‘Extreme Speculation’ – “The problem is that the diversion of resources into investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity.”

The Vancouver RE market can only be understood as part of a global phenomenon of too-cheap money encouraging ‘extreme speculation’. -vreaa

“When the central bank pumps money into the economy and suppresses interest rates it creates incentives to speculate and invest in ways that would not otherwise be viable. At a superficial level the central bank’s strategy will often seem valid, because the increased speculating and investing prompted by the monetary stimulus will temporarily boost economic activity and could lead to lower unemployment. The problem is that the diversion of resources into projects and other investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity. In effect, the central bank’s efforts cause the economy to feast on its seed corn, temporarily creating full bellies while setting the stage for severe hunger in the future.
We witnessed a classic example of the above-described phenomenon during 2001-2009, when aggressive monetary stimulus introduced by the US Federal Reserve to mitigate the fallout from the bursting of the NASDAQ bubble and “911” led to booms in US real estate and real-estate-related industries/investments. For a few years, the massive diversion of resources into real-estate projects and debt created the outward appearance of a strong economy, but a reduction in the rate of money-pumping eventually exposed the wastage and left millions of people unemployed or under-employed. The point is that the collapse of 2007-2009 would never have happened if the Fed hadn’t subjected the economy to a flood of new money and artificially-low interest rates during 2001-2005.”
– from ‘Setting the stage for the next collapse’, Steve Saville, The Speculative Investor, 22 July 2014

“Yellen will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation. But Yellen will, as Greenspan and Bernanke before her, attempt to limit only the damage any breaking bubbles might cause. … I had thought that central bankers by now, after so much unnecessary pain, might have begun to compromise on this matter, but no such luck… The evidence against this policy after two of the handful of the most painful burst bubbles in history is impressive. But not nearly as impressive as the unwillingness of academics to back off from closely held theories in the face of mere evidence.”
– from Jeremy Grantham’s latest newsletter, GMO Q2 2014

‘Vancouver Affordable Housing Agency’ Created By The City

Candidates Should Possess Superhuman Powers and Pixie-Dust

“The City approved the creation of a new Affordable Housing Agency last night, an arms-length organization based on best practices in other cities to enable the creation of new low and modest income housing in Vancouver.

The Vancouver Affordable Housing Agency (VAHA) will also collect available data on issues such as vacant homes, and provide information on ways to limit investor speculation and unnecessary vacancies in Vancouver’s housing market.

“The Vancouver Affordable Housing Agency will be a key tool in the City’s efforts to create new affordable housing that meets the needs of local residents,” said Mayor Gregor Robertson. “As well, by designating it as a research hub to monitor issues such as vacant homes and excessive investor speculation, the VAHA will contribute to an informed, fact-based discussion of Vancouver’s housing market.”

The VAHA will be comprised of a board appointed by City Council, which will include members of the community with expertise in real estate, non-profit housing, and tenant issues, among others. Its target is to create 2,500 new affordable homes by 2021, with 500 in the first three years, with a focus on affordable housing geared towards families.”

– from ‘Council approves new Affordable Housing Agency’, Mayor of Vancouver website, 10 Jul 2014

Above noted, for the record.
A “fact-based discussion of Vancouver’s housing market” sounds like a great idea.
That aside, it would be extraordinary for an Agency like this to make a real difference. It is very, very difficult to create genuinely affordable housing in the context of an extremely overvalued market.
This kind of initiative usually acts as a marker to remind us that people are concerned about the issue, rather than being a force for any substantial change.
– vreaa

Meanwhile…

“Fitch Ratings says Canada’s real estate market is as much as 20 per cent overpriced and cautions the government may need to take more measures to slow down borrowing on homes. Fitch is the second U.S. financial agency to sound the alarm on Canadian home prices in the past week, with the Morningstar research firm predicting a 30 per cent correction was possible over the next few years.

The latest warning comes as the Teranet–National Bank composite house price index for June showed prices rose 0.9 per cent from May and were up 4.4 per cent from last year. The year-to-year gain was the lowest in six months, but still more than twice the underlying level of inflation in Canada and above income growth. Prices were 8.1 per cent higher Calgary compared with a year ago, while Hamilton saw increases of 7.3 per cent and Toronto and Vancouver climbed 6.1 per cent. …

Whether Canada’s home prices are due for a big fall has been a hotly debated topic in Canada for several years, but as yet predictions of a housing bubble about to burst have not materialized.”

– from The Vancouver Sun, 14 July 2014

No, Not Karl Marx; That Other Mark, Mark Carney – “Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”

“Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself,” Bank of England governor Mark Carney said. “A sense of self must be accompanied by a sense of the systemic.”

Carney said public trust had been damaged by the behaviour of banks both before and after the financial crisis. He cited allegations that the Libor interest rate benchmarks and prices on the foreign exchange market were tampered with.

“Unbridled faith in financial markets prior to the crisis and the recent demonstrations of corruption … has eroded social capital,” he warned. “An unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.”

– from ‘Bank of England’s Carney says bankers should be less selfish’, David Milliken, Reuters, 27 May 2014

—

Related things can be said for the threats to a society of perversely low borrowing rates resulting in astronomically overvalued homes. A housing bubble devours its life-blood.
Carney was instrumental in ensuring years of mispriced money in Canada. He repeatedly threatened to tighten policy, but never walked the walk, and his words were ignored and seen as vacuous. And he never adequately leaned on those in government with direct influence on mortgage terms.
– vreaa

BC Premier: “I think the market’s good, it’s a buyers market. I want to make sure I get in before prices start to rise.”

“In Kelowna on Thursday, Clark said she has already been on the Internet looking for a home but would also like to hear from anyone in real estate about a home that requires low maintenance.
“I have a cat, but I won’t be bringing her. So no pets, no smoking and low maintenance,” she said.
The premier told reporters at her victory party on Wednesday night that she didn’t want to be “presumptuous” and start looking for a house while she was campaigning, but she’s getting serious now.
“I think the market’s good, it’s a buyers market. And you know the riding is really getting stoked again, so I want to make sure I get in before prices start to rise.”
– from The Times Colonist, 11 July 2013 [hat-tip kabloona]
—

Announcement:
With this brief (but sweet) post, we’ll be taking another break from our (admittedly very skeletal) posting habits of the past six weeks. We’ll be on hiatus for at the very least the rest of the summer. Refer to VCI and Whispers for ongoing Vancouver RE discussion. We hope to be back in full at some point. Enjoy the fine weather, and keep well, all. – vreaa
(PS: Nothing has changed regarding our overall bearish outlook on the Vancouver RE market.)

The Economist on Land Taxes – “Taxes on immovable property are the most growth-friendly of all major taxes.”

“Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes.”
– from ‘Levying the land’, The Economist, 29 Jun 2013 [hat-tip clive]

Don’t Worry, I’m Sure Somebody Will Sort This All Out – “Policymakers now know better and will be a lot more proactive in preventing a collapse.”

“Risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes. Many housing bears assume this overvaluation entails a hard landing but I’m not convinced it’s inevitable at the national level. One reason – which seems mostly overlooked in the debate – is that Canadian policymakers will be doing their utmost to avert such an outcome.

In a sense, Canada is fortunate to be facing the spectre of a housing bust after other countries have had theirs. Before 2008, it was generally believed house prices could never fall by much. Policymakers now know better and will be a lot more proactive in preventing a collapse.

Canadian policymakers do have the levers to affect outcomes. One is the regulatory framework for housing, which can be amended in various ways to reconfigure housing demand and supply to the extent required. Indeed, Finance Minister Jim Flaherty has tightened mortgage lending several times over the past two years to slow down price increases and give household incomes time to catch up.

Other regulatory changes include tagging Canadian banks with “too big to fail” provisions that require them to put aside more capital. Then there are the “bail-in” provisions that specify when a troubled bank will recapitalize by converting its senior unsecured debt and other liabilities into equity.

In addition to these pre-emptive steps, Canadian policymakers have no doubt given some thought to dealing with the risk that the soft landing could go off the rails. It’s hard to imagine they would allow the housing sector to destabilize the economy and financial system like it did in the U.S. and other countries.

Responses could range from cutting the Bank of Canada rate to relaxing regulatory restrictions on housing demand. Housing bears might complain about such measures but they would allow Canada to reposition back to a soft landing. That would be more preferable than inflicting the trauma that befell the countries hit with housing meltdowns.”

– from ‘Canada’s lucky to come late to the housing-crash party’, Larry MacDonald [a “retired economist”], G&M, 13 Jun 2013
—

A soft landing will not be engineered in the Vancouver RE market;
it is in the nature of spec bubbles that they burst, ending with a “bang and not a whimper”. Let’s hope that those in charge of Canada’s monetary policy and mortgage rates don’t do even more damage to sensible citizens by trying to avert the inevitable.
While we’re on the topic of “late to the party”, it is interesting to see the Globe and Mail’s Larry MacDonald, who up to now has gone to great lengths to reassure himself and everybody else that the RE market is not at risk [see, for instance, ‘Housing bears need to relax and take the long view’, G&M 1 April 2013], now stating that “risks are undeniably elevated in the Canadian housing market with prices so high relative to household incomes.” After all, prices have been outrageously high relative to incomes for many years now.
– vreaa

“I Wish Them Bad Luck.” – Jim Flaherty, on those who wish to profit from Canadian RE price drops

“I wish them bad luck.”
– Canadian Finance Minister Jim Flaherty, commenting on recent moves by some U.S.-based hedge funds and other big investors, who worry that the Canadian housing market is heading for a hard landing, and are looking to short, or bet against, Canadian investments.
[as quoted by the Wall Street Journal, 28 May 2013]

Other excerpts from the same article:
“Last year, Mr. Flaherty had voiced concern about the condo markets in Toronto and Vancouver.
“When I look at the housing market, I’m looking for the ‘doom and gloom’. I don’t see the ‘doom and gloom’. I see some moderation in demand. This is a good thing,” he said.
—

Flaherty’s wish for bad ‘luck’ for the ‘shorts’ is the equivalent of a hope for good ‘luck’ for the (immensely greater) ‘long’ position; a long position that he has, after all, attempted to shore up for many years. Flaherty cannot calculate the damage that the housing bubble has done, nor that which its resolution will end up doing. It’s natural for him to be simply trying to keep it going at this point.
Regarding those betting against price increases:
Any healthy market has to be able to tolerate the possibility of people speculating against price increases.
There are strong arguments that the ability for individuals to short a market improve that market’s strength. Shorts improve liquidity, make for more valid ‘price discovery’, and are around to buy when nobody else wants to (near bottoms).
There are no ways to directly short the Vancouver RE market (it would likely have benefited if that had been possible!).
Some are attempting to indirectly short, and hope to profit from price drops via their likely effects on the values of the shares of certain stocks or other instruments. For the record, vreaa is not trying to do anything like that. We’d simply like to see sane valuation of Vancouver housing.
– vreaa

‘Vancouver City Hall: Housing Report Card 2012’; Plus Revised Version

The following ‘Vancouver City Hall: Housing Report Card 2012’ appears at VanCityBuzz 8 April 2013.
The cheekily truthpacked revised version below that is from a source that is as yet unknown to us (but was passed on via e-mail by ‘B’, 9 Apr 2013).

