Sales In The Lower Mainland Are CMHC Insured?”

A reader has e-mailed us requesting a percentage breakdown of residential RE sales in the BC lower mainland by:
1. CMHC insured
2. non-CMHC insured
3. cash sales.
A very fair question for anyone interested in the local RE market, but not a straightforward one to answer. We have e-mailed a few knowledgable sources who have come up with useful but indirect answers.
Is there anybody out there who can give us an accurate answer?
What percentage of residential RE sales in the lower mainland are CMHC insured?
Thanks. – vreaa

CMHC Cap – “If they do in fact operate within their $600B cap, check out how drastically the growth in their insurance in force would have to slow. That’s a hard stop if ever I’ve seen one.”

– chart via e-mail from Ben Rabidoux, of ‘The Economic Analyst‘, 25 Mar 2012, who adds:
“Attached is a chart of CMHC cap on insurance in force as outlined in their latest Corporate Plan. If they do in fact operate within their $600B cap, check out how drastically the growth in their insurance in force would have to slow…..to only 20% of 2007-2011 levels for the next 5 years, or a slowing to less than 2% annual growth. That’s a hard stop if ever I’ve seen one.”
[Thanks Ben. – vreaa]

“CMHC has signalled it will dramatically curtail its growth in the mortgage market”

“Canada Mortgage and Housing Corp. has signalled it will dramatically curtail its growth in the mortgage market in the coming years in an effort to cool Canada’s sizzling housing sector.
Documents released by the Crown corporation this week show CMHC expects to increase mortgage insurance over the next few years at only a fraction of the pace seen recently.”
– from ‘Bank regulator proposes heightened scrutiny of mortgage market’, G&M, 19 Mar 2012 [hat-tip Derp]

This ‘signal’ has been widely discussed across various blog sites.
Headlined here for the chronological record.
This could be enough to crash the Vancouver market.
A soft landing (a ‘cooling’) will not occur, as buyers will not step in at stratospheric high price levels without the expectation of abnormally large price gains going forward.
– vreaa

Potato’s ‘Rent vs Buy Investment Spreadsheet’

Take a look at this very elegant Rent vs Own comparison spreadsheet/calculator.
Thanks to ‘Potato’ for telling us about the sheet and hinting to link it.
Potato also has a page of discussion regarding the calculator at their blog ‘Blessed by the Potato’. Wise-words excerpt-
“There are a lot of assumptions and estimates involved, a lot. The question is what should you do for your life? And importantly, what are the consequences of being wrong? Don’t use this tool with unrealistic estimates to try to justify a decision you want to make, but rather try to use it to help you come to the decision you should make — and to see what happens if you’re wrong.”

Carney ‘Not Complacent’ About Level Of Household Debt or Housing

“Bank of Canada Governor Mark Carney said, in testimony to the Senate Banking Committee, that he isn’t complacent about the level of household debt in Canada or the state of the country’s housing market.
The Bank of Canada has highlighted in its financial stability report the risks posed by record levels of household debt, and Carney said in a speech in Vancouver earlier this year that there are signs some local housing markets are moving away from fundamental values.”
– Bloomberg, 2 Nov 2011

Another oblique and lukewarm show of concern.
When the housing bubble implodes, BOC will say they ‘warned’ Canadians of the risks.
Well, Canadians are not listening. They continue to borrow as much as they can; two out of three new mortgages are at variable rate.
We know that the BOC can’t raise interest rates in the current environment, for fear of dangerously slowing the economy. But Mr Carney could use his considerable influence to lean on Mr Flaherty. If the government sincerely wants to do something about the over-borrowing, they should tighten mortgage lending. But they won’t do that, because there are too many interests vested in the continuing speculative mania in housing.
– vreaa

The Many Dangers of Low-for-Long Interest Rates

1. It encourages households to take on potentially excessive debt
2. It risks inflating a housing bubble
3. It discourages saving
4. It encourages inappropriate risk taking
5. It threatens the health of pension plans
6. It poses a risk to inflation
Ultimately, an extended period of negative real interest rates is a heavy punishment for savers and a juicy reward for debtors. Can there be any doubt that the end result will be a household sector that is overburdened by debt and undersupported by savings?
– from ‘focus’, BMO capital markets weekly ‘financial digest’, article by D Porter and B. Reitzes, 28 oct 2011 (pdf)

A bit late to be warning of this now.
We’ve already had ‘low-for-long interest rates’ for years now, and 1-5 have already come to pass.
– vreaa

Waitress Pre-Approved For $250K Mortgage

“I was just eating breakfast at a little resto in E. Vancouver and I heard the waitress talking to one of the customers about how she just got herself a Realtor(tm) and has been looking for an apartment to purchase. She looked maybe mid-twenties and talked about how she’s tired of throwing away money for rent, she found a place for 178k (I think that’s what she said), and she has a friend that will rent some space from her. She might be moving to Vernon, though, so she’ll just rent the whole place if she does.
This is who buys real estate in this city? I cannot believe that a bank would give her a mortgage. She’s a server at a cafe. She said she’s pre-approved for 250k, but thinks that’s too much, so she’s being conservative! what can you buy on the east side for that kind of money, anyway? I find this; and the Maint fees are 500 pm. Sheesh.:
#502 – 175 E BROADWAY Vancouver. MLS V905512
437 sqft; condo/strata
Ask price $177,000
Maintenance Fees: $498.40 Monthly”
– Oilman at vancouvercondo.info October 12th, 2011 at 11:43 am

Yes, this is who buys RE in this city. Or, more broadly, individuals at different income levels over-reaching to a degree similar to this.
And, wow, those are pretty remarkable maintenance fees, they come close to the mortgage payments (with 10% down, 3% rate, 30 yr amort., monthly payment is $670).
– vreaa

Broad and Deep Negative Effects – “When housing prices do fall the effect on the economy is often much greater than many people expect. Homes are not riskless investments.”

