In Case You Thought Our Bubble Was Due To Special Local Factors…

“Johan and Alejandra are the kind of Swedes the IMF has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
“I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years.”
– from ‘Swedish household debt soars as poll nears’, CNBC, 24 Aug 2014

“In the capital the latest full-year figures show that the average wage is £39,920, while the average house price is about £400,000.
Prices are therefore 10 times greater than wages.
But in South Buckinghamshire, in towns like Amersham and Beaconsfield, the average home is worth 20 times as much as the annual local salary.
Outside the South East, the place where houses are least affordable is the Cotswolds, where they cost 19 times wages.
The countryside may be scenic, but that is little compensation when the average worker, putting a third of his or her salary into a mortgage, would need over 60 years to pay it off.” …
“”I shall be disappointed if I only get £550,000 for it,” says Mike Golding, as he shows me into a two-bedroom, first-floor flat he is selling. It has no garden, few proper windows, and no view to speak of.
But such prices are not excessive in Stow on the Wold, a pretty market town in the Cotswolds, where the undersupply of affordable housing is matched only by the oversupply of Barbour jackets, local organic brie and bow-windowed tea shops.
One such tea shop is run by Anna Wright and her mother.
She and her boyfriend have been looking for a house to buy, but, faced with prices like the above, they have given up looking in Stow.
“We have been priced out of the market,” she says.
“You are privileged to grow up in the Cotswolds, but there’s never an expectation of buying a house here,” she tells me.
A few doors down, 21-year-old shop worker Nicola O’Driscoll is in the same position.
She has been forced to look for a flat in Cheltenham, no less than 18 miles away.
“It’s really unfair. I feel like they don’t want youngsters to live around here. Because there’s no way they can,” she says.
– from ‘The 62 areas where houses are less affordable than London’, BBC, 18 Aug 2014

Too-cheap money has caused many speculative bubbles in housing, and perverted the relationship between income and housing prices. – vreaa

‘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

Enter Inflation, Stage Right

The Bank of Canada came under pressure on Friday to stop fretting about low inflation after unexpectedly sharp price gains pushed the rate above the central bank’s target, making it more likely the next move in interest rates will be higher.

Statistics Canada reported the annual inflation rate hit a 27-month high of 2.3 percent in May from 2.0 percent in April. Core inflation, which excludes some volatile items like gasoline, rose to 1.7 percent, the highest since July 2012, from 1.4 percent in April.

As recently as last week, Bank of Canada Governor Stephen Poloz had said the underlying rate of inflation, which he pegged at 1.2 percent, was so low it “leaves us vulnerable to a downside shock at any time.” —

“The low-inflation ship has sailed in Canada, and I think the Bank of Canada pretty much has to change their rhetoric as of the next meeting,” said Bank of Montreal chief economist Doug Porter.

Poloz said the central bank’s policy stance was neutral, specifying that rates could just as easily fall as they could rise, using dovish language that has kept a lid on rate hike expectations and the currency.

Still, yields on overnight index swaps show rate cut expectations have largely faded.

And even before Friday’s data economists were unanimous that the next rate would be a hike. —

“We are still of the view that any moves on rates are not likely until 2015, but certainly there is now a higher probability of hikes coming sooner rather than later,” said Royal Bank of Canada assistant chief economist Paul Ferley.

– Reuters, 20 Jun 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

“I personally know of a friend who was offered the moon from the bank to buy a home in October. This month the same bank is reconsidering the mortgage. Nothing has changed for my friend’s finances.”

“Sadly, I’ve been hearing lots of stories of financing falling through. Banks have done a 360 degree turnaround. They are still lending, but on their terms. Not so attractive terms. I personally know of a friend who was offered the moon from the bank to buy a home in October. This month the same bank is reconsidering the mortgage. Nothing has changed for my friend’s finances.”
– enlightened at VREAA 16 Dec 2013 3:36am

BC Realtors Predict ‘Unsexy’ Market – “Over the next year or so we expect price changes to hover around zero”; “Price increases of the last decade are long gone”

Announcer: “There hasn’t been a crash, thankfully, but Ottawa, and the Bank of Canada, are desperate to raise interest rates once the economy improves. Economists are expecting rates to start inching upwards by late 2014, meaning that the price increases of the last decade are long gone.”

Cameron Muir, BC Real Estate Association economist: “We expect the market in Vancouver is going to be unsexy over the next year or so… uh, uh, long term trend sales activity… prices… probably pretty flat, we expect prices to stay.. hover around zero… percent or two on [inaudible] side.. depending on what community or neighbourhood you’re in.”

– from Global News 19th or 20th Dec 2012 [video archived by GreenhornRET; hat-tip El Ninja]
—

Next year will likely see the first very clear declaration of substantial price weakness in Vancouver RE.
Yes, we’ve already seen some price drops, but the numbers are not very remarkable (1%, 4%, 7%), and have been easily hidden in reporting. They certainly haven’t yet pervaded group consciousness.
Realtor association predictions tend to (1) extrapolate recent activity and (2) err on the side of optimism. These calls for a flat market are precisely that, and we are close to certain that they will be proven wrong.
It is noteworthy that even Global sees enough evidence to state plainly “the price increases of the last decade are long gone”.
—
I’d submit that the use of the word ‘unsexy’ is likely an unconscious attempt at delivering a sobering idea in a playful fashion, in the hope that it makes it somehow more palatable.
—
As an aside, consider these reports from the perspective of our recently discussed (mythical) ‘Discretionary Seller’. If you had already decided that you’d like to sell, and either had your property on the market, or had taken it off awaiting a strong spring, how would you feel about these predictions? What would you tend to want to now do? Those who reply: “Put another log on the fire and wait for a strong market (in 2014? 2015?)”, back of the class.
—
– 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

Household Debt Growing Larger At A Slower Pace

He knows

“There are some signs that accumulation of household debt is slowing… So the pace is slowing, it’s still accumulating… and that some adjustment appears to be under way in the housing market. This requires continued vigilance by all parties and we intend to play our part in that.”
– Bank of Canada Governor Mark Carney, 30 Oct 2012, in response to a question from a member of the House of Commons Standing Committee on Finance (Reuters)

Ever had that experience in a station where a train passing yours makes you feel like you’re going backwards, even though you aren’t?
Me neither, but I’ve heard it happens.
Household debt expansion and spending is still growing, but the slowing pace sure feels like it’s stopped all together, or even reversing, doesn’t it? And when household debt load actually stops expanding (or, the mind boggles, starts shrinking) our economy is going to feel like it’s running backwards at significant speed.
– vreaa

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

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

And from the comment section below that article:

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

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

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

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

—

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

S&P Downgrade Outlook On Canadian Banks – “A prolonged run-up in housing prices and consumer indebtedness is contributing to growing imbalances, applying negative pressure on economic risk for banks.”

Ratings agency Standard & Poor’s has revised its outlook downwards on seven Canadian financial institutions, citing high housing prices and consumer debt.
…
“A prolonged run-up in housing prices and consumer indebtedness in Canada is in our view contributing to growing imbalances and Canada’s vulnerability to the generally weak global economy, applying negative pressure on economic risk for banks,” the rating agency stated in its decision. “Growing pressure on banks’ risk appetites and profitability arising from competition for loan and deposit market share could also lead to a deterioration in our view of industry risk.”
…
House prices have roughly doubled over the past decade while, relative to GDP, consumer debt has risen from about 70 per cent to more than 90 per cent, S&P pointed out. And it suggested that Ottawa’s actions have not done enough to stem what could be a significant problem for the economy. “Successive government efforts since 2008 to counteract the stimulative effect of low interest rates on consumer borrowing and home prices have done less than we expected to counteract the growing level of consumer leverage and housing market risk in Canada,” S&P said. The agency is now watching to see if the most recent moves that the government has made will have better results.
…
– from ‘S&P cuts outlook on 7 Canadian banks’, G&M, 27 Jul 2012

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

Novel perspective – “Months of rent at risk with a 1% change in interest rate.”