“Canadians shouldn’t count on home prices to be their main source of wealth gains. Real wealth is built through innovation, and hard work. Not through some magical asset inflation.”

“The correction underway in Canadian house prices is likely to persist for another two years, warns Bank of Canada Governor Mark Carney.
“We’ve seen the adjustment in the housing market. We think there’s a bit more to come over the next couple of years,” Mr. Carney told CTV’s Question Period in an interview broadcast Sunday.
Mr. Carney said rapidly rising prices experienced in Canada over the past decade are “certainly not normal” and Canadians shouldn’t count on home prices to be their main source of wealth gains.
“Real wealth is built through innovation, and it’s gained through hard work,” Mr. Carney explained in an interview taped before this weekend’s G20 finance ministers and central bankers meeting in Moscow. “It’s not through some magical asset inflation.” …
Ottawa has tightened mortgage rules several times since 2008 to cool the market. But interest rates still remain at rock-bottom levels, as do borrowing costs.
Mr. Carney said the pace of debt accumulation has slowed to about 3 per cent a year from 10 per cent.”
– from ‘More adjustment to come in home prices: Carney’, G&M, 17 Feb 2013

Reader Opinion On Construction Trades – “It takes a 2-year trade diploma, a 1 year co-op, and a 4 year apprenticeship to become a fully licensed plumber. This skews the supply and demand curve and allows older workers to bid up their wages.”

DonDWest, a 31 year old Canadian, left this opinion post regarding construction standards as a comment at VREAA 9 Feb 2013. Headlined here as food for thought and fodder for debate:

“Shoddy and overpriced construction/engineering is a big problem in Canada, but I have a different take on what’s the cause. Not to sound like a Republican, but I believe corrupt unions have played a large part. I’ve experienced this first hand from a “young” person trying to enter the trades and then realizing the traditional route to getting in the trades is now economically infeasible at my age (31 years old).

Speaking of leaks, for example, it takes a 2-year trade diploma, a 1 year co-op, and a 4 year apprenticeship in my province just to become a fully licensed plumber. That’s the equivalent of a PhD equivalent level education in terms of time spent. No offense to the plumber, but you’re just a plumber, it shouldn’t take over 7 years to get licensed.
I don’t know about you, but starting a plumbing career at age 40, considering these are physical jobs where the retirement age is much sooner, doesn’t seem economically feasible. I laugh at people who tell guys now entering their late 20′s to early 30′s to “just get a trade” if you’re having difficulty breaking out of the low wage service sector mould.

What the unions have done is significantly convince the government to raise the barriers of entry into the trades for our young. This skews the supply and demand curve and allows older workers (who are mostly baby boomers) to bid up their wages. Ironically, this doesn’t result in better quality work, as there’s less competition coming from the young pressurizing the older workers to back up their wages. The older workers know their jobs are secure and this reflects in their work that’s poorly completed at a snail’s pace.

Oddly enough, due to the incidents of shoddy construction that result from this corruption, this is used by the unions as further leverage that the government needs to increase the levels of qualification in order to enter the trades. The unions created the problem, and their solution is to further reinforce the problem by upgrading credentials on the young, because perpetuating the problem is profitable for the unions and their workers. If the government just took a look at the average age of a construction worker and engineer today – they could easily see that the problem isn’t newbies coming on the scene messing things up.

I’ve come to the conclusion that if a young person wants to enter the trades, he is better off taking the small business route right away. He could start small by restoring old houses in rural Canada for example. I doubt it will take him 7 years just to figure it out, and he won’t be in so much debt due to education requirements, nor will he have to spend years upon years listening to condescending baby boomers that will only serve to hurt his confidence.”
—

Whatever measures are being taken to ensure sound construction standards in the lower mainland, they don’t appear to be working very well. Witness the tarps, even on buildings constructed after the leaky-condo scandals.
Obviously there have to be some basic standards to which the trades adhere. Over and above that, it is ironically likely that fewer restrictions to entry, and more competition (along with greater consumer expectations, and greater accountability for work quality), may well result in a better quality of construction than we are currently having to tolerate.
– vreaa

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

Ignoring The Effects Of A Topping Bubble – “Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity.”

“The market for home sales is chilling further after months of decline – and it’s putting Finance Minister Jim Flaherty on the hot seat. New data show sales deteriorating in November, and the association that represents Canadian realtors says sales will fall, not rise, this year and next. Mr. Flaherty, who sought to cool the market this summer by tightening mortgage insurance rules, says his actions are only one part of the story and that Canadians are voluntarily curbing their appetites for mortgage debt.” …
“Interest rates have remained low and the economic backdrop has remained supportive for housing activity, so that should leave little doubt that recent changes to mortgage regulations are responsible for having cooled activity,” CREA chief economist Gregory Klump stated in a press release.
– from ‘Realtors blame Flaherty as slump deepens’, Globe and Mail, 17 Dec 2012 [hat-tip allen]

A speculative mania eventually implodes under its own weight. It doesn’t need rising interest rates or a failing economy to bring about its demise. In fact, its deflation is more likely to bring on an economic slump than to be caused by it. In Vancouver, the market started slowing before the mortgage changes came into effect.
The erroneous argument put forward by the economist above has already been ‘collected’ in our ‘Erroneous Theories For Falling Prices’ category.
– vreaa

BOC Warns Of Circumstances That Their Very Own Policies Have Encouraged – “The most important risk to financial stability is the elevated level of household indebtedness and stretched valuations in the housing market.”

“High household debt and a heated housing market remain the biggest domestic threats to Canada’s financial system, the Bank of Canada said on Thursday, despite tighter mortgage rules introduced by the government in July.
“The most important domestic risk to financial stability in Canada continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market,” the central bank said in its semi-annual Financial System Review.
Canada’s financial system remains robust but the overall risks to the stability of the banking sector remained high, unchanged from June, it said. …
Housing prices and construction in Canada roared higher in 2011 amid low interest rates, sparking fears of a U.S.-style bubble. The market started to slow after the government tightened rules on mortgage lending in July, the fourth time it had acted to curb borrowing since 2008.
The Bank of Canada’s two-year freeze on interest rates is also seen as a reason for the credit binge and the bank has said it could, as a last resort, use monetary policy to address the problem.”
– from ‘Bank of Canada says housing market risk still high’, Reuters, 6 Dec 2012

“Chief among those domestic concerns is record-high household debt, the inevitable result of rock-bottom interest rates that, nevertheless, have acted as a buffer against even more worrisome threats from outside Canada.”
– from ‘Bank of Canada warns own low rate policy poses risk to economy’, Financial Post, 6 Dec 2012

The Bank is warning us of a problem, while simultaneously confessing that its own ongoing policies have caused and are perpetuating this problem.
– vreaa

Mark Carney Named New Bank of England Governor

“Mark Carney named new Bank of England governor” – Guardian, 26 Nov 2012, 16.28 GMT [Hat-tip Aldous Huxtable and proteus]

Interesting, but not something that should affect the predicament of the Vancouver RE market.*
Carney is clearly very smart and very competent, so congratulations to him for the promotion, and we and most other Canadians would wish him well with the new job.
At the same time, the appointment is likely the result of larger, arguably ironic, forces: Canada’s accounts have appeared stronger because our debt spending (and closely related housing bubble) has not yet reached its inevitable crisis point. This delay is not Carney’s doing directly, there are too many forces at play to believe that, but he has been part of it. Canada and Carney haven’t by any means actually solved the problem, and have yet to deal with the unwinding. Household debt is at nosebleed levels, and there are clear speculative manias in housing in all major centres. The delay in reconciliation has given the false appearance of strength in Canadian fiscal governance. The UK has quite simply chosen a new BOE governor who looks strong because he’s from a place where the debt bubble hasn’t yet burst.
– vreaa

* – There is a possibility that this will effect sentiment. The BOC will obviously now rush to assure us it has firm hands on the tiller. It also may, interestingly enough, end up as another erroneous ’cause’ for the coming housing collapse, as in “Mark Carney leaving caused the housing market to crash”.

[vreaa comment on Guardian discussion thread 26 Nov 2012 5:16pm]

Hoax/Joke – ‘The Office of the Superintendent of Financial Institutions Canada Follows The Twitter Accounts Of Bearish Bloggers And Not Those Of RE Industry-Insider Commentators’

[UPDATE 6am, 25 Nov 2012: I fell for this hoax completely. Somebody set up a fake OSFI Twitter account and only referenced the bears (with a few gvt organizations as diabolically good cover). I popped up a post pointing this out, triumphantly. What can I say? I’m not going to take down the original post, which appears below. Excellent joke, got me entirely. You wag, whoever you are. (I can now return to worrying that the OSFI is not listening to the canaries).- vreaa (Thanks to Whisperer and LJ for pointing out the hoax).]
————

Original Post:

“The Office of the Superintendent of Financial Institutions Canada (OSFI) is the primary regulator and supervisor of federally regulated deposit-taking institutions, insurance companies, and federally regulated private pension plans.” – from OSFI website. For a summary of the OSFI’s mandate, see ‘OSFI, Our Mandate’.

The OSFI has set up a Twitter account. Below find a screen capture showing the Twitter accounts that they themselves, the OSFI, follow (as of 25 Nov 2012). Of the 9 accounts they are following, 5 are Government of Canada organizations (BOC, CRA, StasCan, Immigration, CEAP). The other 4 accounts are all bloggers who are bearish the housing market! Two are from identified individuals (Ben Rabidoux and Garth Turner), the other two are anonymous sources (Canadian Watchdog, and Vancouver’s own YVR Housing Analyst). The Twitter accounts of industry analysts and vested interests are screamingly obvious in their absence. We find this remarkably clear vindication of the work done by these bloggers, which is often (and conveniently) dismissed out of hand by industry-related commentators. And we’re pleased that the OSFI is listening to ‘the canaries’.
[Thanks to ‘Canadian Watchdog’ for bringing this to our attention, 25 Nov 2012]

We Need More Evidence – “Pooling data sets from BC Hydro, the 2011 census, the Provincial Home Owner Grant and BC Assessment, along with whatever numbers the region’s real estate associations are willing to make public, would create one giant playground for local analysts.”