“As I talk with economists from countries whose housing values have risen markedly but not experienced sharp declines, I have been struck by two things. First, they are often confident that national (versus regional) house-price reductions are unlikely. And secondly, most assume that a decline in house prices would have a measured impact on the economy should that in fact occur. But the experience of Japan in recent decades and the U.S. more recently should provide some caution – given that the economic retrenchment that followed these significant declines in home values exceeded most people’s expectations.”  /
“… sharp declines in housing prices can have additional negative effects, with broad implications for macroeconomic outcomes and monetary policy – broader, perhaps, than may be assumed and incorporated into most statistical models of the economy. …
(When) housing prices do fall the effect on the economy is often much greater than many people expect.
A key lesson from the past several years is that homes are not riskless investments.”
– excerpts from a speech given in Stockholm 28 Sep 2011, by Eric Rosengren, President of the Federal Reserve Bank of Boston.
[Taken from a recommended article by Ben Rabidoux, The Economic Analyst, 28 Sep 2011]

Housing is in a speculative mania in Vancouver and the unwinding of that bubble will have broad and deep negative effects on our economy and our society. – vreaa

When A Speculative Mania Ends, Wealth Simply Disappears – “Poof! Gone in a flash of aggregated neurons.”

When a community is caught up in a speculative mania, it seems simply inconceivable to the vast majority that prices could drop. If apparent hordes of buyers are competing to paying $1M, $2M, $3M for solid assets like houses, how could prices possibly plummet by 40%, 50%, 66%? It just couldn’t happen, surely… why would a group of people who’ve ‘agreed’ (via market pricing) that a house is ‘worth’ $3M, then ‘let’ it change hands later for $2M or $1M or even less? Surely buyers would ravenously step in at even 10-15% off [the commonest estimation of the depth of a pullback on this and other blogs]? Surely that ‘wealth’ can’t simply evaporate?
But it can and it does and it will. Most people don’t have any real feel for ‘bubble dynamics’… they don’t understand the massive upward force that expanding credit has on asset prices and, more important, the devastating effect of the reversal of that process.

In an article at ‘Elliot Wave International’, a passage by Robert Prechter describes ‘How $1-million can disappear’ [19 Sep 2011] We take the liberty to paraphrase the passage here to demonstrate it’s relevance to our RE market. –

“The dynamics of value expansion and contraction explain why a bear market can bankrupt tens of thousands of people. At the peak of a credit expansion or a bull market, Vancouver homes have been valued upward, and all participants are wealthy — both the people who sold the homes and the people who hold the homes. The latter group is far larger than the former, because the total supply of money has been relatively stable while the total value of Vancouver RE has ballooned. When the market turns down, the dynamic goes into reverse. Only a very few owners of a collapsing asset trade it for money at 90 percent of peak value. Some others may get out at 80 percent, 50 percent or 30 percent of peak value. In each case, sellers are simply transforming the remaining future value losses to someone else. In a bear market, the vast, vast majority does nothing and gets stuck holding assets with low or non-existent valuations. The ‘million dollars’ that a wealthy owner might have thought he had in his home at peak value can quite rapidly become a small fraction of that. The rest of it just disappears. You see, he never really had a million dollars; all he had was an asset that he thought was worth a million dollars. The idea that it had a certain financial value was in his head and the heads of others who agreed. When the point of agreement changed, so did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what happens to most assets in a period of deflation.”

Housing always has some underlying fundamental value, we don’t believe that a $1M [circa 2011] Vancouver home can drop in price to “non-existent valuations”… but we do foresee it dropping below $500K or even $400K later this decade. It may seem inconceivable, but history teaches us that it is very possible; probable, even. – vreaa

“CMHC practices have been supporting high debt and risky borrowing by homeowners. The size of the drop in refinancing is surprising to the point of shocking.”

Refinancing activity [at CMHC] tumbled nearly 40% following a move by Finance Minister Jim Flaherty to tighten mortgage rules this spring. Sales of the CMHC’s mortgage insurance fell by 10% immediately after the changes were introduced, though they have regained some ground since then. … Changes to mortgage rules, [included] reducing the maximum amortization period for loans qualifying for CMHC insurance to 30 years from 35 years; lowering the maximum amount that Canadians can borrow to refinance their mortgages to 85% from 90% of the value of their homes; and withdrawing CMHC insurance from non-amortizing home equity lines of credit.

“The size of the drop in refinancing is surprising to the point of shocking. You could hardly have better evidence of the extent to which CMHC practices have been supporting high debt and risky borrowing by homeowners.” – Finn Poschmann, vice president of research at the C.D. Howe Institute

– from ‘Did CMHC support risky borrowing?’, John Greenwood, Financial Post, 29 Aug 2011

Answer: Yes, it clearly did.
The risk remains present in the form of overextended ‘owners’.
– vreaa

‘The Mortgagors With Hands On Their Faces’ – “Extremely poor and rapidly eroding affordability in the Vancouver-area market”, “without a doubt the most stressed in Canada, facing the highest risk of a downturn.”

Above images advertise videos accompanying the Globe and Mail article ‘Vancouver housing affordability ‘rapidly eroding’: RBC‘, 22 Aug 2011 [hat-tip Nemesis]. They are remarkably sorrowful images for a 2011 Canadian housing article, and remind us of ‘The Brokers with Hands On Their Faces Blog’.

Excerpts from the G&M article:
—
Most Canadian cities offer “reasonably affordable” housing, according to Royal Bank of Canada’s quarterly survey into affordability, but Vancouver is at risk of a downturn.
—
“Extremely poor and rapidly eroding affordability in the Vancouver-area market is somewhat skewing the national picture.”
—
“Vancouver’s housing market is without a doubt the most stressed in Canada and is facing the highest risk of a downturn,” Mr. Craig Wright, senior vice-president and chief economist at Royal Bank, said.
—

This sensible comment at the G&M by PF Murphy, 22 Aug 2011, 10:35am:
“With the average price of a house in Vancouver being 11 times the average annual salary, the RBC’s advisory is many days – like several years – late and shows the conflict of interest of their benignly offering advice in an industry on which they depend for their bloated profits. To think that ill-advised people can go on buying houses that mortgage their grandchildren’s futures is idiotic. It is to be devoutly hoped that this bubble pops soon [so that] some sanity will be restored to housing in Canada.”

“I’m sure it’s quite embarrassing to banks because in a way, it reflects a failure of their lending systems.”

From cbc.ca 7 July 2011 10:36am –
“Vancouver police have charged two men — including a former real estate agent — with more than a dozen counts of mortgage fraud totalling more than $2 million.
One-time realtor Sunny Kular and a co-accused allegedly defrauded a series of banks between 2003 and 2005.
“This was a larger than normal file with respect to the total number of individual mortgages,” said police spokesman Const. Lindsey Houghton.
“In the end, Crown laid 14 separate charges,” said Houghton, who noted the investigation took five years to complete.
“Five years is a very long time for any investigation and financial crime investigations are often some of the most complex investigations because they require forensic audits,” he said.
Banks tend to under-report mortgage fraud, said lawyer Ron Usher, who has studied the problem.
“I’m sure it’s quite embarrassing to banks because in a way, it reflects a failure of their lending systems,” Usher said.
The bottom line is that customers pay, he said.
“That cost then is passed on to every home buyer.”