“This is how I could argue for current price-rent being reasonable (see chart above). Sure you’re back to valuation of 2000-2002, but recent prices were briefly 100% overvalued, then okay again. That time they were fixed by lower yields and credit spreads as well as slightly higher inflation. Next time price might be the adjustment mechanism. How can you go from reasonable value to 2X overvalued in a heartbeat? Answer: a lot of interest rate risk.”

“This is why I still think it’s bad risk/return. Months’ “rent” at risk with 1% change in “interest rate”. No wonder people are selling their basements.”

– charts and analysis by Zerodown, 14 May 2012
[Many thanks, Zerodown. -ed.]

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

Ben Rabidoux at Macleans – “Those who try to explain real estate prices in Canada without acknowledging the role of easy, accessible credit over the past ten years or so have completely missed the boat.”

“The next decade for real estate in Canada will be fundamentally different than the last. Our aging population, a mismatch between where our prices are and where they should be based on our economic performance, and rising interest rates are all reasons for this. However, the greatest difference will be in the availability of credit going forward, and those who try to explain real estate prices in Canada without acknowledging the role of easy, accessible credit over the past ten years or so have completely missed the boat.”

“Despite three rounds of mortgage rule changes since 2008 that largely corrected previous mistakes, we’ve seen a decade of extraordinarily loose lending in Canada. But the era of cheap credit may soon end–and possibly quite abruptly. News has come from Canada Mortgage and Housing Corporation and the Office of the Superintendent of Financial Institutions Canada, Canada’s chief financial regulator, that major changes are on the way, and it’s hard to understate how significant they may prove to be.”

[Ben then elaborates on] the three changes:
1) CMHC will drastically draw down on mortgage insurance.
2) OSFI targets HELOCs and conventional mortgages.
3) “Increased oversight of CMHC” coming.

– Ben Rabidoux of The Economic Analyst, now also an analyst at M Hanson Advisors, at Macleans.ca, 23 Apr 2012
—

A brief, ‘must read’ article.
Significant for it’s appearance at Macleans.
Thanks Ben.
We are in complete agreement that far and away the major force driving our speculative mania in housing has been cheap credit.
– vreaa

Banks Back-Off; Others Accept The Risk – “I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble. Economists predicting a collapse in Canada have been wrong for years; my prediction is that they’re going to be permanently wrong.”

Banks are paring back loans to below prime borrowers amid signs that housing prices are starting to fall. The Canadian Real Estate Association said April 16 that prices in Canada dropped 1.7% in March from the previous month, led by a 3.1% decline in Vancouver. Finance Minister Jim Flaherty said he’s “encouraged” by signs of a housing correction in Vancouver, preferring the market to “correct itself” without government intervention.

Toronto-Dominion Bank, the country’s second-largest lender, stopped originating non-prime residential mortgages as of March 31, spokesman Mohammed Nakhooda said. …
“This decision was based on a number of factors, including a regular review of our secured lending risk management strategies,” Nakhooda said. “To remain competitive in the business in the current environment would require us to increase our risk profile, something we concluded was no longer in our risk appetite.”

Canadian Imperial Bank of Commerce, the country’s fifth- largest bank, said in March it was considering the sale of its FirstLine Mortgages broker. …
Increased risk management has led some banks to reject loans, Reid said.
“Two years ago, they wouldn’t have turned that deal down,” said Reid, 52.
…
An influx of non-prime lending will benefit Home Capital, Chairman and Chief Executive Officer Gerald Soloway said. The company is expected to earn $1.50 a share before one-time items in the first quarter, up from $1.24 a share a year earlier, according to the average estimate of six analysts surveyed by Bloomberg News.
“We have had a very good first quarter,” said Soloway, who has been CEO for 25 years. “There’s not going to be any surprises, up or down.”
…
“There is an opportunity for the company to increase its market share without lowering its standards for credit quality,” said Bryan Brown, an analyst at Macquarie Capital Markets in Toronto. He rates Home Capital shares neutral.
…
“I don’t think there is any sign anywhere from people on the ground in Canada that foresees the bubble,” said Soloway. Economists predicting a collapse in Canada “have been wrong for years; my prediction is that they’re going to be permanently wrong.”
…
– from ‘Canada’s big banks flee nonprime market amid signs of housing downturn’, Bloomberg via FP, 20 Apr 2012
[hat-tip Deuces]
—

There never was sub-prime lending, but now we’re stopping it.
Worthy of a Cold-War memorandum.
Also, Home Capital will get BBQ’ed.
– vreaa

“Downtown condo sales are down dramatically. I can’t see buyers becoming more motivated because mortgage rates are already super-low. Sellers don’t really want to sell, because if they bought in the last two years they’re going to take a loss. If this continues, it’s going to impact prices. Only time will tell.”

“Downtown condo sales are down dramatically [YOY]… 23.5%… In 2011 Jan-Feb-March, we had 808 sales; in 2012 Jan-Feb-March, we have 619 sales. We used to have about 11.5 sales per day, now we have 8.5 sales per day… big changes.
But the pricing, as far as condo sales is concerned, hasn’t changed all that much…
Our listing counts are only up 5%; not a big deal right there…
But it goes to show you that people are not really motivated to buy right now…
And it goes to show you that sellers aren’t willing to drop their prices, and they’re not motivated to sell right now..
So, it’s a bit of a stand-off.. only time will tell if this is going to impact pricing… if people come more motivated to buy, or more motivated to sell… but as far as things are concerned right now, it just means activity is down…
Eventually, if this continues, it’s going to impact prices… and I can’t see it going up anytime soon… I can’t see buyers becoming more motivated because mortgage rates are already super-low… and sellers don’t really want to sell all that much, because if they bought in the last two years and they have to sell now they’re going to take a loss. So, it’ll be very interesting to see what happens in the next quarter.”
– Ian Watt, self-posted youtube video ‘Downtown Vancouver Condo Sales Down Almost 25% in 2012’, 9 Apr 2012

Nicely put (and, again, the gritty back-alley B&W production values are much appreciated).
This is exactly what’s going on across almost all property types and city regions at present.
Sales down; Inventory higher; Prices little changed.
A Vancouver stand-off.
Perhaps of particular interest to readers here is Watt’s observation that “I can’t see buyers becoming more motivated because mortgage rates are already super-low”. This adds some credence to suggestions (our own included) that the rate of change of interest rates is more important than the absolute rates themselves, and that limits can be reached even at very low rates.
– vreaa

“I’m in my mid-late twenties and I would love to buy a house but I just don’t have the money. My elders tell me I can buy a house with little to no downpayment at all. Terrible advice.”

“I’m in my mid-late twenties and I would love to buy a house now but I just don’t have the money. I work full-time and make a reasonable wage for not having any dependents but it is very difficult to save a a $20,000 downpayment. My elders tell me I can buy a house with little to no downpayment at all. Terrible advice. My rent is still slightly less than a mortgage payment (with utilities included). All I can do at this point is keep feeding my RRSP.”
– tiredofsex in the comment section at the Globe and Mail 5 Apr 2012

A 20-something who is perhaps wiser than their ‘elders’.
– vreaa

Mortgage Broker – “The government has done plenty to put the brakes on the Vancouver market. It is quite difficult to qualify people for mortgages even for the amount of house they need.”