“When questions about foreign ownership came up at the City’s housing affordability meetings earlier this year, task force members realized the issue was large enough to warrant a separate report. A working group of business and architecture academics was assembled to learn more. Its volunteer members met several times over the course of three months to explore the issue and recently penned a five-page summary of their findings.
The result is underwhelming if you were hoping for closure on the matter, but here’s the takeaway: we still don’t know how foreign investment impacts local real estate, but we have researchers in the city who have developed methodologies to study and interpret the data needed to clarify the situation.
Their conclusion put another way: if the City really wants to understand foreign ownership, it needs to pay researchers and quit relying on the generosity of volunteers.
“At the end of the day, we still have no real idea what the impacts are and if they are good or bad and what that actually means to the city,” says Erick Villagomez, adjunct professor at UBC’s School of Architecture and Landscape Architecture and chair of the academic working group behind the report. “We need more evidence.”
The City is hesitant to pledge more money in order to clarify the issue of foreign ownership, at least until it’s sure further study would improve Vancouver’s affordable housing stock in a concrete way.” ..
“Villagomez wants researchers to crunch more numbers to strengthen understanding of the matter. He points to data available from BC Hydro, the 2011 census, the Provincial Home Owner Grant and BC Assessment. He says pooling those data sets along with whatever numbers the region’s real estate associations are willing to make public would create one giant playground for local analysts. The only trouble is finding a pot of money to buy whatever data sets aren’t free and another pot to pay researchers to analyze them.”
– ‘To Solve Housing Foreign Ownership Puzzle, Someone Must Pay’, Luke Brocki, The Tyee, 19 Nov 2012
[hat-tip ‘poster with infinite number of handles’]

Evidence is good. There is easily accessible information out there that could shed an immense amount of light on the RE market. ‘Play’ in the ‘playground’ of data could be very revealing. We’re all for that.
Foreign ownership is one thing; at least as important is utilization.
BC Hydro data likely already reveals how many units in the city are vacant or under-utilized. Interesting, eh?
Perhaps city council is hesitant to uncover information that threatens the strength of the market.
– vreaa

Mark Carney Magic – Soft And Strong At The Same Time

“The Bank of Canada softened its stand on raising interest rates , a shift that reflects an economic outlook that has deteriorated markedly since the spring.
Canada’s central bank also left its benchmark interest rate at an ultra-low setting of 1 per cent for the 25th consecutive month, and left its economic outlook for the next few years largely unchanged.”
– from ‘Bank of Canada softens rate stand, flags debt concerns’, Kevin Carmichael, G&M, 23 Oct 2012

“The Bank of Canada strengthened its bias for raising interest rates, retaining its outlier status among the Group of Seven nations while signaling concern about record household debts it says will keep growing.
Policy makers led by Governor Mark Carney kept the benchmark rate at 1 percent, where it’s been more than two years, and said “some modest withdrawal of monetary policy stimulus will likely be required.”
– from ‘Carney Strengthens Bias to Raise Rates as Debt Risk Grows’, Greg Quinn, Bloomberg, 23 Oct 2012

The speculative mania in Vancouver RE will resolve itself regardless of whether rates stay low, or whether they strengthen slightly. Either way, there is too much debt, and the market is collapsing under its own weight.
Fortunately, our predictions are not dependent on trying to read the BOC’s intentions.
– vreaa

The Mayor – “This is further evidence that Vancouver’s economic action strategy is working to create highly skilled and high-paying new jobs” [… in RE related industries.]

“While the news is full of warnings about a national housing slowdown and shaky global economic future, the Vancouver region has had a building boom almost equal to pre-recession years.” …
“Some cities are crowing about their success, as Vancouver did last week, noting that it has processed building permits worth $1.1-billion in construction value for the first six months of the year.” …
That prompted Mayor Gregor Robertson’s office to issue a statement about the encouraging numbers and the reasons.
“After keeping taxes low, and maintaining permit processing times despite higher volumes, this is further evidence that Vancouver’s economic action strategy is working to create highly skilled and high-paying new jobs,” he said.
– from ‘B.C. building boom nears pre-recession levels’, G&M, 3 Sep 2012

We’re hearing innumerable stories about existing condo stock that isn’t selling, and yet there seems to be more construction going on than ever before. It appears our city has become even more overly dependent on the RE industry in recent months; it’s almost the only game in town.
Throw gasoline on a waning fire and things look bright for a few seconds more.
– 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

Mark Carney – “Invest in productive capital, not in houses or condos”

“And there’s a variety of things that European authorities can do, that the IMF can do, others can do to contain it so that Canadian business and Canadians can get on with their lives and focus on how we’re going to grow our economy, which is largely going to be investing in productive capital, not in houses or condos, and in growing our economic relationships with the major emerging markets,” Mr. Carney, the Bank of Canada governor, said in an interview with CTV.
– from Globe and Mail, 9 Aug 2012

Excellent point; a reference to the dire misallocation of resources that occurs during speculative manias in housing.
At the same time, it’d be fair for many to retort:
“But, Mr Carney, thanks to your low interest rates, my money is not attractive to potentially productive business concerns; as a result I’ve been drawn into high risk speculative activity, such as buying over-priced RE, with leverage, for presumed future price increases.”
– vreaa

Entities Are Aligned In Perpetuating The Speculative Mania Regardless Of Political Stripe – “The only decisive action taken by politicians has been to add more layers of finance to the teetering system of debt and precarity. Elites in Vancouver continue to prolong the system and extract super-profits.”

‘Imagine. A financial institution that lets everybody profit. Now that’s an idea I can live with.’ – Vancity Billboard, Vancouver, July 2012

“A brief recount of recent history is necessary for understanding why and how the local government under Vision Vancouver can be expected to aim towards re-mortgaging the housing crisis, deferring the current crisis of value underlying overinflated housing assets citywide. When the market crashed in 2008, many saw an opportunity for the city to meet its promised housing goals, including its promise to take actual concrete measures to end homelessness. After years of land speculation and high prices created by unprecedented consumer debt, properties finally started showing signs of affordability, with housing activists calling on the municipal government to buy newly-priced lots throughout the city.
In effect the opposite occurred, with sections of the property elite buying up land from the province in private deals, like at Little Mountain in 2009, or selling land back to the government at inflated pre-crash levels, like the land trading of Robert Wilson, who bought dozens of buildings and sold them back to the public. Fundamentally, Wilson and Holborn’s extraction of public funds and assets represents the spirit of the broader post-2008 period.”
…
“Looking back on the past half-decade, what stands out is that since the onset of the financial crisis of 2008, no effort has been made in policy and elite circles to re-evaluate the fundamental contradictions of state-backed housing privatization, despite the rampant inequalities produced by Vancouver’s real-estate market, and despite the volatility of that system. The market, towering over an exploitative rent-extraction economy, has only been the recipient of ever-new supports from the neoliberal state. The only decisive action taken by politicians has been made to add more layers of finance to the teetering system of debt and precarity. The recent experience in Vancouver has shown that while elites continue to prolong the system and extract super-profits, radical change can only come from below. Only a movement led by renters will be capable of taking action to halt the circuits of the exploitative real-estate economy and replace it with something new.”
…
– excerpts from ‘Re-financing the housing bubble: Strategies of the neoliberal state’, Nathan Crompton, rabble.ca, 20 Jul 2012 [hat-tips to ‘joe_blown_away_by_high_housing_costs’ and Jeff Murdock]
—

“My biggest complaint with the article is placing onus on Vision Vancouver for perpetuating the bubble when it’s the nature of the City’s finances, not the political stripe of council, that’s the problem. Ultimately cities derive revenue from permits and other real-estate-related activities and, if that is not present, either need to increase revenues in other areas or cut back. …
So at the local level, because of how the tax base is matched to the expenses, regardless of who’s in power, there will be pressure to kowtow to the real estate industry to keep revenues flush. And it’s not some “neoliberal” trend in my view, it’s what the populace votes for…”
– from a comment by jesse, VREAA, 20 Jul 2012
—

Our thoughts:
As a speculative mania develops and takes hold, more and more individuals and institutions in a society become aligned in their interest to perpetuate the bubble. This occurs on all levels, from the citizen to the federal. Home-owners, RE investors, landlords, contractors, developers, realtors, universities, credit unions, banks, municipal government, provincial government, central banks, federal government…
The entities are co-opted, not by some plan, but rather because all interests become aligned in a dependence on ever increasing prices, and the debt financing necessary to keep that going, and the temporary artificial easy ‘wealth’ that results. Ever expanding borrowed funds being spent into the economy certainly seems better than having to generate genuine wealth from true productivity; and it seems good to the naive, while it lasts.
It is crucial to realize that the majority of individuals and institutions become aligned in this interest, regardless of political stripe.
In the mature stage of a speculative mania, the vast majority of citizens and institutions are heavily dependent on the bubble continuing, and almost all those in positions of political power will have been thoroughly co-opted. This is a market effect. This is also why bubbles are never, ever legislated away. The majority always votes to shore up the mania, to perpetuate the bubble; any dissenting voices will be voted down; any protesters ejected.
Government intervention, from the civic to the federal, can extend the life of bubbles, but cannot dismantle them safely. This is not an ideological, or a pessimistic observation, but one made based on mathematic law and knowledge of market dynamics. Like a chain-letter or a Ponzi scheme or a raging forest fire, the engine runs out of fuel, eventually.
…
Of course, there will be all sorts of flavours and differences in the finer points of this process, so it is arguably of value to discuss how exactly local government is choosing to perpetuate the bubble. In this regard Nathan Crompton’s article is of interest. We respectfully submit, however, that the large overarching picture is far, far more important, and that differences in local approaches will pale into insignificance in the face of the broad implications of a collapsing speculative bubble. After the dust settles, the exact details of local policy will again become important.
…
– vreaa

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

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

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

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

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


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

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

“The Canadian approach is what the world needs.”