0-Down Lending In Vancouver, circa June 2011

This from realtor Lesley Wagstaff’s website, archived here for the record. [hat-tip ‘Patiently Waiting’ at VCI]:

Government Policy During RE Bubbles – “Economic policies which encourage people to borrow and speculate into a rising asset markets, causing general economic largesse. They want to have affordable expensive housing, that’s their policy.”

Interview with Steve Keen, Australian economist, on the Australian housing bubble that is now beginning it’s deflation. Keen predicts 40% price drops, over years. Video and transcript of interview at  finnewsnetwork, 25 May 2011.
Excerpt, that could just as well be applied to Canada – “Both parties here… claim that they want to have affordable housing, but really they’ve both had economic policies which, whether they’re conscious of it or not, have been dominated by encouraging people to borrow and speculate into a rising asset markets and that causing general economic largesse. So they want to have affordable expensive housing, that’s their policy.”

—

Further comments of note in the interview:
“I think what you have to do is get to the stage where you actually buy a house to live in, not to speculate on. And, with landlords, if they buy them to make an income from, buy them to make a profit from the rental income, not that of capital gain. Now that implies you’ve got to wait until housing prices have fallen something of the order of that 40 per cent that I’ve mentioned before hand, maybe even more, before it becomes possible for a landlord to borrow money, buy a house, and earn enough money from the rental income to more than service the mortgage and then you have a European situation for rents, which is what we need in this country. That’s why I think Germany hasn’t had a crisis, by the way.”

More MSM Reports Predicting Price Drops – “Vancouver’s average house now costing an astounding 11.2 times a family’s average income.”

“David Madani at Capital Economics expects Canadian housing prices to fall 25%” [Reuters, 6 Jun 2011].

“Vancouver’s housing market looks primed for a correction, according to a report from Sal Gatieri, senior economist at BMO Nesbitt Burns, with the average house now costing “an astounding” 11.2 times a family’s average income.” [G&M, 7 Jun 2011]

Office of the Superintendent of Financial Institutions Examining Bank Exposure To Household Debt

The Office of the Superintendent of Financial Institutions is examining the bank exposure to household debt [FP 3 Jun 2011] –
“If demand for residential real estate were to dry up in Canada, it would not be good for Canadian banks,” said Peter Nerby, senior vice-president at Moody’s who is responsible for the credit ratings of Canadian financial institutions.

We note this here for the chronology and direct you to a discussion of the subject by jesse at Housing Analysis [‘OSFI in da House’ 5 Jun 2011].

“Five years ago I decided to buy a condo in Vancouver … Last month I seized the opportunity to escape the housing market.”

Anecdote from Andy, extracted from that headlined by Garth Turner at greaterfool.ca 5 May 2011 –
“Five years ago I decided to buy a condo in Vancouver. I had a new job and a decent wage, but had only just finished paying off my student loans so I didn’t have any money. Undeterred and encouraged by everyone around me, I borrowed 5% from my parents for a down payment and enlisted a mortgage broker to sell my soul . . . I asked him for $350K, but he then offered me $500K before I even filled out the forms.
I looked at condos non-stop for a few weeks and eventually purchased a great one. I felt like I had really accomplished something (thanks to all those pats on the back from fellow home-owners). I was finally investing in my own future instead of wasting money on rent, just like my friends and family had coached. Life was good! Or so I thought.
As the years passed I began to realize exactly how buggered I really was. The running total I was spending on principle plus interest was rising much faster than my property value; the longer I held my place, the greater the difference between the two. Then real estate values dropped in 2007-2008 and I was stuck; unable to sell without losing my shirt, and spending more and more money on interest with each passing day. Knowing I simply couldn’t sell until the market came back, I accepted my predicament and settled in for the long haul. At least I was “doing the right thing” by owning a house, right? As housing prices rose again following the Olympics, I began to wonder if/when it might be time to sell and get out of the market. My gut said, “get out” but everyone around me said I’d be a fool if I did. Peer pressure won, and I held on.
A friend of mine turned me onto [greaterfool.ca] a few months ago and I have been glued to it ever since. It was refreshing to read that the “invest in a house” pressure I had been subjected to my entire adult life may have been misplaced. After a few weeks of reading [the] blog and I knew my gut feelings were right. Armed with new confidence, I seized the opportunity to escape the housing market and haven’t looked back. I packed, moved (into a rental), then staged and listed my place within 3 weeks. After a grand total of 7 days on the market and only 3 showings, I received 2 offers above my already-inflated list price. I accepted one of the offers and have never felt better. I made it out alive!
When I consider all monies paid (down payment, interest, principle, strata fees, realty fees, etc.), I think the outcome is actually brighter than I could have hoped. Now, don’t get me wrong – I didn’t make money . . . I simply lost less than I was expecting to, given the naïve way in which I entered the housing market (minimum down payment, inflated market prices, etc.). I consider myself lucky to have escaped when I did, especially considering the inevitable real estate price drop we all know is coming. Not to mention, I now find myself sitting on a lump sum of “forced savings” left over from the sale.”

Foreign Buyer Poll – 72% of these buyers have 35% or less equity in their properties.

Hat-tip to ‘Van MD’ at vancouvercondo.info 4 May 2011 10:35am for directing us to a ‘group anecdote’ in the form of a running poll regarding the Percentage Down-Payment Mainland Chinese buyers use when purchasing RE in Canada. From at iask.ca (“one of the biggest Mainland Chinese forum/news websites”):

Results (as of posting, with n = 160):
100% Cash – 6.88%
80-90% DP – 1.88%
60-75% DP – 1.88%
50% DP – 11.88%
40% DP – 5.00%
35% DP – 20.63%
25-30% DP – 25.62%
15-20% DP – 16.88%
10% DP – 3.75%
5% DP – 5.63%

[Note: 72.5% of these buyers have equity in their properties of 35% or less.
Substantial leverage; no different from all the other ‘types’ of buyer; their equity in these properties will get wiped out when the bubble bursts. As we’ve said before; speculative momentum players. – vreaa]

Open Reply to Rusty – “Just because you perceive a bubble does not make it so. Bubbles are only identified after they’ve burst.”