“The article makes reference to our situation paralleling the US situation, and that is also utter nonsense in so many ways that I wouldn’t even start to get into them all. We do not offer loans at 100%+ LTV, we do not offer teaser loans to subprime clients and qualify them on the teaser rates, and we do not offer NINJNA (no income, no job, no assets) mortgages. As it is, in the Vancouver market, it is quite difficult to qualify people for mortgages even for the amount of house they need. The government has done plenty to put the brakes on the Vancouver market as it is. The harder the government makes it to lend money, the more that the market tilts in favor of the wealthy and the more difficult it will be for average and lower income earners to get ahead. That is a much greater thing to fear for the future.
I have said this many times, but the lending that really needs more regulation is the credit card and unsecured lending industries. What regulation have they been scrutinized under other than a regulation that requires them to disclose how long it takes to pay off a credit card bill with minimum payments? It is that ability to spend money so easily at such high interest rates that is really hurting people. However, the housing market is the one that gets constantly attacked. “Pay no attention to that man behind the curtain.”
I live and work in the highest priced market in Canada, and this is where it is hardest for people to buy. In most of Canada, housing is SO much more affordable than here. Most of the country has nothing at all to worry about.”
– Jeff Evans, Richmond mortgage broker, posting as ‘Jeff’ at greaterfool.ca 28 Mar 2012 9:01pm

“I have been enjoying all the radio, TV and print ads from the major banks telling everyone about 2.99% for 4 years as if they are offering you something special. I do have that available with other lenders as well, but I have something even better… 2.89% for 4 years! That is better than the banks are offering!
Contact me today and we can get you locked in for this special offer.”
– Jeff Evans at his site bc-mortgage-brokers.ca, 20 Mar 2012

What do you call a mortgage that starts at a 2.89% rate and then, after 4 short years, resets to a rate that is perhaps substantially more than that?
“Teaser”, perhaps?
– vreaa

Slew Of Mainstream Press Articles About Canadian RE

‘Housing a ‘balloon’ not a bubble: economist’
BNN.ca 11 Jan 2012
“Sal Guatieri, Senior Economist at BMO Capital Markets, tells BNN that housing is not in a bubble, but rather a “balloon.”
“In a balloon the air can seep out slowly, it doesn’t necessarily need to burst unless something comes along to prick the balloon,” he says. “That something could of course be a recession or a loss of incomes or job…or a big spike in interest rates that worsens affordability, but we don’t see that happening.”…
Guatieri says that while home valuations are “excessively high” in Vancouver and “somewhat high” in the Greater Toronto are, he doesn’t expect a major implosion in home prices.
“We think Canada’s housing market will fizzle out rather than flame out,” he says. “It will indeed soften, there’s no doubt it will because household debts are relatively high — there’s only so much more rapid mortgage growth that can be sustained in Canada’s housing market and economy.”
CIBC chief executive officer Gerry McCaughey told bankers at a gathering that the housing sector may have peaked and will begin to soften.
RBC CEO Gordon Nixon and Bank of Montreal CEO Bill Downe also expressed concern about housing prices, saying the next few years could see a pullback.
Many economists say the condo market is particularly vulnerable if there is a pullback in home prices, but Bank of America Merrill Lynch Canada economist Sheryl King says predicting an isolated fall in home prices is risky.
“I don’t think that anybody would want to say with the lessons that we learned with the United States that you can isolate a particular sector or a particular part of the market and say everybody else is going to be protected,” she says. “There’s a lot of exuberance in this market right now, there are increasing signs of speculation…this is a market that is red hot and you have to be a little cautious right now,” she adds.

‘More gains in home prices expected’
Vancouver Sun, 12 Jan 2012
Canada’s housing market will continue to be strong this year, with rising property values expected in all major markets, real estate brokerage firm Royal LePage said Thursday.
The company’s forecast called for prices across to country to rise 2.8 per cent by the end of 2012, after stronger gains last year. …
“Widespread calls for a major real estate correction in 2012 simply can’t be justified,” Royal LePage CEO Phil Soper said in a statement. “The industry has significant momentum entering the year, and buoyed by the stimulative effect of very low interest rates, we expect the market to continue to expand — albeit at a slower pace.”
The Canada Mortgage and Housing Corp. has forecast the average price of a listed homes for resale to be $363,900 this year, up 1.2 per cent from 2011. The Canadian Real Estate Association predicted that the average price would be relatively flat at $362,700. Both forecasts were made in November.
Royal LePage said even pricey housing markets in Vancouver and Toronto — where standard two-storey homes averaged $1.1 million and $629,188, respectively, in the last quarter — will see continued price appreciation in 2012.

Bill Good Show, CKNW Radio
calguy via e-mail to vreaa, 12 Jan 2012
“Just listened to Cameron Muir [chief economist of the B.C. Real Estate Association] on the ‘Bill Good [radio] show’. He says the market will be flat …except for the premium pockets.
Interesting he says the influx from China is a big factor, especially in areas like Dunbar etc, and West Vancouver. He says they are bringing lots of cash but
also taking loans out. He basically admitted that young people have to look at a condo in order to buy a place.”

‘Mark Carney’s low-for-long rates yielding more houses than machines’
Vancouver Sun/Bloomberg, 18 Jan 2012
Bank of Canada Governor Mark Carney’s 1 per cent interest rate has fostered the opposite of what he has said the country needs to be competitive — record borrowing by consumers, while companies pare debt ratios to the lowest in decades. …
“For the bank to be exhorting businesses to go out there and spend at a time when the bank itself admits the global environment is quite uncertain, I think it’s being a bit disingenuous,” said Mark Chandler, head of fixed-income strategy at Royal Bank’s Capital Markets unit in Toronto.

‘Chinese cash buyers may be about to spice up choice neighbourhood real estate market’
The Province, 19 Jan 2012
Will the story of 2012 in real estate-mad Vancouver be a “not very sexy” period of moderation, or another surge of cash-in-hand transactions in the “micromarkets” favoured by Chinese investors?
For answers we interviewed Cameron Muir, chief economist of the B.C. Real Estate Association, and Julia Lau, Chinese real estate specialist at Sotheby’s International Realty Canada.

‘Year of Dragon heats B.C. real estate market’
CBC, 25 Jan 2012
“Real estate agents in and around Vancouver are expecting big things this week, thanks to the Lunar New Year, which is typically a great time for sales.
Real estate agent Malcolm Hasman showed four Chinese families through a $7.8 million mansion in West Vancouver on Tuesday. The home has panoramic views, two kitchens and even a heated driveway.”

UBC Prof. Duanduan Li says the Year of the Dragon is auspicious for big changes, including big purchases. (CBC)

‘Household borrowing surge driven by most indebted’
CBC, 26 Jan 2012
“The debt-to-gross income ratio of those most indebted families is 160 per cent. The proportion of the most indebted families is greater in British Columbia, Alberta and Ontario where housing is the most expensive.”

‘Pending housing bubble spells trouble for Canada, experts say’
Financial Post, 26 Jan 2012
“Patti Croft, recently retired from being chief economist for RBC Global Asset Management, cited the risk of a housing bubble as among Canada’s biggest issues. Part of the problem, she said, is exceptionally low mortgage rates, due to the Bank of Canada’s low interest rate of one per cent — a level intended to support the economy. “Historically, after a long period of low interest rates, what lies ahead is some kind of speculative excess,” she said.

[hat-tips to Makaya, calguy, E.G., others for pointing out these articles. -ed.]

The above only a small sample of the large wave of RE related articles in national and local MSM over the last few weeks. – vreaa

“When I asked him what is he going to do when they raise the rate, he said “I am just gonna sell the place, and I will get the money back anyway.”

“One of my younger colleagues can barely keeps up with his mortgage at 3.85%.
When I asked him what is he going to do when they raise the rate, he said “I am just gonna sell the place, and I will get the money back anyway”.
This make me think, how many Canadian homeowners have this idea in mind? And when this actually happens, what would be the magnitude of listing waves?”
– azenis at RETalks 15 Dec 2011 6:26pm

“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

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

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

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

“Canada’s recent economic performance has benefited greatly from a booming housing market, which has driven house prices, residential investment and construction employment to elevated levels. We see little hope of it rising much further.”