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

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

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

NDP leader Tom Mulcair has remortgaged his home 11 times since early 1980s

“New Democratic Party leader Tom Mulcair and his wife have repeatedly refinanced their home west of Montreal, gradually increasing the debt on the property over a series of 11 mortgages, land records show.
Mulcair’s office will not explain why the couple have loaded more and more financing onto the West Island home they’ve lived in since the early 1980s, saying only that it’s a “private matter.”
It is unclear why Mulcair would need to refinance the modest two-garage home in Beaconsfield so many times, bumping the value of the mortgage from $58,000 to $300,000.”
…
“They paid $64,000 for the home in 1983, with a $56,000 mortgage from the Caisse Populaire du Lac St. Louis at 10.7 per cent interest — the going rate of the day.
Every few years, new financing with the Royal Bank of Canada was registered on the property with mostly increasing values as the amount owing rolled over.
The couple obtained loans in 1984, 1987, 1988, 1990, 1996, 1997, 2001, 2003, 2006 and 2009.
Nearly a year after the last transaction, Mulcair filed a report with the federal ethics commissioner, saying that he taken a line of credit with his wife from the Royal Bank.
Under the MP’s Code of Conduct, material changes in a member’s assets or liabilities must be reported to the ethics commissioner within 60 days.
The value of the line of credit is not specified.
Today, Mulcair earns $157,731 annually as an MP plus a $75,516 stipend as Leader of the Official Opposition. When in Ottawa, he lives for free at the official residence, Stornoway.”
…
– from ‘NDP leader has remortgaged his home 11 times since early 1980s’, Ottawa Citizen via Vancouver Sun, 28 May 2012
—

NDP, Liberal, Conservative… the political ‘stripe’ here may or may not be important, that can be debated. We are of the opinion that many Canadian politicians, across all parties, are, like the general citizenry, overdependent on RE for their financial health.
That said, this piece of information certain won’t help NDP promises of being capable of fiscal prudence.
This anecdote illustrates:
1. a nice concrete example of ‘RE-ATM’; it is now commonplace, with escalating home prices, for individuals from all walks to allow mortgages to balloon over time, rather than to pay them down; many longterm owners still have considerable mortgage debt;
2. our politicians, like our general citizenry, have strong personal interest in the RE market remaining robust.
– vreaa

OSFI’s Melessanakis Asks “Are Canadian banks equipped to handle a 40% drop in home prices?”; Mortgage Broker McLister Retorts “The idea of 40% price drops is ‘farcical’”

Previous failures of Canadian financial institutions were due to bad real estate lending and sharp falls in housing prices, and these can happen again, Vlasios Melessanakis, manager of policy development at the Office of the Superintendent of Financial Institutions, wrote in documents obtained by Bloomberg News under freedom-of-information law. …
“Canada is not immune,” Melessanakis wrote March 21 in internal notes responding to a posting on a mortgage-industry website. “Just because nothing happened in Canada in 2008 (a U.S.-centered crisis), does not mean that Canada is not vulnerable to a housing correction now.”
Melessanakis wrote his comments to colleagues in response to a posting on a mortgage-industry website, Canadian Mortgage Trends, that criticized proposed standards published by Canada’s top banking regulator on 19 Mar 2012.
…
Ottawa-based OSFI suggested requiring lenders to take “reasonable steps” to verify borrower incomes, establish standards for measuring borrowers’ ability to pay their debts, and limit the size of loans secured by the equity in people’s homes. The draft guidelines are based on mortgage-lending principles set by the Financial Stability Board, a Basel-based group that coordinates global financial rules.
“How many new lending ‘guidelines’ can the market bear before it breaks?” wrote Robert McLister, a mortgage planner who edits the website.
“The market may break because the fundamentals are not sound (i.e. overvaluation of homes), not because of OSFI guidance,” Melessanakis wrote in response.
…
There’s “no question” the proposed OSFI guidelines will curb demand and hurt housing prices, McLister said in an interview. “OSFI had good intentions here, but some of this policy is certainly misguided,” he said, when asked to react to Melessanakis’ comments.
McLister pointed to banks’ low arrears rates on mortgages as evidence more rules aren’t needed. Melessanakis wasn’t convinced.
“This can change fast,” he wrote in his notes. “Are the banks equipped to handle a 40 percent drop (what occurred in Toronto market in early 1990’s)? Need to stress test to find out.”
McLister called the idea of a 40 percent decline in housing prices across the country “farcical.” Such a decline is “not going to happen, period. But in some places like Vancouver, maybe Toronto, obviously you’re going to have greater risk there of price volatility,” he said by telephone.
…
OSFI’s guidelines suggest lenders limit home-equity lines of credit to 65 percent of the property’s value. The regulator also recommends that HELOCs be paid off over a specific amortization period, like conventional mortgages.
While McLister wrote that those rules “portend a big slowdown in HELOCs,” Melessanakis responded that the loans have “contributed significantly to growing overall household debt.”
“This is not sustainable,” he wrote. “If (or when) housing prices drop, households will be vulnerable,” echoing comments made by Flaherty and Carney.
Melessanakis also disputed McLister’s point that many of OSFI’s recommendations are already employed by “scores of lenders.” “Not all, and not on a consistent basis,” the OSFI official said. “There are some enhancements in lending practices that are needed.”
…
– from ‘Banks Not Immune to Housing-Related Failures: Corporate Canada’, Bloomberg, 15 May 2012
—
Forty percent off is a fair downside target, but we see it going lower.
The ‘farcical’ quote will be archived in the ‘Bull Hubris’ sidebar, for ease of future reference.
– vreaa

Flaherty – “For some time now I’ve had concerns about the role that CMHC now plays. Historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that. I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada.”

“Over time, I don’t think it’s essential that a government financial institution provide mortgage insurance in Canada. I think what’s key is that mortgage insurance is available at a reasonable cost in Canada. I think there is a role to regulate but whether we, the Canadian people, have to be the owners and shareholders of a financial institution to do this is a question. I don’t think it’s essential in the long run.” [Finance Minister Jim Flaherty]
…
In a wide-ranging discussion on the housing market, he said he has no plans to increase CMHC’s current $600-billion loan limit, ruled out any possibility of regulating foreign real estate investment and made it clear his focus is on the governance of Crown corp. which controls about 75% of the mortgage default insurance business in the country.
“For some time now I’ve had concerns about the large commercial role that CMHC now plays. CMHC has become a significant Canadian financial institution. As you know, historically it was created with a mandate post-war to advance housing in Canada. It’s become much more that.”
The finance minister moved this week to tighten control of CMHC, placing it under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions. Previously, it fell under the watch of the Department of Human Resources and Skills Development.
The shift comes with CMHC closing in on the $600-billion limit the government has for how much of its portfolio will be backstopped by the taxpayer. Three years ago it was $450-billion.
By law, consumers must buy mortgage default insurance if they have less than a 20% down payment on a home and are borrowing from a federally regulated financial institution.
But CMHC has not been insuring just those loans, it has agreed to step in and insure loans — with the premiums paid by financial institutions — for lower-ratio mortgages, or what is called “portfolio” or “bulk insurance.”
…
Mr. Flaherty’s own opinion on the housing market is that has been fuelled by low interest rates which he says he does not control. “Cheap money,” he said, noting he did talk to the banks about being unhappy about their mortgage rate wars earlier this year which had reduced the rate on a five-year closed mortgage to below 3% — an all-time low.
As to whether the market has been in part fueled by foreign buyers, as many in the real estate industry have suggested, Mr. Flaherty said his government will not get involved in that aspect of the market. “No,” he said, pausing to emphasize the point. “I don’t think there is [a role]. They key in housing from my point of view is to get the best information on housing.”
…
– from ‘CMHC could be pulled out of mortgage insurance business, Flaherty says’, Garry Marr, Financial Post 27 Apr 2012 [hat-tip allen]
—

If it ain’t broke, don’t fix it.
Ergo, I think we can very fairly say that these announcements of change are an admission that something is ‘broke’, or is going to be. Just as many of us have opined for some time. The problem has been that the CMHC has mispriced risk and created a form of moral hazard, fuelling speculation with the same “cheap money” that Flaherty here blames on the bankers.
Interesting to note Flaherty playing hot-potato with Carney: “Cheap money is his problem!”; “..no, his!”; “..no, HIS!”; etc.
We’re not sure what he means when he says: “The key in housing from my point of view is to get the best information on housing.” Translation, anyone? Does he mean we shouldn’t consider things deemed extraneous to the market?
– vreaa

‘Borrow To Get Ahead’ – “People are notorious for looking at the glass half full, or pretending things aren’t happening.”

Scotiabank Store Poster, image from this CBC News clip

Announcer: “The biggest concern for the Bank of Canada is still the record amount of debt that Canadians hold, debt that Carney expects to keep rising.”

Carney: “Some Canadian households are becoming overstretched, and Canadian households as a whole are being overstretched, which creates risk for the economy.”

Announcer: “Some experts argue that most Canadians can handle their debts, often backed by solid assets, like houses. But, even with strong hints interest rates may rise, Canadians appear to be ignoring the bank’s repeated warnings.”

Laurie Campbell, CEO of Credit Canada: “Well, to a certain degree I believe they are tuning it out, I mean people are notorious for looking at the glass half full, or pretending things aren’t happening.”

– from ‘Carney’s Warning’, CBC News, 18 Apr 2012

Household Debt and Carney Warnings – Maclean’s Chart

“It’s been years since Bank of Canada governor Mark Carney first started warning about Canadians piling on too much personal debt. Rising household debt, after all, has been the most dangerous byproduct of his low interest rate policy, which was initially designed to help Canada sprint out of the Great Recession––and, later on, partly dictated by the need to help sputtering Canuck exports. Right from the get-go, though, Canadians haven’t been listening. As the situation became more dire, so did the Bank’s warnings. Today Canada’s ratio of household debt compared to disposable income is inching toward 160 per cent, the peak seen in the U.S. and the U.K. just before their respective housing busts. (In the last three months of 2011, the debt-to-income ratio declined somewhat–not because Canadians stopped taking on debt, but because income levels also rose during the same period.) Carney is still at it. Last week, he finally raised the prospect of raising interest rates, cutting people off from all that cheap money, even as the Fed down south sticks to near-zero rates.”

– from ‘Household debt and the Bank of Canada’s anxiety levels—in a graph’, Macleans, 11 Apr 2012

Federal Budget – No Changes To Mortgage Lending

“In fact in the entire budget, for which at least one medium forest died, the words “mortgage debt” do not appear. No cautions about overborrowing or the dangerous amount of collective net worth now stuffed into a single asset.
So much for Mark Carney. His continuous warnings about overheated housing in Vancouver, condo madness in Toronto or the inevitable impact of higher interest rates.”
– Garth Turner at greaterfool.ca 29 Mar 2012

“I had hoped this budget was really going to have some significance, but its totally anti-climatic. Canada is being crippled economically with the biggest ponzi scheme this country has ever seen.”
– ‘Vancouver Mt Pleasant renter’ at greaterfool.ca 29 Mar 2012 6:08pm

—
It’s what he didn’t say that is noteworthy.
The dog that didn’t bark.
The Finance Minister tippy-toed around the housing bubble, knowing that if he woke the bear, so much else in his budget would become moot. The bear will wake, regardless.
– vreaa

Calgary’s ‘Attainable Homes’ Program – “We give you the required down-payment (yes, it’s a gift!). You come up with $2,000 of your own money. You get a $240K home.”