Rusty at VREAA 30 April 2011 8:47am –
“vreaa,
Just because you perceive a bubble does not make it so.
Bubbles are only identified after they’ve burst.
Or do you define a bubble as a real estate market where you personally cannot afford to buy?
What is your “pre burst” definition?”

—–

Dear Rusty

Thanks for your question.

It is a myth that “Bubbles are only identified after they’ve burst”. The myth is propagated by those directly or indirectly benefiting from the bubble, and also by vested interests in postions of responsibility, who could make a difference, but decline from so doing. An example of this is Alan Greenspan keeping monetary policy too loose through the tech and US housing bubbles, claiming that you can’t identify a bubble in advance. Greenspan is simply wrong on this point, and many observers saw those bubbles for what they were during the process of them being inflated. Yet, we still hear this myth perpetuated (as in your bold claim). This is closely related to the ‘hoocoodanode’ responses you’ll get from various players after a bubble inevitably bursts. It’s also a way of those guilty of policies and actions that perpetuate bubbles to claim innocence after the fact.

A speculative bubble can most definitely be identified while it is inflating. Such a bubble occurs when prices of any asset lose contact with fundamental values of the asset and start rising higher and higher simply because they are rising higher and higher. All buyers in such a market buy with the expectation of higher prices, some buying solely for the expected higher prices.
Almost all bubbles are supported by fallacious arguments citing ‘reasons’ for differences between bubble price and fundamental value. For instance, during the tech bubble, we heard the argument that P/Es of 1000 were merited because “we’ll be able to sell to everybody” (neglecting to take into account the fact that everybody else will be able to sell to everybody, too).
Bubbles are also facilitated by large quantities of easily available cheap capital.
They are all versions of Ponzi schemes, where, essentially, the late-comers are left holding the bag after prices collapse, and the only players who profit are those who get out early enough (surprisingly few), and those who sell ‘shovels to the prospectors’ (brokers; some developers, some in construction, etc).
All bubbles deflate, no exception (If you can think of any, let us know). Prices return to levels that make sense according to fundamentals. In fact, as we see now happening already in some areas of the US housing market, they often drop well below fundamental value, and may remain depressed for the better part of a generation. Bubbles are very, very destructive to a community, both through the terrible misallocation of human effort & resources on the way up, and through the tragic financial, social, and psychological consequences of the aftermath.

In Vancouver currently, median housing prices are about ten times median income, and rental yields are extremely low, much lower than one would expect even at current low interest rates. Thus, prices are far, far removed from those merited by fundamental value. By our calculations, prices are 2 or 3 times fair value, meaning that we’d expect price drops of well over 50% when the bubble deflates. But people continue to buy believing that prices are only going to go up (or, a slightly different version, that prices couldn’t possibly drop by more than 5% or 10%, before continuing higher). Higher and higher prices are ‘supported’ by fallacious arguments (“we’re running out of land/best place on earth/never-ending demand/foreign buyers”). Capital is very freely available, along with low deposits, long amortization periods, and government loan insurance.
By all measures, we are in a massive speculative bubble. Massive in terms of both the percentage of citizens involved, and the size of the overvaluations. This is not an opinion, it is a fact.

You have suggested that we may define ‘bubble’ as a market in which we, vreaa, cannot afford to buy. That is a fair thought for you to have. We could claim that this information it is neither here nor there to this discussion, but it is fair for you to know if we’re just ‘talking our book’. So, we’ll share with you that we can indeed ‘afford’ to buy, even at current prices, and definitely by all Vancouver standards. But we choose not to, because of the massive disconnect between price and fundamental value; because of the RE bubble. There is a very small minority of prospective buyers in this position in Vancouver. It is never easy to be on the wrong side of a bubble, but what else can you do but call it as you see it?

Say we had to reframe your statement to read: “Bubbles are only identified by the vast majority after they’ve burst.”
That we’d agree with. By definition, once even a minority start bailing, the bubble bursts. We haven’t reached this point yet in Vancouver’s remarkable market, but we will get there, and after we do, there will be a very broad consensus that we have indeed been through a very large bubble.

regards,
vreaa

“He asked: “Why haven’t you bought in this hot market? Banks are practically giving money away for free.” It turns out that he has a no-money down NINJA mortgage.”

bubbly at VREAA 26 Apr 2011 11:07am – “This morning, I talked to this guy, let’s call him Joe, [who I’ve known] for a few months. He has been living in his house for some time now and I always assumed that his parents paid for it.
Today, Joe asked me why I haven’t bought in this hot market. I told him that I think that the market is overpriced and I don’t want to go too deep in debt. He asked “Why not, banks are practically giving money away for free”. I asked him to elaborate and it turns out that he has a no-money down NINJA mortgage! Here in our best place in Galaxy, where banking is supposed to be sound. And as if that was not enough, the bank gave him more than what he actually paid for the house – for “renovations”. Since he is a NINJA, I assume that he is using this “extra” money to pay his monthly payments. This is just a speculation on my part, but I can’t see any other way how this scheme could work.”

“When I bought a new condo in 2001, I negotiated a price of ~$271k, because with GST, that was the limit the CMHC would insure at the time with 10% down.”

Ahab at vancouvercondo.info April 23rd, 2011 at 1:54 am– “When I bought a new condo in 2001, I negotiated a price of ~$271k, because with GST, that was the limit the CMHC would insure at the time with 10% down. I don’t know exactly when they went ‘no limit’, but I’m certain that is a major component of what has driven this market to such obscene levels.”

Spot The Speculator #34 – “I was talking to a guy I know who has about $700k in mortgage debt on rental properties at a variable rate of 2.85%. I told him that rates are going up. He has this attitude that whatever happens, he will be ok.”

pricedoutfornow at VREAA 18 Apr 2011 12:07pm –
“People just do not believe (or don’t know) that interest rates ARE going up. They have not sat down and done the calculations. I think there are going to be a lot of people crying to their brokers and banks “But but you never told me that my payments could go up 50%/100%!!! Why didn’t you tell me?” This is exactly what happened in the US-people just got a letter one day from the bank that next month, their teaser rate is expired, and the mortgage payment is now much higher. I was talking to a guy I know last week, who has about $700k in mortgage debt (rental properties) at a variable rate of 2.85%. I’ve told him time and time again that rates are going up. I really don’t think he has a clue, he has this attitude that whatever happens, he will be ok. But I know for a fact that he has not sat down and done the calculations. He just carries on lalala….life is good-I have paper equity!”