Excerpts from ‘Canada’s house of cards?’, BNN.ca, 28 Oct 2011 –
“Homeowner’s continue to hear a chorus of admonishments from the Department of Finance, the Bank of Canada and OSFI that these low interest rates will not be around forever,” Bank of America Merrill Lynch economist Sheryl King said in a recent note to clients. “However, we think the stronger signal households are receiving is from policy rates, which have held steady at 1.0 percent for 13-months now.”
King says roughly two out of three mortgages underwritten this year have been for a variable rate term, compared to a typical 25 to 30 percent share. …
“Over the past decade or more, rolling a variable rate mortgage from month-to-month has consistently been less expensive than a fixed mortgage rate. In essence, a generation of homeowners has experienced nothing but declining rates and lower monthly interest payments,” she says.
“This expectation will be hard to change. … The U.S. homeowner was lured down a very similar path by the Federal Reserve at the turn of the century.” …
“Canada’s recent economic performance has benefited greatly from a booming housing market, which has driven house prices, residential investment and construction employment to elevated levels, from which we see little hope of it rising much further. There is the strong likelihood of a housing market correction at some point in the not-too-distant future, which we believe would involve an outright decline in housing investment.”

Agree on all counts. -ed.

Macleans on the Futility of Prudence – “My fear is that most people in Canada are now debtors and not savers, and so governments will enact policies to help them because they make up most of the population. Savers may get screwed on the way down, too.”

“Steven Patterson and his family moved to Vancouver from Cambridge, Ont., in mid-2008, just as the financial crisis hit. After years of scrimping and saving to pay off their first mortgage, they had earned a tidy profit when they sold the Cambridge house and put the proceeds into GICs, where the money would be safe and easily accessible should they decide to buy another home in B.C. Three years later, Patterson, a 42-year-old IT manager, is still sitting on the sidelines, renting, while real estate prices march ever upward in a city where a three-bedroom bungalow covered in warped siding can fetch $1 million.
That might seem like a prudent move in an uncertain economy, but Patterson says his cautious approach has come at a steep price: all his money is steadily being eaten away by inflation, which the meagre interest income from his GICs can’t cover — particularly after the taxman takes a cut. Meanwhile, several of Patterson’s friends have taken advantage of those same low interest rates, loaded up on debt, and bought into Vancouver’s frothy housing market in recent years. And they have enjoyed a windfall—at least on paper—as the value of their homes continues to climb. As for Patterson, “I’m only a few thousand dollars ahead—minus inflation,” he says, clearly frustrated. “So actually, I’m way behind, and I don’t have a house.”
Welcome to the world of ultra-low interest rates, where profligacy is richly rewarded and saving is, well, for suckers. Those who’ve opted to be austere with their personal finances have found themselves on the losing end as governments and central bankers have worked to get people to borrow and spend in the wake of the global recession. While emergency interest rate cuts were to be expected after the financial crisis seized up lending markets, it’s been nearly four years since central banks started slashing rates to the lowest levels in history.
—
As a result, those saving money have seen almost nothing in the way of returns for a painfully long time. In fact, after accounting for inflation, anyone who dares to be prudent risks seeing the value of their money decline. If one were to put $10,000 into a five-year GIC at two per cent this year, and assume headline inflation goes no higher than the current rate of 2.7 per cent, the future value of that investment in 2016 will have shrunk to around $9,670.
For seniors and others living on fixed incomes in particular, low rates threaten to wipe out their savings. Yet it’s also depressing for those in the second half of their careers who don’t have an appetite for risk but feel they now have no other choice. “People in their 50s are worried about what they’re going to retire on,” says Susan Eng, vice-president of advocacy at CARP, which works on behalf of aging Canadians. Between the carnage in stock markets and the collapse of interest rates, “there’s a huge amount of anxiety. You’re asking for a lot of trouble with this situation.”
—
Some will argue people like Patterson are simply bitter because they didn’t buy into Vancouver’s soaring housing market. And yes, those who take risks should enjoy the potential for greater rewards. That principle is at the heart of capitalism. Only, in the current environment where central banks have pushed down interest rates to abnormally low levels, and government policies encourage consumption over thrift, the dynamics of risk and reward have been severely distorted.
This isn’t how it’s supposed to work. From the moment children are given their first penny, it’s driven into us that saving is a virtue and the path to financial security starts with that ceramic piggy bank on the dresser. Only now, with policy-makers in a desperate race to reignite economic growth, all that has been turned on its head. Yes, Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have repeatedly warned Canadians not to take on too much debt, but their policies, and those of their colleagues in countries like the United States and Great Britain, have had the opposite effect, encouraging people to buy homes, cars, flat-screen TVs or take a plunge into volatile stock markets—anything, that is, but save.
—
“We’ve got ourselves into a position where debt and spending seem to be highly valued, but saving, which is prudent and helps people plan for their futures, seems to be almost looked down upon,” says Simon Rose, who works with Save Our Savers, a British organization that’s taken up the fight for downtrodden penny counters. “It’s unfair that the problems of the economy should be disproportionately shouldered by savers rather than those with a tendency to borrow too much and get into trouble.” No one is saying Canadians should abandon thrift and go on a wild spree of gluttonous consumption. Indeed, Ottawa has set up tax-free savings accounts to encourage people to save. But the competing priority of spurring economic activity means the interests of savers have taken a back seat and made it that much harder to act responsibly. What’s more, while central bankers have undone basic thinking about saving in the name of juicing the economy, a growing chorus of critics claim that strategy has not only failed to turn things around, but the dogged pursuit of low rates might be weakening the recovery
—
Sometimes Lee Tunstall wonders why she bothers saving at all. A child of parents who grew up during the Second World War and instilled in her the importance of living within her means, Tunstall, a consultant in Calgary, has rented the same apartment for 17 years and dutifully contributes to her conservatively managed RSP account. Yet all around her, friends have piled on huge mortgages and run up towering lines of credit debts in the past few years to buy homes and new Bimmers for the driveway. “If you are a saver you’re absolutely losing money to inflation, and if you go into the markets you’re losing money there too, so why bother?” she says. “Sometimes I think, ‘Why don’t I just join the herd and do what everybody else is doing, buy the toys and live it up like everybody else?’ ”
Tunstall would have plenty of company were she to give up her frugal ways. Gone are the days when Canada was a nation of savers. In 1980, the personal saving rate peaked at above 20 per cent and was still around 13 per cent in 1995. Today it stands at just 4.1 per cent. At the same time, over the last decade Canadians have increasingly relied on debt to maintain their lifestyles. The average household now owes $151 for every $100 of disposable income, a higher level than even American households reached in 2007 as the air rushed out of the U.S. housing bubble. This week, Moody’s, the credit-rating agency, said it is increasingly uneasy with the consumer debt mountain rising in Canada. “We are concerned that Canadians are relying on low interest rates to support high debt levels,” the agency said in a statement.
Much of that growth in debt has taken place since 2007, when the Bank of Canada cut its overnight rate from 4.5 per cent to a low of 0.25 per cent in 2009. The dramatic cuts, along with stimulus programs targeted at the real estate sector, revived house prices, which had begun to tumble. As of June, the Teranet-National Bank House Price index has nearly doubled over the last decade, while in markets like Vancouver, prices have soared a whopping 140 per cent. That shouldn’t have been a surprise; reckless behaviour gets a boost when government and central bank policies punish individuals for not taking part. But while the cuts were a boon to mortgage borrowers, they’ve sideswiped the saving crowd.
One way to measure the impact is to look at how much interest income is being lost as a result of low rates. Stephen Johnston, a Calgary money manager, estimates that with roughly $1.2 trillion on deposit at the banks and rates roughly three percentage points below their historical average, savers are losing out on $30 billion to $40 billion every year in interest income. He argues this amounts to a massive subsidy for the country’s banks, since the rate depositors are paid to part with their money is far less than what the banks can earn lending that money out to other people as mortgages. “Deposit rates now cost the banks nothing, but that’s not free,” he says. “Someone else is paying the price, and it’s little old ladies and people on fixed incomes who can least afford it.”
—
With Canada’s overnight rate at an almost-princely one per cent compared to the U.S., savers have at least had that going for them. Unfortunately, Canada’s economy shrank by 0.4 per cent in the second quarter, reviving calls for more rate cuts. At the very least, Carney now says the need for a rate hike has been “diminished.”
—
For its part, the Bank of Canada is in a difficult spot. If it leaves rates low indefinitely, there’s the very real risk more Canadians will decide saving is a suckers’ game and start to pile on debt. Yet when the bank eventually does raise rates, which it must, someday, over-indebted households could spark a fresh crisis. “Previous generations used to buy a house that was twice their household income, but now families are spending 10 to 12 times what they earn,” says David Trahair, a financial author whose new book, Crushing Debt: Why Canadians Should Drop Everything and Pay Off Debt, is due out in November. “The central banks are in a bind because they can’t increase interest rates or it will be extremely punitive to these people with mountains of variable rate debt.”
Whatever happens, Ritchie Hok, an actuary living in Ottawa, is convinced savers will ultimately wind up paying the price for others’ imprudence. At the peak of the U.S. housing bubble, Hok lived in Minneapolis and saw the excesses first-hand. While there he resisted those who urged him to get into the market; a wise move given prices are down 40 per cent there. Now that he’s in Ottawa, though, he’s hearing all the same arguments for why he should take advantage of low rates and buy a house before prices rise even further. He’s convinced Canada’s housing market is a bubble that will eventually burst, and when it does, policy-makers will rush to people’s rescue. “My fear is that most people in Canada are now debtors and not savers, and so governments will enact policies to help them because they make up most of the population,” he says. “Savers may get screwed on the way down, too.”
If Hok is right, the frugal few could be in for even more pain ahead. Why is it again that it pays to save?
– liberally excerpted from ‘What’s the use of saving money?’, Jason Kirby and Chris Sorensen, Macleans, September 27, 2011