Thanks to ‘Zerodown’ for (aptly, given his handle) pointing out the ‘Attainable Homes‘ program now running in Calgary. The following from their website:

“How it Works”

Over the last few years, housing prices have increased significantly yet Calgarians’ earnings haven’t kept pace. This has created an affordability gap. High rent payments and other monthly expenses leave little to no ability for many people to save for a down-payment and own a home. Attainable Homes Calgary is here to bridge the affordability gap and help hard working, middle-income earners like you, get out of renting and into home ownership.

Our Program

Through our program, we do three things a bit differently in order to provide Calgarians with attainable homes:

1. We partner with reputable local builders to provide condominiums and townhouses at a price that is attainable for middle income Calgarians. We define ‘middle income’ as having an annual household income under $80,000.
2. We give you the required down-payment (yes, it’s a gift!) and guide you through the entire purchase process. You will need to come up with $2,000 of your own money as a deposit, which is put towards the purchase price of your home.
3. We re-invest a portion of your home’s appreciation back into the Attainable Homes program to help other Calgarians buy a home. You have the freedom to sell your home at anytime.

Let’s work through an example:

$240,000 Home at Market Value:

Attainable Home purchase price	$220,000
Less 5% gifted down-payment* from AHCC	($11,000)
Your cost	$209,000
Your minimum deposit	$    2,000
Your mortgage (from lender)	$207,000

*the gifted down-payment becomes a forgivable loan.

When you decide to sell your AHCC home, you and AHCC share the appreciation in value (you keep more, the longer you own your home):

Years of Ownership	Appreciation to Home Owner
0 – 1 year	0%
1 – 2 years	25%
2 – 3 years	50%
3+ years	75%

Let’s say you stay in your AHCC home for four years and the appraised value is now $254,700.

Market Value of your AHCC home	$254,700
Less your original deposit	$   2,000
Less your first mortgage amount	$207,000
Appreciation	$  45,700

Your share of the $45,700 appreciation would be $34,275 (or 75%).
Our share of the appreciation, which we’ll reinvest in the program would be $11,425 (or 25%).
What a great opportunity… everyone wins!

Get on the path to home ownership! For more information or to book an appointment with a member of our sales team, contact us!

—

Our thoughts:
Not seeing it as sufficient to subsidize mortgage insurance through CMHC, governments are now gifting the down-payments on which those mortgages are extended. This is complete insanity. Leverage upon leverage.
Should anyone who can only come up with $2k ever be given a loan of $207K?
(Sub-prime, anyone?)
—
Clearly the government is also aiming to support “reputable local builders” and others. See the program’s partners and sponsors.
—
We note that there is no provisor on the “How it works” page for the possibility of future price drops. Possibly:
“Let’s say you stay in your AHCC home for four years and the appraised value is now $140,000.
You still owe $200K on the mortgage.
You couldn’t come up with more than $2K to buy the home, but now you’d need more than $60K to sell it.
You mail us the keys and leave the province.
Everybody wins… (no.. wait..!)”
—
Homes will be more affordable for all when their prices fall to levels reflecting fundamental values.
Endeavours like the one above simply facilitate citizens overextending themselves to buy overpriced properties.
If the ‘City of Calgary’ understood the situation, and really cared about “middle income Calgarians”, they’d not promote this program.
– vreaa

“When I look at the actions of governments, I cannot figure out whether they are mostly stupid or mostly dishonest.”

“For most of us, housing is our biggest expense. One out of every five dollars we earn goes to build, buy, rent and run our homes. Facing high home prices, large personal debts, and an uncertain economy, fewer Canadians can buy a new home today than in the past, and they are choosing to rent instead.
Unfortunately, in many cities finding an affordable place to rent is nearly impossible. The most immediate problem is supply. Vacancy rates under 3 per cent push rents up. In Vancouver and the Greater Toronto Area, it’s 1.4 per cent.
Vacancy rates this low force our young people to move out of the city, threaten seniors on fixed incomes, and have a negative impact on local businesses.
That’s why this spring’s federal budget must put Canada’s rental housing market on solid ground, by pursuing low-cost, high-leverage policies that get jobs on the ground and build housing Canadians can afford.
Building and renovating rental housing will give cash-strapped Canadians more affordable housing options at a time when they’re being increasingly priced out. It will also create thousands of construction jobs to replace the 50,000 lost to slower new housing starts.
We’re calling on the federal government to use its spring budget to introduce cost-effective market incentives to encourage private-sector investment in rental housing.
These include:
• Low-interest loans underwritten by the Canada Mortgage and Housing Corporation (CMHC) to finance new rental construction.
• Tax reform to encourage owners to renovate and retain rental properties, providing an incentive to preserve affordable rental housing.
• Help for landlords to make rental housing more energy efficient, reducing costs and easing pressure on rents.”
– Gregor Robertson, Mayor of Vancouver, in an article co-authored with Joe Fontana (Mayor of London, Ontario) in the Toronto Star, 7 Mar 2012
—

This from the discussion at vancouvercondo.info 12 Mar 2012:

“Why build apartments when developers can make quick and obscene profits on shabbily built condos and walk away even before the expiration of their faux warranties?
The only thing that will truly encourage construction of rental stock is a return to sanity in housing prices.”
– chilled, 12 Mar 2012 10:30am

“…“they” will start building affordable, quality rentals when people stop buying high-priced, crappy condos.
The construction industry is simply doing what makes them the most money. If you want someone to blame, blame the buyers and the governments which enable them.”
– patriotz, 12 Mar 2012 5:02pm

“Right, like the current government that decided to give ten grand to people buying a first home, which is to say, they decided to give ten grand to any developer who sells to a first time buyer, which is to say that they arranged for it so that rentals would have to bring in ten grand more to be competitive with sales. As often happens when I look at the actions of governments, I cannot figure out whether they are mostly stupid or mostly dishonest.”
– N, 12 Mar 2012 5:45pm
—

By the way: A plan for “tax reform to encourage owners to renovate and retain rental properties” means that tax-payers will be subsidizing landlords; this will apply even more government-backed upward-pressure on housing prices in Vancouver.
Governments can really make a hash of markets. Case in point: the CMHC itself was created with the idea of making housing affordable; by mis-pricing the risk of lending, they have supported a speculative mania in housing and made housing less affordable.
Frequent readers know our position very well:
No government can design a solution for Vancouver’s dilemma; we are trapped in a monstrous speculative mania, there is no way through but price collapse.
Government policies may precipitate the collapse, or they may give cocaine to the dying racehorse and let it limp along for a while longer (drawing in even more buyers for the slaughter), but, whatever a government does will not put off the inevitable outcome of a bubble.
– vreaa

BC Budget: Taxpayer Debt To Support The Construction Industry – “Every young person out there today understands the challenges of getting into the housing market.”

“Every young person out there today understands the challenges of getting into the housing market. As parents and grandparents, we worry about the struggles our children and grandchildren have trying to save for their first home.
Even with the relief we provide to first-time buyers from the Property Transfer Tax, it is still difficult for many British Columbians to save up enough to make a down payment and still have money left over to cover all their other costs.
That is why, as part of this budget, we are introducing the B.C. First-Time New Home Buyers’ Bonus. It is a temporary, refundable income tax credit for first-time buyers who purchase newly‑built homes effective today until March 31, 2013.
They will receive a cheque for up to $10,000. Just think of the difference that’s going to make.”
[Yeah, it’ll almost definitely result in the prices of New Homes purchased by FTBs rising by an effective $10K, resulting in absolutely no net-savings to the purchasers, who will continue to purchase at the very limit of their monthly-payment ‘affordability’ level. -ed.]
“It complements the measures we announced last week — which included raising the threshold for the existing HST rebate to $850,000, and making a similar grant available for new secondary homes outside the Greater Vancouver and Capital regional districts. Over 90 per cent of all new homes in the province are below this threshold.
Together, these measures serve the dual purpose of giving consumers a break, while supporting the new-home construction sector.”
– BC Finance Minister Kevin Falcon, Budget Speech, 21 Feb 2012

This in a budget that will come in with a spending deficit of about $1 Billion.
Taxpayers are spending borrowed money to support the construction sector.
And note the glib assumption that “every young person” needs to “get into the housing market”.
Next up, assistance for toddlers interested in buying their first condo.
– vreaa

Addendum:
Find the ‘fact sheet’ regarding this bonus here:
2012 First Time Home Buyer’s Fact Sheet
[And see the end of the sheet for the hilarious example that some government wag came up with: a home for $150K! Unfortunately the home has to be in BC, Canada. – ed.]

Mayor’s ‘Housing Affordability Task Force’ – “Vancouver must be a city where our children can afford to live and raise their families.”

“Vancouver Mayor Gregor Robertson has drawn deeply on all sectors of the housing industry to represent his new “housing affordability task force” in the hope of finding realistic solutions to the city’s housing problems.
From developers and builders to academics, housing finance groups and operators of not-for-profit housing, the 14 members will assist the mayor and co-chair Olga Ilich to try to find new ways to soften the effects of the city’s systemic housing affordability crisis.
They will prepare an interim report by March 12, which will then be opened for public consultation. A final report is due June 30.
Robertson said Vancouver faced extraordinary challenges in creating affordable housing and he wanted the task force to look at ways to both protect existing housing and to create more. The city has a 10-year housing and homeless strategy of creating 38,000 new affordable homes, including 5,000 new purpose-built rentals and 20,000 new housing units.
Over the years, successive councils have grappled with the seemingly intractable problem of stimulating affordable housing without destabilizing the existing stock.”
…
“The 14 members will help mayor and co-chair find new ways to soften the effects of the city’s affordability crisis.”
In addition to Ilich and Robertson, the task force includes:
Alan Boniface — Principal, DIALOG & Urban Land Institute B.C. Chairman
Nathan Edelson — Senior Partner, 42 Street Consulting
Leonard George — Director, Economic Development, Tsleil-Waututh Nation
Marg Gordon — CEO, B.C. Apartment Owners & Managers Association
Mark Guslits — architect, principal, Mark Guslits & Associates Inc.
Colleen Hardwick — founder and CEO, New City Ventures
Howard Johnson — CEO, Baptist Housing
Kenneth Kwan — Chairman, Building Committee, SUCCESS
Michael Lewis — Executive Director, Canadian Centre for Community Renewal
Eric Martin — VP, Bosa Development Corp.
Karen O’Shannacery — Executive Director, Lookout Society
Al Poettcker — President & CEO, UBC Properties Trust
Peter Simpson — President & CEO, Greater Vancouver Home Builders Association
Bradford Tone — President, Tone Management
“The members of the Housing Affordability Task Force bring a broad and diverse array of experience, leadership, and vision to our work on the pressing challenge of affordability,” Robertson said in an emailed statement.
“Vancouver must be a city where our children can afford to live and raise their families. This is not a simple challenge but it is one that we have to address — and I believe this task force has the ideas and expertise to provide new affordability solutions for Vancouver.”
– from ‘Vancouver appoints ‘housing affordability task force’, Vancouver Sun, 6 Feb 2012
—

“Foxes To Design New Henhouse?” – Actually, such criticism would be too easy, too glib, and, we would hope, incorrect. Not everybody on the task force is a developer. Still, interesting that people trying to solve the problem should come from “all sectors of the housing industry“. Isn’t there a possibility that some important solutions may involve steps that are not in the best interests of “the housing industry”, and that those would be avoided by this task force?