Peter Ladner On CBC – Foreign Buyers; Eroded Communities; Resort Towns; Avoiding Unaffordable Vancouver – “A chief financial officer from a mining company could not afford to move to Vancouver because of housing prices.”

Peter Ladner, former Vancouver councillor and former mayoral candidate, made the news recently by calling for some form of restrictions on ‘foreign’ ownership of local RE. The story was covered widely, at CBC [11 Apr 2011], News 1130 [11 Apr 2011], and discussed in the blogosphere.

Broadly, we are opposed to excessive government intervention in markets that affect the daily lives of citizens. We feel this way because markets are highly complicated, governments are highly limited & inefficient, and measures always have unintended consequences. Things seldom go as planned. Witness the government interference regarding the existence of the CMHC: Though mandated to make housing more affordable, the CMHC has very definitely fuelled the price bubble by artificially distorting the price of risk, and drawing many more into ownership than would be there under free-market conditions. The CMHC has paradoxically made house-ownership less affordable. If there is a  significant chance of doing more harm than good with an intervention, government should stay out.

Having said that, we do live in a country where governments are very involved with many markets: transport, education, health care, gambling, car insurance, alcoholic beverages, interest rates, our currency, etc etc. So, one could argue, why should foreign RE investment remain relatively untouched by government restriction? We wouldn’t let foreign interests take control of our water, our energy, or our food supply, why let them distort our access to accommodation? And, with restrictions on property ownership in countries like Australia and China, there is the possibility that speculative money runs to the last markets that allow them access, increasing the risk of our houses becoming the play-things of international speculators.

For the record, we don’t think that having the government step in here is essential or particularly desirable. We strongly suspect that any such restrictions would be slow-coming, ham-fisted, and easily circumventable. In other words: “too late, folks; let’s let this all play out”.  As often occurs with calls for restrictions, the calls come at the wrong time in the cycle. We believe that the Vancouver RE market will sort itself out regardless of any such measures; the bubble will implode without such restrictions. Once the inevitable initial price drops establish themselves (10%?, 15%?), speculative buying of all types (foreign, local, and, our personal favourite, local-speculative-buyers-disguised-as-normal-folks) will evaporate, speculators will become sellers, and prices will plummet. The issue of foreign RE ownership will very rapidly become an absolutely moot point. Any social concerns about foreign ownership will disappear (just watch). In a RE crash, the community will welcome any buyer of any description (witness the US, circa 2011).

Here follows a transcript of a CBC radio interview with Peter Ladner, in discussion with Rick Cluff and Tsur Somerville, from The Early Edition, 11 Apr 2011. [ thanks to Angela for the transcript. -ed.]
Foreign buyers are discussed, of course, but the piece is at least as interesting for mention of changing communities, Vancouver as a ‘resort’ town, local non-resident owners, and businesses & individuals avoiding Vancouver directly because of RE prices.
Note that they all dance around the elephant in the room, the massive speculative bubble that must inevitably implode. They simply don’t see any possibility of this outcome. All of the ‘problems’ that they wrestle with will eventually be resolved with RE price deflation and a return to fundamental values. – vreaa

RICK CLUFF:  It’s no secret that real estate is expensive in our part of the world.  The popular consensus is that the market is being driven by Chinese buyers.  Is that cause for concern?  How expensive is too expensive?
To debate those questions we’re joined by two guests:  Peter Ladner, former NPA councillor and columnist for Business in Vancouver newspaper, and Tsur Somerville is the Director of the UBC Centre for Urban Economics and Real Estate.

TSUR SOMERVILLE:  Good morning.

PETER LADNER:  Good morning, Rick.

RICK CLUFF:  Peter, you’ve expressed concern that the market is being driven by foreign, specifically Chinese ownership.  Why does that matter?

PETER LADNER:  Well, it doesn’t, actually.  It doesn’t matter where the foreign ownership comes from, but if our prices are being driven up by people who are simply investing in our community and not living here, there are a whole lot of problems that result.  We have difficulty — actually, I got onto this when I was at a meeting of the Business in Vancouver Editorial Advisory Board and somebody from the mining industry said that a chief financial officer from a mining company could not afford to move to Vancouver because of housing prices.  And that’s just one indicator of how high housing prices, when we’re now the third most unaffordable housing city in the world, can undermine the economy, people can’t find people to — employees to work here, even managers can’t afford to live here.
So it erodes the economy, it erodes the community when people come here and buy homes they don’t live in and it makes the neighbourhoods unsafe and — and less vibrant, it splits up families.  If you want to — if you’re already living here and somebody squeezes you out of your — you can’t afford to buy a home in your neighbourhood, you can’t live with — near your children, your parents, your grandparents, and it blocks social mobility for people who are — a whole generation of people who can’t afford to buy here, new immigrants who want to come here and work here and live here and pay income taxes here can’t afford to buy homes.  So it — it — and it adds to the division in the community between the rich and the poor and you end up with a resort community that’s unlivable, in spite of all our great reputation for being the most liveable city in the world.

RICK CLUFF:  Tsur Somerville, how do you respond to that?

TSUR SOMERVILLE:  I’m really worried about the government sticking its hand on these issues which are based, to a great extent, on perception.  I mean, part of it is if you want to be an international city you can’t really stop sort of international people from — from being here, even if they want to be here and investors and so I think we kind of have to decide what kind of city we want to be.
I think the other thing is, is that this is really driven by sort of what’s going on on the West Side of Vancouver, which is not the whole Lower Mainland and there’s some really unusual dynamics on the West Side and in Richmond that aren’t matched anywhere else in the entire Lower Mainland.  So I think this is a little bit of navel gazing.  It doesn’t mean that there aren’t some issues for concern, but it would be hard to walk around the West Side of Vancouver and say, “Gee, there’s all these empty houses and no one living here.”

RICK CLUFF:  Peter, in your recent article you suggest that we should consider foreign ownership restrictions in Vancouver real estate.  Why?

PETER LADNER:  Well, just for the reasons I said, Rick, that if you have — if you have a community where so many people are priced out of the market by people who are not living here and not paying income tax here and not contributing to the community here, you have a more unliveable community.  And I agree with Tsur that — that government meddling in this kind of thing is a big — it’s not easy and it’s not simple and it’s fraught with political landmines and all sorts of bureaucratic problems.  It is done, however, in some countries and we do — we meddle in the housing market in other ways, by massive public spending on subsidizing people with rent supplements and social housing and so on.  And so it’s a question of just where do we spent that public money?  Are we content with that kind of a city?
And in spite of the recent flare-up in the West Side of Vancouver, the whole Lower Mainland is nine times more than the average income to — to live here.  The whole place is unaffordable.