As street-smart youngsters may say: “Word!”. -ed.

The Punished Prudent – “My financial adviser tells me that my wife and I are way ahead of the curve. But it’s hard not feel like a chump sometimes, watching people around me cash in on real estate.”

“I have $32k in a Canadian bond fund. We have combined $53k in RRSPs. We squirrel away $3200/month into savings each month – $1200 to an RRSP and $2000 into a TFSA. RRSP and TFSAs are all in a growth-oriented mutual fund. The TFSA and bond money is meant for a future down payment. Our dream is to one day have a small house on the East Side with 20% down without stretching ourselves too thin. When will we actually be able to buy this house? Who knows, but prices have to come down a lot.
My financial adviser tells me that my wife and I are “way ahead of the curve” when it comes to our financial futures and that we’ve learned lessons that people in their 60s are only learning now. That’s nice to hear but is no comfort to us when one of my peers sells his Richmond home and can now buy a house in Coquitlam and live mortgage-free with his stay-at-home wife and child. Or when another friend buys a nice little house in North Van and can drive to work in Vancouver in 25 minutes.
It’s hard not to feel like a chump sometimes living in somebody’s basement. I can’t bring myself to gamble on real-estate and watch people around me seemingly cash in on it. At the same time interest rates are kept abysmally low and the return on my down-payment money investments is peanuts.”
– anecdote from Vancouver quoted by Garth Turner at greaterfool.ca 16 Sep 2011

Are economists ignoring Australia’s property bubble? – “Many leading economists whose analysis and commentary the public relies upon have so many conflicts of interest it would fill a small book.”

I view of a related discussion on the ‘UBC housing’ thread yesterday, we note this timely Australian article today [from ‘Are economists ignoring Australia’s property bubble?’, Philip Soos, theconversation.edu.au, 20 Sep 2011].

Excerpts –

“One aspect of housing and stock market bubbles continually repeats: the vast majority of economists either miss or deny their existence.
In recent years, enormous asset bubbles have burst in many countries.”
—
“In Australia, our $2 trillion housing bubble has seen prices rise by 127% from 1996-2010, and every fundamental indicator is off the chart.
But while it seems logical to conclude that Australia’s property bubble will inevitably burst, very few observers seem willing to do so.”
—
“By definition, an asset bubble requires the vast majority of the public and economists to participate in the mass delusion that prices will endlessly rise.”
—
“Many leading economists whose analysis and commentary the public relies upon have so many conflicts of interest it would fill a small book. Consultancies, university chairs, endowments, six-figure salaries, and industry directorships comprise part of the package that ensures economic “thought leaders” within government, industry and universities speak the words pleasing to the rich.”

…and, one might add, in Vancouver, we’re ALL ‘rich’.
-vreaa

“More than one-in-three Canadians between the ages of 30 and 39 think today’s interest rates are about average or high. In reality, they are sitting at historic lows.”

“More than one-in-three Canadians between the ages of 30 and 39 think today’s interest rates are about average or high.  But in reality, they are sitting at historic lows. These younger homeowners may be taking on more debt than they will be able to afford if interest rates rise.”
– news1130.com, 12 Sep 2011, citing a survey from Manulife Bank of Canada
[hat-tip Patiently Waiting at vancouvercondo.info, and belated hat-tip to jack at VREAA]

Modest Ottawa Example – “I bought my house 18 years ago and paid $178,00 – now I am being told it it worth $375,000. This is crazy. My old job is only paying $3,000 a year more.”

“I bought my house 18 years ago and paid $178,000 – now I am being told it it worth $375,000. This is crazy. My wage has only gone up because I switched jobs. My old job is only paying $3,000 a year more. The only way I will realize a profit is if I sell and purchase a home outside the Ottawa market – hmm I still need to work. The house price is more driven by the cost of land so when we looked around for a smaller home – the price difference would only cover the cost of moving – no more. The only one who gained was the bank – we have paid them a lot of interest over the years.”
– DeborahS, comment at cbc.ca 12 Aug 2011 9:26am

This Ottawa example is extremely modest by Vancouver standards. That’s an annual compound growth rate of just 4.5%, but still more than twice the Canadian inflation rate over the same period (1993-2011 CPI averaged about 2%). -ed.

“Dull”, “Steady”, and “Flat” Canadian RE Markets? [Highly Unlikely]

“The realization that the Bank of Canada will not be raising interest rates in the coming months is working to remove any sense of urgency to front-load activity. At this point we do not see any catalyst that will change the current trend in any dramatic way.” – Benjamin Tal, Deputy Chief Economist, CIBC World markets, Reuters, 16 Aug 2011.
Tal also said the Canadian real estate market will be comparatively “dull” going forward [in interview on CBC Radio, 16 Aug 2011, 3:35pm.]

“We will probably have a couple of years of steady prices” – Victoria Real Estate Board president Dennis Fimrite, ‘Victoria housing tilts toward buyers’, Times Colonist, 3 Aug 2011

“CREA expects sales to fall less than one per cent in 2012 while prices will flatten next year.” – ‘Home sales to rise this year, says CREA’, Kim Covert, Financial Post, 16 August 2011

A speculative mania never ends with a flat, boring market; not even in Canada.
We suspect “Dull”, “Steady”, and “Flat” are hopeful terms being used by vested interest insiders who are seeing the first signs of coming weakness. – vreaa

“Money is so cheap to borrow and everyone else does it”

“I have nine friends, family, co-workers in the same boat. They used their principle residence as a bank machine to do renos, buy investment properties, travel, buy new cars. Everyone almost said the same thing: “Money is so cheap to borrow and everyone else does it”
– Patrick at VREAA 11 Aug 2011 4:14pm

Ontario – “I have 3 rentals that i own and a house that i live in and iam only 29 years old. How can you say its a risky investment i have so little risk i want to own even more.”