Having said that, we’re sure that there are members of this task force who are well-meaning, and have a genuine desire to attempt to ‘solve’ the housing ‘problem’ that faces Vancouver. We’ll be genuinely interested to see what they come up with.
Forgive us our jadedness, but we’d expect their ‘final report’ to include:
1. Opening and final statements regarding the importance of ‘affordable housing’ to Vancouver, our futures, our communities, our children, etc.
2. Suggestions for projects that involve small and/or low quality units at lower prices, but essentially still at ‘market prices’ for what they are. As per the ‘two parking spot’ bachelor suites released last year.
3. Projects that benefit “the housing industry” at the expense of tax-payers.
4. Absolutely no mention of the real cause of the housing crisis in Vancouver, namely the massive speculative mania driven by overextended locals high on cheap debt.
5. No plans that would risk ‘destabilizing’ current housing prices.

Regular readers know that we believe that Vancouver is in the grips of a very large bubble in housing, and that prices are at levels 2 to 3 times those supported by fundamental values. The speculative mania so distorts the market that any current talk of trying to make changes to improve ‘housing affordability’ is rendered trivial and cosmetic. Once the bubble bursts and prices drop 50%-66%, the whole ‘affordability’ picture will look very different. Thereafter there will still be a need for sensible housing policy for the city and the region, and perhaps a task force will be helpful at that point. Until then attempts to address ‘affordability’ are rearranging the proverbial deck chairs on the proverbial Titanic.
– vreaa

Whitehorse Housing Crisis – “Apparently, the higher the number of people who own a home, the more others will want one of their own. No one wants to be the only person in town renting.”

“For several years, the territory has seen the effects of the latest commodity-fueled mining rush and stimulus spending. It’s also seen a remarkable shortage of housing lots.
So, alongside the money, Whitehorse has near-zero vacancy rates sparking high rents and crazy housing prices.
The effects have rippled throughout society, with the poor and professionals alike trying to cope, in their own way, with the inflation and homelessness.
For eight weeks, Yukon News reporters and photographers fanned out to chronicle the crisis – the problems people are having, why it happened and some possible solutions.
Here is what we found…”
– ‘Gimme Shelter’, as series of special reports on the Whitehorse housing crisis, 16 Jan 2012
Excerpts:
“Apparently, the higher the number of people who own a home, the more others will want one of their own.
No one wants to be the only person in town renting.
In Whitehorse, between 1991 and 1996, these rates increased to 67 per cent from 60.
Two of every three households in the city own their own home. This exceeds the national rate.” …
“The average sale price for a single detached house in Whitehorse has increased at a relatively steady rate between 1999 and 2005.
Prices increased by 34 per cent to $199,000 from $149,600.
After that, prices skyrocketed. Between 2005 and 2008 housing prices shot up 62 per cent.
That same house that was once worth $149,600 is now worth $322,800.
Housing prices have only continued to climb in the past three years.” …
“In order to buy a $325,000 home, an annual household income of about $81,500 is required, according to the Canada Mortgage and Housing Corporation’s online mortgage calculator.
Given that the average household income was $92,308 in 2006, this would appear to be affordable for the average Yukoner.”
—-
The above link via e-mail from ‘Zerodown’, who comments:
“Having spoken to people there I echo the panicked tone of the articles. I tend to be a demand-sider on Canadian housing (sentiment, ease of credit, buyer and holder mania), but the Whitehorse market has genuine supply problems (city planning incompetence: trust me there’s plenty of land) and actual economics driving the demand (ramp in government hiring; gold rush).
That the crisis is also felt in rents (and availability) reveals a contrast to the rest of the country. People who know better are buying because they need somewhere to live, others are choosing not to move there.
Sadly, knowing the quality of local governments there, I am inclined to conspiracy theory that city council (baby boomers of course) are more than happy to watch their homes skyrocket in value while they destroy economic potential. How much of a factor is it that (nationwide) policy makers are all about 60 years old right now (Carney the obvious exception, but I mean down the totem pole a bit)?”

[Thanks, Zerodown. -ed.]

Bank Of Canada – Warn Of Extreme Debt Levels, Yet Set Monetary Policy Such That “the ratio of household debt to income is projected to rise further.”

“The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1.25 per cent and the deposit rate is 0.75 per cent.” …
“…very favourable financing conditions are expected to buttress consumer spending and housing activity. Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further.”
– from ‘Bank of Canada maintains overnight rate target at 1 per cent’, Bank of Canada press release, 17 Jan 2012

Get that?
The Bank of Canada is expecting the Canadian consumer to support the economy and the housing market by going even further into debt, while at the same time they have been warning Canadians of the dangers of excessive debt.
– vreaa

—-

Further in a similar vein of hypocrisy:
“Both the Finance Minister and Bank of Canada Governor Mark Carney have been urging consumers to get a handle on their debts, the bulk of them in mortgages, and not allow low interest rates to entice them into taking on more credit than they can handle.” …
“We have been cautioning Canadians for some time that they need to be prepared to have higher interest rates in the future and be aware of the affordability issue that that may create for some Canadians, not to assume that mortgage interest rates will remain low for a long period of time,” Mr. Flaherty said Tuesday. “So we all have to be cautious in our financial planning.”
– from ‘Flaherty keeping wary eye on housing market’, G&M, 17 Jan 2012

From the comments section at the G&M:
“Is Flaherty not the man who gave Canadians the 40 year house Mortgage?” – ososo
“Flaherty keeping wary eye on housing market? That’s like having Dr. Kevorkian keeping an eye on my 85 year old mother.” – Peter Pan

On What Central Bankers Should Do To Pop Housing Bubbles

Dean Baker, of the Center For Economic And Policy Research, correctly identified the US housing bubble in August 2002, four years before it peaked.
In a current article he points out ‘What Greenspan should have done‘ [aljazeera.com 11 Jan 2012].
Excerpts:
“In Washington policy circles, money and influence can be used to make even the most simple and obvious things complicated and confused. This is certainly the case with the housing bubble and its aftermath. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame.
First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.
By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.”
…
“..some quick points on what could have been done. First, the Fed has responsibility for maintaining the stability of the US economy. Alan Greenspan should have recognised the bubble and done everything in his power to burst it before it grew to such dangerous levels.
Step one in this process should have been to document its existence and show the harm that its collapse would bring. This means using the Fed’s huge staff of economists to gather the overwhelming evidence of a bubble and to shoot down anyone who tried to argue otherwise. Greenspan should have used his Congressional testimony and other public appearances to call attention to the bubble.
This would have put the bubble clearly on everyone’s radar screen. And, the reality was that there were no serious counter-arguments. It is difficult to believe that this action by itself would not have slowed the home buying frenzy and curbed the issuance of junk loans, or at least their repurchase for securitisation.
Second, the Fed has enormous regulatory power beginning with setting guidelines for issuing mortgages. They first issued draft guidelines in December of 2007. It was not hard to find abusive and outright fraudulent practices in the mortgage industry, if anyone in a position of authority was looking for it.
Finally, the Fed could have used interest rate increases as a mechanism to rein in the bubble. This should have been a last resort, since higher rates would have slowed the economy at a time when it was still recovering from the collapse of the stock market bubble.
To maximise the impact of any rate increases, Greenspan could have announced that he was targeting the housing market. He could have said that he would continue to raise rates until house prices were brought back to a more normal level.”

In the case of Canada’s RE bubble, it’s too late for Mr Carney to do the right thing. The implosion quite likely has already begun of its own accord.
Of interest, here is what Dean Baker has said of the Canadian RE market: “It looks to me like you have some real problems. Canada could see house prices collapse by 25 to 30 per cent if interest rates rise by about two percentage points.” [Nov 2010]
On a related note, for those who can stomach it, take a look at this G&M article [12 Jan 2012] ‘Bernanke saw ‘relatively soft landing’ in housing in 2006’, featuring excerpts from Federal Reserve meeting transcripts from 2006. These guys seem almost completely unaware of the dangers that had been foreseen and written about by many others, so, I suppose, you could argue you couldn’t really expect them to move to clampdown on something that they didn’t think existed. – vreaa

“Affordable Housing Plan” – Apartment The Size Of Two Parking Spaces For $850 Rent Per Month

Life in an apartment the size of a double parking space will be on full display today as the public gets its first inside look at the mini-living going on at the restored Burns Block building on West Hastings Street in Vancouver.
Boasting 30 micro units described as the smallest rental units in Canada by developer Reliance Properties and partner ITC Construction Group, the Burns building is part of the city’s ongoing affordable housing strategy.
Coun. Kerry Jang told The Province Sunday that the low-rent suites – which range in size from 226 square feet to 291 square feet and rent for an average of $850 a month – were designed with modest income earners in mind.
“What we are trying to do as part of the affordable housing plan and housing in general is to provide a range of housing,” he said. “Because right now, if you rent a place, it’s over $1,000 and that’s beyond people who are making $10 or $12 an hour.”
The city contributed a $50,000 grant to fix the face of the 100-year-old heritage building, $144,000 in property-tax reductions and 62,000 square feet in heritage bonus density.
…
“It’s for folks who need to work in Vancouver but can’t afford to live here,” Jang added. “They can live in Vancouver, go to work and save money on cars and all that kind of stuff because they don’t have to drive in so it makes a big difference.”
…
Wendy Pederson, researcher and organizer for the Carnegie Community Action Project, decried the renovation of the old hotel as gentrification, adding people living on welfare or on old age pensions won’t be able to afford the rents even at $850.
“In my view, it’s a crime that the last housing before homelessness is being converted into micro-lofts,” she said.
“Those rooms used to rent at welfare and old age pension rates, and now the Downtown Eastside is being gentrified by the upscaling of these hotels. It’s upscale by our standards,” she said, adding the pre-reno rents were around $375.
“We don’t have enough social housing, and we’re losing our [single-room occupancy] hotels to upscaling like the Burns Block.
“The city is ignoring gentrification as a cause of homelessness,” said Pederson. “Many residents in a very full hotel were evicted [in 2006] by the owner who wanted to empty his building.” … “That owner made $1 million flipping it,” she said.
– from ‘Living small on West Hastings’, The Province, 19 Dec 2011 [hat-tip jesse]