RICK CLUFF:  Tsur, is there evidence to suggest that restricting ownership might in fact help cool prices?

TSUR SOMERVILLE:  Well, I mean, there’s cooling — there’s — it’s not going to make this place, you know, affordable.  So, you know, if your — if your concern is affordability, you know, this is not the issue that’s driving unaffordability and I think it’s important to separate those two out.  I mean, there are places in the world that — that do treat non-residents differently.  Florida has a different property tax rate on non-residents and on residents.  You know, China makes it very difficult to — for foreigners to buy property.  I don’t know if sort of the government model we want is the Chinese government model, though.
So I mean, I — I think that the notion about — the notion about affordability should not be mixed with the notion of the issues about what kind of neighbourhoods we want.  These are actually somewhat separate and I — I do think that, you know, if you go back to the 1980s and the sort of worry about Hongcouver and all these kinds of things, I mean, Hong — Vancouver’s been through this story before about, you know, foreigners coming in and changing the character of our neighbourhoods and pushing up prices and making it unaffordable and hard for families.  I mean, that was all the arguments that people used in the last 1980s and I think most people think that the city is better off now than it was in 1987.

RICK CLUFF:  Peter, do you restrict ownership or do you change the taxation structure so that foreign owners have to contribute more to the community in which they own the property?

PETER LADNER:  Well, I would start, Rick, with just looking at the options.  I don’t hear any public discussion of these options.  The only person I know — the only study I have ever heard of that’s looked into this issue is Bing Thom, the architect, on his own dime commissioned a study to find out what really is going on, what really is the impact.  And is Tsur is right, is it foreign ownership that’s — do we have empty places that are just sitting idle, just somebody speculating on the property or what is going on?  And if we want to look at the options, okay, if it’s not restricting foreign ownership what are the options?  You can increase supply and — and we’re trying to do that, but that’s — that’s a big problem, too.  So let’s look at this thing and let’s have a discussion about it.

TSUR SOMERVILLE:  Rick, if I could just, you know, pop in.  If we go down this road what we’re going to discover is a place that isn’t really happening, it’s not sort of, you know, Chinese capital buying houses on the West Side of Vancouver, but it’s all the downtown condos that are mostly owned, you know, all — most of the new buildings are owned by people who aren’t residents in those — in those buildings.  But that’s also an important part of our supply rental housing.  So, you know, it’s — it’s not a sort of simple bullet that you can sort of target, you know, what — you know, Chinese multi-millionaires who are buying houses on the West Side and not living in them.  I mean, that’s not our sort of non-residency ownership issue or non-residency ownership issue, which is what [indiscernible] looked at.  It’s really condos downtown, but those are also where we get a lot of rental units from.  So it’s — this is not — not simple.

RICK CLUFF:  I’d like you both to respond to this question.  I mean, we always hear that Vancouver is the best city in — one of the best cities in the world to live in, certainly the best in Canada.  So what consequences are housing prices having on the character of this city?  Peter, you first.

PETER LADNER:  Well, I mean, it just — it changes who can live here.  People who can live here, the rental that Tsur’s talking about for sure, there’s an increased supply but it’s all at the high end.  And the people who are trying to work here and — and raise families here cannot do it, so they end up having to move to another — another town or another city.  If they’ve been educated here they don’t — they go away somewhere or they end up living right at the — way out in the fringes of the region and we spend billions of dollars building transportation infrastructure to move them around.
So I think there are a lot of downsides and if the biggest upside is we get some more luxury condos downtown, well, that’s — to rent, that people can rent for uncertain lengths of time because the owners might come back one day or sell them, we should look at that.

RICK CLUFF:  Tsur.

TSUR SOMERVILLE:  I think that it’s — it’s complex.  I mean, one of the things that people do do is they trade off the amount of housing that they’re going to consume in order to live here, but that’s no different than what people do in New York City or London or San Francisco, or a whole bunch of expensive cities.  I mean, you know, there is a dynamic that way.  I think there is concern, there’s certainly certain types of businesses that aren’t going to locate here, which is why we have so few, you know, corporate headquarters because of the high housing prices and there is a point where housing prices can really restrict productivity and growth.  You know, it’s not clear that we’re at that point yet and while housing is expensive here, you know, we’re not the only city in the world that has absurdly expensive housing prices, it does manage to thrive.

RICK CLUFF:  Thank you both for your time this morning.

PETER LADNER:  Thanks, Rick.

TSUR SOMERVILLE:  It’s a pleasure, Rick.  Thanks, Peter.

RICK CLUFF:  Tsur Somerville, Director of UBC Centre for Urban Economics and Real Estate, and Peter Ladner, former NPA city councillor and columnist for Business in Vancouver.
—-

“My office mate just bought a house WAYYY above his means in Vancouver.”

Trollette at vancouvercondo.info March 14th, 2011 at 1:34 pm– “My office mate just bought a house WAYYY above his means in Vancouver. He did not come to work this morning. You know why? His breaker blew up!!! He could not believe how much he had to pay to have it fixed by an electrician. Apparently the wiring had been done in a rush during the pre-sale renos, and was not to code…”

Global BC TV: New Mortgage Rules In 9 Days – “Sales surge; Move Quickly; Deadline; Compromise; Buy Lesser Property Right-Away”

Global BC TV, 9 Mar 2011 –
CHRIS GALUS: “One factor that’s fuelling the real estate market right now is the change in lending rules that will take effect in a week and a half. That’s when mortgages will get a little tighter and you’ll have to pay them back faster. And a sales surge was expected as many first time buyers move quickly to meet that deadline. Ann Drewa explains why…”
ANN DREWA (REPORTER): “Vancouver real estate doesn’t seem to be cooling down, and for first time homebuyers it’s about to get even more difficult to plunge into the market. On March 18th new lending rules will apply. The federal government will reduce the maximum amortization period for government insured mortgages from 35 years to 30.”

ANGELA CALLA (Mortgage broker, & host of ‘The Mortgage Show’ on CKNW): “It’s not a bad thing. When you have 30 percent of borrowers in the last three years since they’ve been available going into longer amortizations you have to look at the reason why people get home ownership is for security and affordability, and if a market changes you want to ensure that people can still have control of their home, and that’s why they have their home in the first place. So this protects people.”