“I have 3 rentals that i own and a house that i live in and iam only 29 years old. all the house make me a positive cash inflow and have made my life very comfertable. How can you say its a risky investment i have so little risk i want to own even more and build a rental empire to last me till i decide to sell. Some areas are out of control like toronto or vancover but the rest is a great bang for your buck… maybe look at areas where it is good to buy a house like most of ontario.” – Dgreen, comment at Canadian Business 20 Jul 2011 2:49pm

[sic] -ed.

RBC – “The longer the BOC delays raising interest rates, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later.”

“The very source of Canada’s relative success during the worst of the credit crunch — a banking sector that kept on lending and households that kept on buying — could yet spell its undoing if newly enlarged household debt loads prove too onerous to bear.”
“There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders. The opposite is in fact true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later.”
Once the Bank of Canada raises its key lending rate from the current “astonishingly cheap” one per cent, rising costs of servicing mortgage and other debts will sap consumer spending. Housing prices will fall as lower-tier buyers are forced out of the market by diminished affordability.
– from the Financial Post 26 Jul 2011, quoting Eric Lascelles, chief economist for RBC Global Asset Management.

Completely correct, but also very old news. Many who are bearish Vancouver RE have for years been alarmed by exactly these concerns. – vreaa

Westside Owner – “I am grateful for what I have, I take care of my property and live frugally so I am able to pay mortgage and property tax. I am paying tax on an over-valued asset.”

notsellingyet at VREAA 25 June 2011 at 1:01 pm–
“In his movie, ‘Everything’s Gone Green,’ Douglas Coupland introduced a couple other means of livelihood in Vancouver–lottery scams and internet porn. Don’t know anybody involved in those ‘industries’ so not sure how much $$ those ‘jobs’ bring in. My husband and I bought a fixer-upper in westside Vancouver in 2000 (market still depressed) with down payment from our own savings and a gift from generous relatives. We diligently paid the mortgage over the years with hard-earned $$ from our respective white-collar jobs (medical research, computers). He passed away recently– I used his life insurance proceeds to gut the house and put in a rental basement suite. My total square footage increased 14.5%, while my property tax increased 33.3%, thanks to yearly tax increases, increase in my property assessment and property tax shifting (from business to residential properties) started by the NPA and continued by Gregor’s gov’t. In BC, property assessment values are based on market value (therefore influenced by skewed prices) and not replacement value. In this scenario, banks and municipal governments always win. Banks will keep enticing home owners with home equity loans they can’t afford based on unrealistically high property assessment values, and municipal gov’ts collect ever-increasing property taxes based on unsustainable, hyper-inflated market values. As far as I am concerned, market value is irrelevant as long as I don’t sell my house, but under the current property taxation system, I am paying for an over-valued asset which is clearly on paper only or, as poster DM has called it, ‘illusion of wealth.’
I am grateful for what I have, I take care of my property and live frugally so I am able to pay mortgage and property tax, but there may come a time when I may have to consider lottery scams — internet porn and drug peddling aren’t my thing. I also know I’ll keep buying goods via the internet (started during reno), and pick up from a relative’s place in WA state, or a mail receiving business in Blaine. I’ll bulk-buy to minimize cross-border travel. I hope as long as I am upfront with Canada Customs border agents, they’ll continue to wave me through without collecting sales taxes. Sorry, local businesses, I can’t support you much anymore–wanna join my future lottery ‘business?’
PS. The house across the street from mine has changed hands 2x in the last 18 months. A young family (from somewhere in the Far East, they did not venture out much) lived in it for approx 1 yr, then put the house up for sale in March this year. Sold in April, the house has been reno’d cosmetically since then, and will be back on the market soon. I’d like to see how much this one goes for.”

“The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis.”

From BBC 26 Jun 2011 –
“The Bank for International Settlements (BIS) has warned that low interest rates across the globe are a threat to world financial stability.
Central banks have cut interest rates in an attempt to boost growth after the 2008 financial crisis.
“The prolonged period of very low interest rates entails the risk of creating serious financial distortions, misallocations of resources and delay in the necessary deleveraging in those advanced countries most affected by the crisis,” the bank said in its annual report.

—
Interest rate increases are not necessary for the Vancouver RE price bubble to implode, but if they were to occur they would speed the process. – vreaa

Globe and Mail Video: 25% Basic Vanilla Pullback For Canada If Interest Rates Flat; For ‘Unstoppable’ Vancouver Pick Your Own Number [Ours is 50%-66%]

From ‘How bad could it get in the housing market?’ video at Globe and Mail, 20 Jun 2011 –
Rob Carrick: “You’re predicting a 25% decline over 3 years, is that the worst case scenario?”
David Madani, Economist, Capital Economics: “No, it’s basically a baseline view .. the fact that prices have risen so much relative to income… we can’t see how income growth alone will close this very large gap between price and income…”
Carrick: “Where do rising interest rates fit into that?”
Madani: “Actually our outlook right now for the next few years is one of interest rates remaining where they are…”
Carrick: “So if interest rates were to rise, that could make things substantially worse”
Madani: “Yeah…”
—
Carrick: “The Canadian market is often distorted by what’s going on in Vancouver… I mean, that market is just unstoppable…”
Madani: “25% is an average… this is not just a Vancouver story, we see this bubble-phenomenon across Canada.. … we don’t think it’ll get as bad as in the US, but we do think a ‘substantial decline’ is in store for Canada .”
—

So, 25% basic vanilla pullback across Canada.
In extreme markets like Vancouver, with or without interest rate hikes?
We’d bet Madani would now say “over 50%, easy”.
We at VREAA now foresee a 50%-66% price crash for Vancouver.
– vreaa

Game Day – Carney On The Road In Vancouver – “The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear.”

15 Jun 2011, 8am: Big Day! No, not this evening’s Stanley Cup Game 7 on home ice, but BOC Governor Mark Carney, on the road, speaking here in Vancouver. We don’t know what he’s going to say, yet, but we expect it to be pertinent to our speculative mania in housing and the nosebleed debt levels BC-ites are carrying. He’ll be subtle, but he’ll warn us nonetheless. Nail-biting stuff.

UPDATE; excerpts from the speech:

“Some markets are already severely unaffordable even at current rates.”

“Given such developments, one cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand. The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear – greed among speculators and investors – and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

Entire speech here: (pdf)

Local Realtor: “I sold a 33′ lot in Dunbar a few months ago for $1.55M. It’s back on at $1.8M.”

thinktom [local realtor] at RE Talks 29 may 2011 9:42pm – “I sold a 33′ lot in Dunbar a few months ago for $1.55M. It’s back on at $1.8M.”

Gee. Assuming that ‘a few’ means ‘three’, that’s 16% appreciation in 3 months, for an annual compound interest rate of 82%. Much, much higher with the inevitable leverage, of course. Not too shabby. Amazing, in fact, given the interest rate environment, where the banks are offering savers 1% on a one year GIC. Wait!… maybe it’s because of these low interest rates that the lot prices are on fire. Speculative mania; 8th inning? ; Top of the 9th? (Or, rather, 3rd period, 20 seconds left on the clock?) – vreaa

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

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

—–

Dear Rusty

Thanks for your question.

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

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

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

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

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

regards,
vreaa

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

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

Global News Switch – ‘Real Estate Bubble?’ Story Becomes ‘Steady Climb’ Story

Global BC TV, 12 Apr 2011, Noon news –

Randene Neill: “Vancouver’s real estate market continues to lead the country in terms of price. the latest survey by Royal Le page shows detached homes in vancouver sold for nearly three times the national average but as Tanya Beja reports some analysts are suggesting that these prices can’t be sustained for much longer.”

Announcer: “It takes just over a million dollars to put a ‘sold’ sign on the average Vancouver home. It’s a little less if you’re buying east of Main Street, and 50% more on the westside. Those figure released today by Royal LePage, showing that prices of homes rose 10% in the first quarter of this year, compared to last.”