As we’ve said previously: “Calls for ‘affordable’ new-build housing are almost all band-aid solutions. They largely result in relatively low quality product at proportionally roughly the same elevated costs as all other local properties.” [16 Dec 2011] – vreaa

Sign Of The Times – 58 Year Old Man Locks Himself Into 30 Year Mortgage

Federal Reserve Chairman Ben Bernanke, who turned 58 this week, refinanced his mortgage in September, less than two years after the last time he refinanced, according to a report in the Wall Street Journal, citing sources and public records.
Bernanke owes $672,000 on his house, about 80 percent of its appraised value. The mortgage has a 30-year term, implying that repayments are fixed and that it likely carries an interest rate of about 4 percent.
…
What we have here is a man who was approaching 58 saddling himself with a debt that will have to be paid down over 30 years, at the end of which time he will be a hopefully sturdy 87-year-old.
That is not the way in which mortgages were originally intended to be used. In the now quaint days of the 1950s and 60s, people actually took out mortgages with the idea that some day they would retire them as opposed to using them as a sort of permanent source of leverage. Typically borrowers would time their mortgages so that it would be retired shortly before they did, thus leaving them better able to cope with reduced retirement income.
In fact the Chairman is not too far off the age at which you’d expect him to be taking out a reverse mortgage, one which pays out monthly in exchange for a lump sum repayment on death.
– excerpted from ‘Bernanke’s 30-year mortgage a sign of the times’, Financial Post, 16 Dec 2011

Price Drops Will Result From Market Forces, Not Policy Change

“If we all agree that lowering the value of current homes is not a realistic policy option, then it’s critical we get more creative in order to increase housing affordability.”
– Daniel Fontaine, Editorial, 24HRS, 14 Dec 2011. Mr Fontaine is “former Chief of Staff to Vancouver Mayor Sam Sullivan”
Hat-tip for the above link to ‘4SlicesofCheese’, who adds:
“No, we don’t all agree, that’s the problem right there. Policies like mortgage relaxation led us here, why should we not use policies to address this as well?”

Policy makers are very reluctant to take any steps that lead towards price reductions:

“At a public debate, both Robertson and NPA leader Suzanne Anton said neither would put limits on foreign investment, which many observers believe is behind skyrocketing real estate prices in Vancouver.”
– from 24hours, 13 Nov 2011

“…government’s role should be to modulate severe market swings and not precipitate them. Shocking the market has potential to wreak havoc on households, especially those who may be over-leveraged or recent buyers.”
– Sandy Garossino, independent candidate for City Council in recent elections, VREAA, 11 Nov 2011

“This is a tough one. As a home-owner I do not want my home to drop too much in value but that said a correction is definitely needed in our city regarding real estate prices.”
– Joe Carangi, NPA City Council candidate, VREAA, 2 Nov 2011

“People who already own homes would be unfairly hurt by a policy that would lead to a drop in real-estate values. If the current homeowner has taken out a mortgage for say 90% of the worth of their home, and values then drop by 10%, the homeowner has lost 100% of her or his equity. I am strongly supportive of policies that would bring new housing to market at below market cost.”
– Tim Louis, COPE City Council candidate, at VREAA, 11 Nov 2011

—
The longer speculative bubbles remain inflated, the greater the number of citizens who get on board before the inevitable crash.
Humane policy makers with a Martian perspective (complete outsiders) wouldn’t hesitate to deflate the bubble instantly, to stop it doing further damage. To do that, they’d simply have to cut off the fuel supply (cheap government backed financing). The bubble would pop; prices would crash; citizens could then get on with sorting out a sensible housing policy amidst the sensibly priced rubble. Vancouver wouldn’t be bothered by another speculative mania in housing for a generation.
In the real world, policy makers shuffle around woefully inadequate ideas aimed at, they believe, decreasing the overall pain.
Calls for ‘affordable’ new-build housing are almost all band-aid solutions. They largely would result in relatively low quality product at proportionally roughly the same elevated costs as all other local properties. Those buying into such schemes would be the most vulnerable to the coming inevitable price deflation.
In the grand scheme of things, though, it doesn’t really make much difference to the outcome whether policy makers step aside or shuffle around paper while it all plays out. As they’re paid to do stuff, we suspect we’ll all be shown a good deal of shuffling.
– vreaa

Vancouver raises rates for water, sewer, garbage

“Vancouver city council has approved rate hikes for some essential services.
City residents will pay almost 10 per cent more for sewer and water services next year, and 5.7 per cent more for garbage disposal.
In total, the average taxpayer will pay between $80 and $85 more in 2012.
Mayor Gregor Robertson said the increases are at least partly due to decisions made years ago.
“Unfortunately, past councils did not make the investments in infrastructure in water or sewer or landfill, and that means we’re having to make up ground now,” Robertson said after Tuesday’s council meeting.”
– Vancouver Sun, 14 Dec 2011

Headline inflation: 2%
Wage inflation: pretty much flat.
– vreaa

Sandy Garossino – “We need a thorough and rigorous analysis of our housing market, the causes of its extreme condition, the risks it poses for our long-term economic sustainability, and a study of the levers and mechanisms available to government to modulate those risks.”

From a post by Sandy Garossino, independent candidate for city council in the recent civic elections, at her blog votesandy.ca 28 Nov 2011. The entire post is a must read for those concerned about Vancouver housing. Some excerpts below for our chronological archive. –

“Relative to household income, our property values are now among the most severely unaffordable in the world. Relative to income, Vancouver’s property values are 56% higher than New York’s, and 31% higher than London’s.
In its November, 2011 report on the Canadian housing market, RBC notes that 94% of average household income is required to cover the ownership costs of a 2 storey detached home in Vancouver.
This development is new and unprecedented.”
…

…
“Excesses in the housing sector can generate key vulnerabilities in the financial system and the economy as a whole.
Rather than stimulating productivity and competitiveness through business investment, cheap credit has been used to bid up the price of houses.
Vancouver residential real estate values began to detach from their historical relative values to the rest of the Canadian market sometime around 2006, when volatility began to get very choppy.”
…
“Many see Vancouver in a housing bubble, and it may well be. Others however, such as celebrated architect Gregory Henriquez, think our prices still have far to go to reach that point. Amazingly, Henriquez says that Vancouver is still under-priced. He is not looking at local economic conditions, however, but at the international forces in play. Viewed globally, Henriquez says that our market has become the “safety-deposit box for the world.”
…
“… circumstances militate against Vancouver being able to compete in the global marketplace for the best and the brightest talent needed to drive the knowledge and creative economies that will sustain cities in the future.
Our universities are losing key talent and find themselves unable to attract replacements or build on what we have. Our business sector cannot recruit, our local merchants are caught in a fight for an ever-dwindling supply of disposable incomes, and attitudes are hardening against even modest tax increases necessary to maintain our basic infrastructure.”
…
“Many Vancouverites seem unaware of the strange drama unfolding in many of our neighbourhoods.
The west side of the city is shedding residents almost daily as international buyers purchase more and more housing stock. These homes often sit empty or are re-cycled into the market and re-sold at significant gains within months to other international purchasers.
The west side real estate market is behaving exactly like a secondary market in financial instruments rather than a shelter market. Often the commodity is not actually used or consumed, but only traded. This trait allows valuations to inflate so long as the market is supported by global buyers, completely independently of local economic conditions.
During the recent civic election I was twice approached by people who reported that their homes were the only ones occupied on their block.”
…
“Yet Mark Carney’s sobering warning last summer seems to have fallen on deaf ears. To hear local developers, urbanists and planners discuss this issue, you would think our market is within the normal range, and people concerned about the speculative spree fueled by interest rates and global capital influx are alarmists and potentially xenophobic.” [Well put. – vreaa]
…
“The theory currently dominating the discourse on our housing market points to natural or systemic causes for our pricing: our limited land base pressured by in-migration. According to this view, the cure for this market is to build more housing—ie. condominiums.
Yet in-migration is occurring at historically normal rates and we didn’t grow mountains and a southern frontier overnight.”
…
“Conclusion: It is time to take off the rose-coloured glasses and face some hard truths. We need a thorough and rigorous analysis of our housing market, the causes of its extreme condition, the risks it poses for our long-term economic sustainability, and a study of the levers and mechanisms available to government to modulate those risks.”
…

Great article. As we’ve said before, Garossino is to be applauded for publicly articulating the ‘hard truths’.
We agree with Garossino’s analysis in many respects.
The hope that there are ‘levers and mechanisms’ to ‘modulate the risks’ the market imposes, is similar to the hope for a ‘soft landing’ after a speculative mania. Some tweaking could alter the flight path, but who is going to be stepping in to buy very overpriced RE that has started a downward price trajectory?
– vreaa
[hat-tip Makaya.]

—

ADDENDUM 6 Dec 2011 8:20am

This comment posted to Sandy Garossino’s site:

Sandy,

Many thanks for this thoughtful and eloquent article.
We’ve headlined, excerpted, and commented on it in our chronological archives.

You are one of the few public figures speaking out on these issues, and we commend you for that. To point out these truths is brave; the thoughts are deeply unpopular in many quarters. As a consequence, most local  discussion of these issues has been done ‘underground’, in anonymous online forums. Some individuals, such as Gord Goble and Peter Ladner, have spoken out publicly, and you are a welcome continuation of that move.

We agree with your concerns about the multitudinous deleterious consequences of the massive misallocation of resources that comes with a speculative mania in housing. The optimist in us wishes you well with your endeavours to alter policy for the better. The realist is concerned that the only path forward for the speculative mania is a crash.

Judging by historically valid underlying fundamentals such as incomes and rent levels, Vancouver RE market prices are 2 to 3 times fair value, perhaps even more.
You see the speculative mania for what it is, and you are suggesting we attempt to orchestrate a ‘soft landing’ (no mean feat, if it is possible at all).
That suggestion itself creates a massive dilemma:
Given that there is such a large difference between the market price of properties, and their fundamental values, who do we hope to be buying these properties at perhaps slightly reduced but still massively elevated prices in the coming years?
Wouldn’t any such buyers be risking financial suicide?
Isn’t the only credible resolution a marked drop in prices, and then a recovery from the rubble?
Aren’t band-aid solutions on the way down simply going to put even more locals at dire financial risk?

Keep up the good work,
vreaa
(vancouver real estate anecdote archivist)

“When your credit card is maxed out, you don’t go out and get another one and continue to accumulate debt at 18 per cent interest.”