ANN DREWA: “The new rules apply to potential buyers who are only able to put down less than 20 percent on a down payment. For example, for a $300,000 property with a fixed rate of 3.79 percent, under a 35-year amortization monthly payments would be $1,285. Compare that with a 30-year amortization, monthly payments rise to almost $1,400. That works out to an extra $106 a month.”

ANGELA CALLA: “It might not take them out of the market completely, but they’ll certainly have to have some consideration to the lifestyle that they have and possibly won’t be able to have that extra dinner out a month.”

ANN DREWA: “The reason why the federal government is scaling back is to keep Canadians from swimming in debt and to avoid the economic catastrophe south of the border. In addition, the move is likely to prepare for higher interest rates.”

ANN DREWA: “For real estate agents like Carsten Love clients are trying to beat the looming deadline. For those that don’t make it, they’ll have to make some tough decisions.”
CARSTEN LOVE: “They’re going to have to decide that are they going to wait and try to save up more money, wait for their income to rise so that they can again afford the property that they wanted to buy, or do they buy right away but the lesser property, a property that they weren’t expecting to buy.”

ANN DREWA: “It may seem like a compromise now, but it could mean avoiding a financial disaster in the future.”

[thanks to GreenhornRET for the video, and to Angela for the transcription]

‘The Province’ Runs ‘Greater Vancouver Home Builders’ Association’ Advertisement As News Item

The Province ran the announcement ‘First-time buyer seminar‘ as a ‘news’ item, 27 Feb 2011. Seems like an ad to us. We hope no innocent FTBs see the ‘article’, or the seminar itself, as anything other. Excerpts follow. [hat-tip joycer at vancouvercondo.info]

“The Greater Vancouver Home Builders’ Association is once again offering a seminar aimed at helping first-time homebuyers sort through the often overwhelming process of making the jump into home ownership.”

“The presenting sponsor is the provincial Homeowner Protection Office, branch of BC Housing, and corporate sponsors are The Vancouver Sun, The Province, Canada Mortgage and Housing Corporation, Real Estate Board of Greater Vancouver, Genworth Financial Canada, Scotiabank, Travelers Guarantee, Sheraton Vancouver Guildford Hotel, Shaw Cablesystems, CKNW, Rock 101, AM 730 and 99.3 the FOX.”

Vested Interests – “Are the developers and the condo industry and others really pushing the government hard saying you’ve gotta have a big CMHC to get more people into this market or we can’t sell that product?”

From BNN interview 17 Jan 2011 5:40pm with Neil Mohindra, Director Centre For Financial Policy Studies, Fraser Institute [hat-tip vancouvercondo.info] –

Interviewer: “What might surprise a lot of viewers is that fully 70% of existing Canadian mortgages are 100% guaranteed by the CMHC. I mean, why do you think Flaherty and others weren’t taking a harder look at that today and pulling the balance sheet of CMHC back towards more of its historical average which is almost a fifth of its current size. Are the developers and the condo industry and others really pushing the government hard saying you’ve gotta have a big CMHC to get more people into this market or we can’t sell that product and construction and housing is part of our national economy is going to suffer?”

Mohindra: “To the extent [that] those industries lobby, I don’t know. I’ve certainly seen testimony on the House of Commons Finance Committee, and the Senate Committee on Banking, Trade and Commerce, where those industries have made those types of points, and so they are very much in favour of the current system. Certainly it works very well for the banks as well, because, they take the returns and for the premiums their customers pay, all the risk is handed over to the taxpayers. So they get the returns, and the risk is on the taxpayers.”

Extra! Extra! Read All About It! – Pablum From ‘The Vancouver Sun’ Lulls Locals

What motivates ‘The Vancouver Sun’ to print an article like: ‘Real estate market calm expected to follow hectic 2010 in Metro Vancouver; Home sales forecast to increase modestly across B.C. as prices stabilize‘, 27 Jan 2011?
It contains no ‘news’ or analysis whatsoever. It consists of hopeful statements regarding price direction from a family who have recently purchased a home, and reassurances of stable markets and price increases from BCREA, CMHC, UBC’s Land Economics department, and a realtor. There is no mention whatsoever of any downside risk.
The only conceivable purpose of this article appears to be to lull current owners and potential buyers into believing that the Vancouver real estate market is stable, cosy, and benign. It’s an advertisment dressed up as a newspaper article. -vreaa
[hat-tip to Mr. Poppinfresh at VREAA for pointing out the importance of non-articles such as this one.]

“Carrie and Mike McDougall — with their daughter Kylie, 3, and son Colton, 4 — moved to British Columbia from Alberta recently and bought a new house in Maple Ridge. They were comfortable with the price they paid and are expecting prices will go up in the next year, as are experts across Metro Vancouver.”
“Hopefully, it was a good time to purchase,” McDougall said in an interview.

Other excerpts:

“There will be a much more gradual increase in consumer demand and less volatility. There will be more stable market conditions this year.” – Cameron Muir, chief economist for the B.C. Real Estate Association

“We’re calling for a three-percent price increase in 2011.”– Robyn Adamache, senior market analyst for Metro Vancouver with Canada Mortgage and Housing Corp.

“[I’m] seeing an uptick in buyers who believe interest rates are heading north. [I] believe there will be a modest increase in both pricing and demand this year.” – Ron Antalek, a realtor with ReMax Ridge Meadows Realty.

Tsur Somerville, director of the centre for urban economics and real estate at the University of B.C.’s Sauder School of Business, said he doesn’t like forecasting the future, but nevertheless believes that 2011’s real estate picture will be largely determined by the speed of the recovery and the Bank of Canada’s action on interest rates.

Flaherty Tightens Another Smidgen; How Will Vancouver RE Respond? – Faucet or Tipping-Point?

Minister of Finance Jim Flaherty announced 17 Jan 2011 that mortgage lending terms will tighten. Maximum amortization periods will drop from 35 to 30 years, HELOCs will not be insured by CMHC, and individuals will only be able to refinance up to 85% of their property’s market value, down from the prior 90%.

These small incremental measures are designed to slightly cool off the market, and are an attempt at engineering a soft landing. Flaherty is hoping that a ‘faucet’ model applies regarding lending and the RE market: The hope is that as you tighten a little, the market slows a little. If this model applies, and you do that incrementally, you can potentially get it ‘just right’.
However, is that how the market actually works?

What if a ‘tipping point’ model better applies? In that case, there is going to be a non-linear response: as some point in the tightening process, a threshold is crossed, and large changes will rapidly occur. Like worn brakes going from smooth braking to suddenly seizing, like an egg being nudged over the edge of a table.