Chris Simmons, Royal LePage Realtor: “The vast majority of buyers on the westside and Richmond buying single family homes are from mainland China.”

Announcer: “Royal LePage says strong demand from overseas and low interest rates helped push the price of Vancouver homes three times above the national average.
It’s cause for concern say analysts, who warn buyers are taking on too much debt:”


AJ Sull, Pacifica Partners: “[inaudible]..income concerns, especially here in BC. The debt to income ratios are quite lopsided. We’ve exceded the US averages at the peak of the US bubble. So, that to us is not very comforting.”

Announcer: “The average Canadian household debt reached a record $100K last year, more than one and a half times the average income. Experts warn with rising interest rates, Canadians will no longer be able to service their debts and their mortgages. They say a correction in housing prices is inevitable.”

Sull: “We do think about a 25% price decline would start to balance incomes and housing prices off, quite well.”

Announcer: “AJ Sull says with a federal election looming, it’s time for politicians to weigh in on real estate prices. But unless there’s a drop in demand for Vancouver housing, some realtors say they don’t see prices going anywhere but up.”

Realtor: “We have people who want to live in Vancouver, people from Toronto want to live here, people from China want to live here, people from Iran wish to live here, people from all over the world want to live in Vancouver. So it’s a place where there’s an awful lot of demand.”
—

Okay, so that was the Noon news on Global, 12 Apr 2011.
Noteworthy for having the words ‘Real Estate Bubble?’ heading the piece, for mention of the word ‘bubble’, and for having an analyst on camera suggesting that 25% price drops are possible, perhaps even desirable, in the Vancouver market. (A concept familiar to bear blog readers. FWIIW, we would tease AJ Sull that he is being overly optimistic. If he’d suggested a 50% price drop, however, he’d likely not have gotten air-time, so “hats-off”, it’s a start).
The realtor, of course, gives the perennial “demand, demand, demand” argument for never ending price increases. -vreaa

The message is softened somewhat on Global between the Global Noon and 6pm news slots [hat-tip to Brian via Garth at greaterfool.ca for alerting us all to this]. Here is the later version, also verbatim, for the archive record:

Global BC TV, 12 Apr 2011, 6pm news [archived by Greenhorn here]-

Announcer: “And even as you ponder how much cheaper your car insurance could be, the price of real estate just keeps going up. According to the latest industry report, a typical home in Vancouver sold for nearly three times the national average in the first quarter of this year, and three things appear to be at work here: low interest rates, a limited supply of houses, and increased pressure from foreign buyers.”

Announcer2: “Putting down roots in Vancouver is getting more expensive, especially if you’re shopping for property in some of the cities most desirable neighbourhoods.”

Simmons, Royal LePage Realtor: “You know you’re probably looking close to two million dollars for an average sale price of a SFH on the westside of Vancouver, and maybe not quite so high in West Vancouver”

Announcer2: “A new survey by Royal LePage shows that vancouver housing prices are now three times the national average, with condos going fro a half a million dollars and bungalows about double that. It’s an increase of almost 10% from the first quarter of last year. according to realtors, it’s fuelled mainly by low interest rates, and demand from abroad.”

Realtor: “There is a large demand for properties in Vancouver and Richmond amongst the Chinese population, and they’re looking to immigrate.”

Announcer2: “While the focus on Chinese buyers has prompted some to push for restrictions on foreign ownership, some analysts say the bigger concern is whether Canadians are taking on too much debt, without having the income to match rising prices.”

AJ Sull: “Canadians had a little bit of complacency, saying that in Canada we don’t incur debt like Americans do..well, we’ve started to trade places with the Americans.. the Americans are paying down debt at a fairly rapid clip, and Canadians have yet to face that and bite the bullet on that.”

Announcer2: “Historically housing prices are three and a half times Canadian’s income levels, they’re now almost six times higher [sic], the average family has a debt of almost $100K, and, unless wages keep up, AJ Sull says, the real estate bubble could soon burst.”

Sull: “… concern is that, as interest rates go up, and they will eventually, will people be able to service that mortgage and the credit card debt that’s been piled on.. and that will have an impact on the economy over time, because people’s ability to spend is going to be more and more constrained.”

Announcer2: “Sull says a market correction of between 12 and 25% could be in Vancouver’s future. For potential buyers, it could just be a matter of being patient.”
—-

Between Noon and 6pm, the segments ‘Real Estate Bubble?’ headline has become ‘Steady Climb’, and AJ Sull’s self-stated “25%” becomes voice over “12 to 25%” mentioned by the announcer. The realtor drones on about foreign demand in both segments, using different words but saying the same thing.
Global have, however, in the second segment, introduced the idea of ‘patient buyers’, which we’ll give them credit for. That can’t be something the RE industry wants to see. Buyers becoming VERY patient will be part of the coming crash. -vreaa

Mortgage Rates Rise: 5yr fixed @ 5.69%

The big lenders raised interest rates this week, with the 5 year fixed rising by 0.35% to 5.69%. Noted here for the chronological record.

“Mortgage lenders and realtors I know are really busy because rates are rising. Buyers are trying to beat the higher rates and are scambling to spend their preapproved and locked in mortgage money.” – SethM at RE Talks, 5 Apr 2011 7:03pm (with Global TV news video)

US Housing Prices 1890-2010: Tracking CPI And Nothing More

from The Atlantic, 24 Mar 2011

“These numbers are easy when you are writing on paper, but they are not easy when you have to pay from your pocket.”

Anecdote excerpted from ‘Customer fee to pay out mortgage doubles’, cbc.ca, 22 Mar 2011 [hat-tip vancouvercondo.info] –
“A Vancouver man is speaking out about how Scotiabank charged him $25,000 to pay out his mortgage early — nine months after telling him the fee would be half that much.”
“Mohsen Movahed is an engineer who moved to Canada from Iran in 2006 and landed a job at BC Hydro. The following year, he and his wife bought a condo in North Vancouver with a mortgage of well over $400,000. Then they had a second child, his wife stopped working and he said the payments became unaffordable.”
“My income seems not enough. We have a baby,” said Movahed. “So I thought, I have to do something. Let’s contact the bank and see what I should do.”
[see article for full details regarding the mortgage penalty – in Nov 2010 when he sold his home, he was told the penalty for extracting himself from the fixed-term mortgage would be $34K]
“These numbers are easy when you are writing on the paper, but they are not easy when you have [to] pay from your pocket,” he said “I am financially in trouble. I just want to sell the property.”
“I can’t forget that day,” said Movahed. “Thirty four thousand dollar penalty! One of the guys at the bank said it was the biggest penalty he’d seen for that size of mortgage.”

[As he got closer to the end of the mortgage term, the penalty got bigger!]
“When he spoke to us in July, we would have used the four-year rate because he had about 45 months left on his mortgage. At the end of the year, he had 39 months left, so we apply the three year [lower] posted rate to the calculation,” said Scotiabank spokesperson Ann DeRabbie in an email.
“The three-year rate is lower than the four year rate, so the interest rate differential and the corresponding charge is higher.”

Movahed said he came out of it with less than a quarter of his original down payment. He said he now works at a second job — delivering pizzas — to make up for the money his family lost.
“I just want to let Scotiabank knows that how much that $25,000 is worth to me. I had to deliver pizza to the people — get dollar by dollar — to try to recover that,” said Movahed. “I was really hurt.”
—

We have seen relatively few of these types of stories thus far, because rising prices have tended to bail people out. Once prices start dropping, these tales of misfortune will become commonplace.
“These numbers are easy when you are writing on paper, but they are not easy when you have to pay from your pocket.”
Exactly, very well put. You can say the same thing about local prices. Impossible for the vast majority of buyers to actually consider earning and saving the purchase price. -vreaa

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

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

Mortgage Brokers Protecting People From Mortgage Brokers

Angela Calla (Mortgage broker, & host of ‘The Mortgage Show’ on CKNW), on Global BC TV, 9 Mar 2011: [regarding mortgage rule changes] “It’s not a bad thing. When you have 30 percent of borrowers in the last three years since they’ve been available going into longer amortizations you have to look at the reason why people get home ownership is for security and affordability, and if a market changes you want to ensure that people can still have control of their home, and that’s why they have their home in the first place. So this protects people.”