“Households don’t operate like this and neither should countries. When your credit card is maxed out, you don’t go out and get another one and continue to accumulate debt at 18 per cent interest. Instead, you figure out a way to restrain your spending and you increase your payments to reduce your debt.”
– Finance Minister Jim Flaherty, Toronto, 25 Nov 2011

Canadian household debt is now >150% of disposable income, more than the US at the peak of their housing bubble. Our Minister of Finance speaks of austerity yet continues to support loose mortgage lending that encourages more and more Canadians to overextend themselves into more and more debt. – vreaa

Policies On Housing #6 – “Mayoral candidates Gregor Robertson and Suzanne Anton each said they would not put limits on foreign investment, which many observers believe is behind skyrocketing real estate prices in Vancouver.”

“At a public debate last week, both Robertson and NPA leader Suzanne Anton said neither would put limits on foreign investment, which many observers believe is behind skyrocketing real estate prices in Vancouver.”
– from Stephanie Ip, 24hours, 13 Nov 2011

—
[This post is not to be seen as a VREAA endorsement of any of the above positions. See ‘Policies On Housing’ – The Positions Of Local Entities On The Challenges Facing Vancouver Housing‘ for an introduction/rationale for this series.]

Policies On Housing #5 – Ellen Woodsworth, Cope City Council Candidate

1. What do you see as the main housing challenges facing Vancouver?
Homelessness and affordable housing is a chronic problem in our city. Many residents who wish to start a family and live in Vancouver are forced to move out of our city to find affordable housing. COPE is committed to creating a Vancouver where seniors, immigrants, youth and families are able to choose the communities they want to live in, build a family in and grow old in.

2. What measures do you propose to address those challenges?
Vancouver has been critically unaffordable for far too long. The lack of affordability is threatening families, seniors, immigrants and our local economy. COPE is committed to the following measure to address this issue:
• We will launch an “Affordability Crisis Commission” to determine the extent of the new crisis and recommend positive solutions to keep families, seniors, students, new immigrants and small businesses in our city.
• COPE will protect affordable housing by closing by-laws loopholes that allow affordable units to be replaced with high-end condo rentals
• COPE will set a target of creating 1000 affordable rental units in Vancouver every year. Real affordable housing, not high-end rental condos.
• Rent banks
• As a city councilor Ellen has voted to the 10 housing plan

3. What is your policy on housing densification?
New housing in Vancouver should be about the type of housing that is created and NOT the volume of housing or the number of units that are being constructed. However, it is important to built a wide range of housing to meet the range of housing needs in our city. Affordable housing should be the number one priority of housing densification projects in Vancouver because affordable housing will create a Vancouver where everyone can afford to live where they choose. As a Vancouver City Councillor, I supported the 10-year City of Vancouver Housing Plan.

4. Would you support policies that would lead to a drop in real estate values?
We live in a great city and a very desirable city. Seniors, immigrants, youth and families move to Vancouver because of the many opportunities that are available here. Directly building and maintaining a supply of affordable housing separate from market developments is going to promote affordability all over Vancouver and make our communities more inclusive. Housing will target specific groups like students, artists, families and seniors.

5. What is your own family’s housing situation?
We rented a row house for 32 years. It was recently sold and we are now looking for housing.

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[This post is not to be seen as a VREAA endorsement of any of the above positions. See ‘Policies On Housing’ – The Positions Of Local Entities On The Challenges Facing Vancouver Housing‘ for an introduction/rationale for this series.]

Policies On Housing #3b – Sandy Garossino, Independent Candidate for City Council

[We have previously featured Sandy Garossino’s interview with The Mainlander as part 3a of this series. Here follows her specific response to our questions. -ed.]

Thanks for getting in contact. Here follow Sandy’s responses to your questions regarding her position on housing policy.
This is an important issue for Sandy and we appreciate being able to share her thoughts with your readers.
Sincerely,
Sandy and team

1. What do you see as the main housing challenges facing Vancouver?
Battling homelessness is a constant challenge. My worry is that a housing crisis has now spread into what is termed in Hong Kong as the Sandwich Class—those with incomes above subsistence levels but below the wealth required to buy medium level property. Excessive buying of residential property for investment, rather than shelter purposes has driven housing prices to stratospheric levels relative to local median incomes. A housing crisis for the middle class stresses the entire system including our ability to house the homeless.
The larger context is the challenge that faces all global investors. Apart from labouring for wages, the way to make money is to build or invest in a business, buy stocks and bonds, or speculate on assets like real estate or gold.
In the current climate of global uncertainty, almost nothing in the world is matching Vancouver real estate for return on investment, security, and long term value. My concern is that our real estate market has morphed into a stock market, and human beings who need affordable homes are being forced out of competition.
Vancouver’s future rests on a healthy knowledge economy as well as small and medium sized businesses that will provide long-term employment. Both these sectors need young people and immigrants with good prospects and disposable incomes. Because housing prices have now detached from the local economy, we cannot offer a promising future to the very people we need to build it.

2. What measures do you propose to address those challenges?
The most important thing is to recognize that we have a problem and we must commit to solving it. We have to gather critical data, including clear information on the extent of non-resident purchasing of investment properties. We can then have an informed discussion about solutions such as incentivizing capital toward rental properties or investment in local businesses, taxing unoccupied properties at the business rate, or considering innovative zoning options. This is a sensitive issue and we need a made in Vancouver solution. Lets bring experts together to generate savvy solves that turns this into an opportunity for Vancouverites.

3. What is your policy on housing densification?
My mind is not made up on density. We must take care to add density of residences for human beings as opposed to density of investment units. A second priority is that density should be absorbed by the City on terms that meet neighbourhood objectives.
Adding density in an attempt to moderate housing prices is unlikely to work. We have to look at the demand side. That said, there are many positive benefits of the right kind of density and I am open to those.

4. Would you support policies that would lead to a drop in real estate values?
This is a time for great care in policy development.
We may well be in a real estate bubble and a sharp drop in values for other reasons is not out of the question, regardless of government policies. However, government’s role should be to modulate severe market swings and not precipitate them. Shocking the market has potential to wreak havoc on households, especially those who may be over-leveraged or recent buyers.
I think we can be more surgical in our responses. Finding solutions that look at targeting specific real estate practices can help solve some of these problems while also encouraging investment in other asset classes.

5. What is your own family’s housing situation?
I have been a homeowner for 24 years. My first house was purchased in 1987 in Point Grey for $125,000, with parents and in-laws supplementing our down payment. The opportunities that created such security for our generation have vanished and it is vital that we stand up now for young people and families.
As a homeowner, I understand the concerns of Vancouverites about possible drops in real estate values and the risks associated with broad, generic approaches to housing policies. We need to find specific, pragmatic solutions tailored to the Vancouver market.

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[This post is not to be seen as a VREAA endorsement of any of the above positions. See ‘Policies On Housing’ – The Positions Of Local Entities On The Challenges Facing Vancouver Housing’ for an introduction/rationale for this series.]

Policies On Housing #4 – Tim Louis, COPE City Council Candidate

My answers to your questions are below. Please let me know if you have any additional questions or concerns.
Best,
Tim

1. What do you see as the main housing challenges facing Vancouver?
Affordability. The average person is no longer able to afford the purchase of an apartment or a house. Even worse is the situation for people who are homeless.

2. What measures do you propose to address those challenges?
If elected I will propose the creation of a blue-ribbon committee to determine whether or not Vancouver taxpayers are getting good value for money from Vancouver City Council’s property endowment fund. This fund is worth over 1 billion dollars. I believe that the City of Vancouver could be using it to build social housing at no cost to the taxpayer.

3. What is your policy on housing densification?
As my mentor the late Councillor Harry Rankin said, “If it was not for development we would all be living in caves.” For me the question is not for or against development, but development for who — development for the benefit of the developer, or development for the benefit of the people who will live in it and for the benefit of the neighbourhood around it. I would like to see City Council empower neighbourhood councils to make all rezoning decisions that are above a certain size. I am not opposed to higher densification per se. It is the negatives that come with higher densification that I am concerned about, in particular, traffic congestion. We need to look at ways to allow developers to build car-free accommodation.

4. Would you support policies that would lead to a drop in real estate values?
People who already own homes would be unfairly hurt by a policy that would lead to a drop in real-estate values. If the current homeowner has taken out a mortgage for say 90% of the worth of their home, and values then drop by 10%, the homeowner has lost 100% of her or his equity. I am strongly supportive of policies that would bring new housing to market at below market cost.

5. What is your own family’s housing situation?
I am very fortunate. My partner Penny and I purchased our home in 1988. It came with some wonderful tenants for whom we have not raised the rent once since 1988.

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[This post is not to be seen as a VREAA endorsement of any of the above positions. See ‘Policies On Housing’ – The Positions Of Local Entities On The Challenges Facing Vancouver Housing’ for an introduction/rationale for this series.]

Peddling Influence In Municipal Government – Civic Politicians and Vancouver’s RE Industry

In March 2011 we calculated that Christy Clark received more than 50% of her campaign funds for the race for the leadership of the BC Liberal Party from RE-related industry.

Now, at the Municipal level:

“In this case, the money speaks a lot. If you look across the range of contributions and you try to group them broadly, the property development and construction business is the largest collective group of contributors.” – Patrick Smith, political science professor, SFU
– from ‘Running Against Developers in Condolandia’, Ben Christopher, The Tyee, 9 Nov 2011
[hat-tip ‘Jeff Murdock’]

“It’s clear that Vision Vancouver and NPA received a lot of funding from development companies during the last election.” – Nicole Benson, Candidate, Neighbourhoods for a Sustainable Vancouver (NSV)
– The Tyee, 9 Nov 2011

“Both main parties are completely beholden to real estate developers, more so than any time in the city’s history. This isn’t good and I have to wonder just how much monied backslapping and handshaking is going on. This is how the BC Liberal Party imploded, by allowing their donors and top, most accommodative friends unfettered access to the keys of the province: No door was off-limits, no industry remained unmolested–friends and insiders ravished them all.
Well, look for Vision’s attempts to destroy the viaducts to be one such example. The developers with the most to gain are Vision’s biggest corporate cheque writers…that’s if you don’t count the American money of unknown origin, pouring in from the radical, left-wing Tides Foundation.
And this isn’t an issue for the NPA to raise? Of course it is, but they can’t, seeing as though the same monsters, who buy favour, are writing them cheques as well.”
– Alex Tsakumis, on his blog ‘Rebel With a Clause’, 7 Nov 2011
[hat-tip ‘Nemesis’]

“Vision’s executive director, Ian Baillie, insists that there is no quid pro quo relationship between campaign donors to his party and the candidates they support.”
– The Tyee, 9 Nov 2011
[Don’t you love it when these guys say this with a straight face?
Why would companies possibly give money to politicians if they didn’t want to curry favour?
What else could possibly be on their minds?
– vreaa]