In Vancouver, the RE bubble has been fueled by very loose lending. Prices have pressed upwards, always at the very edge of what ‘affordability’ based on monthly payments has allowed. There will come a point where one more tightening nudge will halt that upward advance in prices. Today’s changes may very well be that nudge. And when that upward price advance ends, other factors will suddenly come into play. We believe that the very most critical change will be the psychological one that occurs when a majority of owners go from believing ‘this market is only going up’ to ‘this market could go flat or even fall’.

Many, many Vancouver owners are holding onto properties based on the premise that prices only go up. The moment that belief is seriously challenged, we believe that these holders will begin to liquidate their RE holdings. We are not just referring to the obvious speculator/flippers here, although they do make up an important minority. We are talking about the large number of regular citizens who have their financial futures dependent on the real estate market. They may be holding second and third properties, or their financial well-being may be largely dependent on the equity in their principal residences. There is far more ‘speculative holding’ in this market than is widely understood or acknowledged.

Sure, we had price drops before. At the end of 2008/beginning of 2009, prices dropped 15% in 3 to 4 months. But most owners had no chance to respond to the drop. It takes a few months to decide to sell real estate, and to act on it. Before the vast majority of owners could respond, interest rates were dropped to zero and the market was juiced. So slowly do things move in the RE markets that some owners may only have heard of the drop and bounce after the fact. When the market next turns, there will be a more relentless grind down. There will be no fiscal loosening to rescue a previously overextended market, both the MoF and the BOC appear to have made that clear. Price drops will beget price drops. The ‘virtuous’ cycle of price rises begetting more price rises will turn ‘vicious’.

-vreaa

“I’m sorry, Sir, you must be mistaken… the CMHC NEVER allows GDS ratios above 32 per cent.”

Jsan at greaterfool.ca 4 Dec 2010 12:33am cites the response they got to an e-mail sent to the CMHC describing a single mom on a $64K pa salary who had taken out a $695K mortgage on a $725K home in New Westminister [as described in whispersfromtheedgeoftherainforest.blogspot.com 15 May 2010] –
“When assessing a mortgage applicant’s ability to pay, a calculation known as the Gross Debt Service (GDS) ratio is used. This is the percentage of gross income required to cover the mortgage payments (principal and interest, based on the qualifying interest rate explained above), heating expenses, property taxes and (where applicable) 50 per cent of condo fees. CMHC mortgage loan insurance is not normally available when a prospective borrower has a GDS ratio above 32 per cent.
The blog post that you referenced in your correspondence claims CMHC has insured a $695,000 loan for a single individual who has an income of $64,000. This would result in a GDS ratio far in excess of the maximum that CMHC can accept. Unless there are extenuating circumstances, such as a family member helping the borrower with the mortgage payments, this situation is highly unlikely.”

This reminds us of a kind of perverse and reverse version of the apocryphal story from about three or four decades ago, of the Rolls-Royce that broke an axel in the Spanish Pyrenees. The tale goes that Rolls-Royce flew in mechanics and repaired the car at great expense to themselves. A few weeks later, when the owner, back in London,  enquired about why he hadn’t yet been sent a bill, he was told: “I’m sorry, Sir, you must be mistaken… Rolls-Royce axels never break.”
So, now, Vancouver 2010, despite overwhelming evidence to the contrary, Jsan is told: “I’m sorry, Sir, you must be mistaken… the CMHC never allows GDS ratios above 32 per cent.”
-vreaa

[PS: Isn’t the internet a thing of remarkable beauty? After writing the above based on vague memories of a story heard years ago, I googled ‘Rolls-Royce axels never break’ and the very first hit was to this discussion of the urban legend: ‘Buttered Rolls’ at snopes.com. ]

Canadians Carry $1 Trillion Mortgage Debt

The Canadian Association of Accredited Mortgage Professionals released a web poll survey (n = 2005) that was discussed in The Vancouver Sun [8 Nov 2010] and The Globe and Mail [8 Nov 2010]. Here follow some data points:

There is $1.01 trillion in outstanding mortgage debt in the country as of the end of August, up 7.6 per cent when compared to last year.

Over the past 15 years, the volume of outstanding mortgages has increased by 194 per cent. [It has thus tripled. This works out, by co-incidence, at 7.45% per annum, compounded, for 15 years. Far greater than  the inflation rate.  -ed.]

The average mortgage holder has home equity (the value of their home minus their owed mortgage debt) of $146,000, or 50% of the value of their home. [We would love to see figures and distribution for what percentage of net worth is tied up in RE. -ed.]

People who have arranged a mortgage in the last year had attained an average rate of 4.23 per cent a year on five-year, fixed mortgages.

22% of mortgages in Canada have amortization periods of more than 25 years.
42% of home owners who have taken out a new mortgage on a newly purchased home or condominium, in the past year, have amortization periods of more than 25 years.

18% of mortgage holders took equity out of their homes, almost half of them citing a need for “debt consolidation or repayment.” [=”spending”. -ed.]
The average amount borrowed against home equity was $46,000.
There are 5.65 million mortgage holders in Canada, thus the borrowing is estimated at $41-billion, about the same as last year.
About $15-billion was taken out for renovations, $6-billion for education and other spending, $7.5-billion for investments and $4-billion for other purposes.

84% of those with mortgages could withstand paying an extra $300 or more on their monthly payments. [Thus, 16% will not be able to withstand $300 more per month. – ed.]
At $1,056 per month on top of current costs, the average respondent would “be concerned with [their] ability to make [their] payments.” [Thus, 50% could not withstand paying $1,056 more per month. -ed.]

“There is a sizable minority, about 350,000 out of 5.65 million, or about 6 per cent, who would be challenged by rate rises of less than 1 per cent, and a further 225,000 (5 per cent) have thresholds in the range of 1.00 per cent to 1.49 per cent. However, most of these have fixed-rate mortgages: by the time their mortgages are due for renewal, time will have increased their financial capacity and reduced the amount of mortgage debt being financed. There are about 100,000 borrowers who are susceptible to short-term moves of interest rates, which is a quite small share (less than 2 per cent) of the 5.65 million mortgage holders in Canada.” [Thus 11% will be unable to tolerate rate increases of 1.5% by the time they renew. -ed.]

[Note: The above self-estimations likely have an optimistic bias, as most people, by their hopeful nature, underestimate the risk of getting into dire financial circumstances. Thus we could read “at least 16%…” etc. -ed.]