And on ‘The Fox’ Jan 2011 (discussing the same mortgage rule changes)–

Interviewer: “Jim Flaherty changed the rules this week, and… the truth is, there’s probably a lot of Fox listeners out there paying $1600 in rent and that could easily be going to a mortgage, right?”
Calla: “Oh, easily.. I mean, you want to own a condo for $300,000? It’s going to cost you about 1,120 bucks a month, and you own a condo… for 300,000.” [recites numbers of listings at these prices in different parts of the city]
Interviewer: “What do you get in Vancouver for $300,000.. you get a shoebox, right?”
Calla: (shrugs) “Ah – You gotta start somewhere… You may be renting that shoebox for a thousand twenty bucks a month, so there’s options out there…”

20-Something Chat: “I bought a house in Kits last week” .. “Did you win the lottery?” .. “No, I’m just in debt for 60 years. I better get a job after school.”

painted turtle at vancouvercondo.info March 7th, 2011 at 7:28 pm–
“I am done wondering about this real estate market after what I overheard today. I almost choked:

Person A (20 something): “I bought a house last week”
Person B: [silence]… “Do you like it?”
A: “Oh yes. It’s in Kits, and 1400 sqft!”
B: “….. Did you win the lottery?”
A: [laughing] “Oh.. no… I’m just in debt for 60 years. …. Well, I guess it means I better get a job when my education is completed.”

Perverse Markets Cause Misallocation Of Efforts – Young 31 yr old Couple; Two Kids; Finances Under Pressure; Considering Moving; Higher Risk Investments Become Priority Over Careers

zzz at vancouvercondo.info March 9th, 2011 at 5:09 am– [in response to a comment “wow, renters must be sitting on a giant pile of money waiting to swoop in and cash in”]
“Given up on that. Age 31, married with two kids under 3. Family finances coming under pressure. Expenses rising steadily, no wage improvement, job change imminent. We could be moving. Savings are a huge buffer but they’re losing value. We’re changing our plan and switching to active investment. Long term investment returns are priority #1, careers are #2, and Canadian real estate is off the radar.
Renting something acceptable is less than 30% of the cost of buying somebody’s fucked up reno here in the Fraser Valley. Buying my current rental with cash would yield under 4%, a poor return for an asset that depreciates. Like it or not, houses are an investment and at these prices they are a poor one. They are also illiquid and the risk is extreme given our obscene levels of mortgage debt and leverage.
No real problems here, but maximum uncertainty. It really shouldn’t be this way, but people here are just house crazy. I’ve got a relative with multiple properties holding out for a return to peak prices in the interior, others nearing retirement and 500k in debt, and a young family with 3 properties. They paid off their residence and then bought two in a year.
So yeah, the market is hot. Buy and hold People are playing monopoly with free debt. Thanks BoC!”

A couple of thoughts:

1. Note how distracting the current environment is to this young couple:
(a) they may move because of the housing market,
(b) they see ‘long term investment returns’ as higher priority than their careers. (It is likely that the ‘fast-and-loose’ milieu, with individuals around them making unnatural gains in the RE markets, is persuading them they have to take on more risk elsewhere.)
This bodes poorly for our community. We would be far better off if couples in this position were happy with affordable accommodation, and if they could concentrate on using their skills and talents to add to their own wealth by being useful in our society. Misallocation of resources, times two.

2. This is, in our humble opinion, a very poor time for a part-time investor to be shifting to ‘active investment’ (unless ‘zzz’ means considering short positions, which would not be a common idea at this juncture). A two year equity bull is about to turn: it is now sucking in the retail investor during a distribution phase. After retail investors took a record amount out of funds in 2010, a record amount of retail money is coming back in 2011 Q1, just in time for the smart money to sell to the man in the street. The little guy is about to get screwed, AGAIN. This could result in a double (and particularly devastating) blow for ‘zzz’ and their family; we would respectfully urge caution (which is the opposite of the urge they are experiencing, namely, to take on more risk for the promise of higher returns).-vreaa

Vancouver Realtors Chat About Hot Market – “CRaZY”, “I got 11 calls while I was in yoga”, “Homes are hotcakes”, “Exhausting couple weeks and now I’m off to bait mice in my investment property”

#YVRREChat on twitter, 8 Mar 2011 9am-10am –
Scott Dawson (Mortgage broker): “We’re 10 days away from the new mortgage rules coming into effect. Has anyone seen a rush in the market because of this?”
Leah Bach (Realtor): “absolutely CRaZY yesterday!!!”
SD: “Word is lenders are getting busier as well. Allow extra time for subjects if possible.”
Jamie Gale (Mortgage broker): “Absolute insanity! I had more re-fi requests this past week than I did all of February.”
LB: “I am not entirely sure it is do to the new mortgage rules. It just maybe the onset of the spring market.”
SD: “Spring is always busy I predict it will continue after the new rules too.”
LB: “I would agree. I got 11 calls while I was in yoga.”
Heather Stewart (Home-stager): “I’m hearing about lots of action from mortgage brokers this week…”
Gary Jones (Financial advisor): “I think we are going to see an oozing bubble. No giant drops but small decreases.”
SD: “I’ve never heard the term ‘oozing bubble’.” [That makes two of us… bubbles never ‘ooze’, they implode. -ed.]
GJ: “Of the busy calls how many of them are buyers and sellers? Or just people concerned about new rules?”
SD: “I’m not currently working with clients that are impacted by the new mortgage rules.”
TMB Realtors (3 realtors): “The 5 year qualify seems to me to be a larger hurdle than 30 year amortization. Was that a big adjustment?”
SD: “I would say the qualifying rate has had a bigger effect than the 30 yr amortizations.”
Jeff Poh (Realtor, Burnaby): “I slept in, exhausting couple weeks and now I’m off to bait mice in my investment property, yay :/”
Andrew Hudson (Realtor, Metro Vancouver): “In my hood, homes are hotcakes. A week is a long time on the market right now.”
Rossana Wyatt (Mortgage broker, London, Ontario): “Wow, amazing. Not here.”
AH: “Mostly (almost exclusively) Chinese buyers. I think it was Pasquale Sasso [Richmond Realtor] looking for a Chinese translator last week.”
Mark Attar (‘Property management’): “There was an interesting story in the Sun or Prov yesterday about Chinese gov restricting spec causing our market to gain.”

“Even at the corporate level, locals have a desire to ‘overpay’ for RE assets and make strange choices when it comes to parting with cash for RE.”

Mango at financialinsights February 20, 2011 at 1:44 am– “Lululemon just paid $65M for a building in Kits. That is 25% of the cash they have on their balance sheet. That [building] would have cost them less than $3 million a year to rent. They have massive growth in earnings per share (EPS), so common sense [should have told them to rather use the money to invest further in their business].  Instead, they bought the building? So even at the corporate level, locals have a desire to “overpay” for RE assets and make strange choices when it comes to parting with cash for RE.”

Developer Pamphlet – “3 Reasons To Buy In 30 Days” [before prices drop]

Developers ‘Onni’ lay out why we should all rush to buy ASAP. If you pause for a moment, of course, you’ll realize that tightening requirements will restrict you and everybody else after 18 March, and thus put downward pressure on prices, and thus you’ll very likely save even more money by simply waiting. But, then, Vancouver buyers aren’t well known for letting logic get in the way of a good speculative buying opportunity.  Race you to the sales desk! -vreaa [hat-tip to VillageWhisperer]