Opinion – “Anyone that can look a young family in the eyes and sell them a tear down shack for half a million dollars while knowing full well that emergency rates are coming to a screeching halt in a few short weeks has a special place in hell waiting for them.”

veej at greaterfool.ca 7 Apr 2010 10:14 am –

“Anyone that can look a young family in the eyes and sell them a tear down shack for half a million dollars while knowing full well that emergency rates are coming to a screeching halt in a few short weeks has a special place in hell waiting for them.”

“I grew up in Dunbar. I want to, one day, live in or around Dunbar. We have a total family income of about $275k. We could slap down a down payment of $500k. Yet to buy a decent house in Dunbar it would mean borrowing well over $1million. Who are the people who are doing this?”

Other Mike at yattermatters.com 1 Apr 2010 7:30 am –

“Dunbar boggles my mind. I grew up in Dunbar. I love Dunbar. I want to like, one day, live in or around Dunbar. We are a 2 income family with total family income of about $275k. We could slap down a down payment of about $400k ($500k if we really had to) without getting near the RRSP’s. Yet to buy a decent house in the old neighbourhood it would mean borrowing well over $1million. Who are these people (aside from the Asian story) who are doing this? Are they really borrowing $1mil?”

Like ‘Other Mike’, we at VREAA are curious about the personal and financial details of people buying >$1.5M homes on the Westside.  Anecdotes that shed any light on this question would be greatly appreciated. Disguise details as necessary without losing the core of the story. -vreaa

Fear and Ignorance in Vancouver – 34yr Old FTB Overpays For Condo; Inadvertently Becomes A Landlord – “It’s a learning process that’s so scary. No one can ever tell you what it’s going to be like. At least I’m in the market and I’m learning.”

Fear and ignorance can only drive a market for a finite amount of time. Over the next 5 years there will be a whole lotta learnin’ going on. -vreaa

This anecdote extracted from a Canadian Press story, ‘Homebuyers’ pain, mortgage brokers’ gain as tighter rules come into place’, by Derek Scott, 2 Apr 2010 –

“Buyer Leslie Urquhart said buying her first home was a horrifying ordeal. Urquhart, 34, began her six-month home shopping odyssey with one goal – to get into the market. But she quickly realized that was easier said than done. Increasing budgets, pressure from her realtor to commit to a place and finding a mortgage made her wonder what she had got herself into. Urquhart’s realtor urged her to use a broker, saying a broker could find a better interest rate than her bank. The broker did find a cheaper rate, but it was still too high for her to manage. Urquart was left somewhat cold by the experience with her broker. She said she was left in the uncomfortable position of putting her trust in someone she had only spoken with over the phone. “I never met with him, it was very impersonal,” she said. Although she eventually found a condo for $60,000 more than her original budget, she advised other first-timers to do their homework and prepare themselves for changes. “It’s a learning process that’s so scary,” she said. “No one can ever tell you what it’s going to be like.” In the end, Urquhart accomplished her goal of getting into the housing market, but she won’t be living in her new place as she had hoped. Instead, she will become a landlord, renting the place out while living in a basement suite at her parent’s house where rent is cheap. “At least I’m in the market and I’m learning,” she said.”

“An investor who bought into a rent to own home placed their own tenant in the building until they came up with the financing. They wanted to complete in October but now they HAVE TO complete before April 19th or will not qualify.”

joycer at vancouvercondo.info 30 Mar 2010 8:00 am –

“I know personally of an investor who bought into a rent to own home and placed their own tenant in the building until they could come up with the financing. They wanted to complete in October [2010] but now say they HAVE TO complete before April 19th or will not qualify. So it’s no surprise to me that sales are doing well (but still not containing listings), the question is how much future demand is being robbed.”

“Talking with mortgage brokers you’re seeing a lot of cash brought to the table. People buying those properties over a million dollars are plunking down 50%+ on them. Yes, there is a lot of rich foreign money coming in.”

Agent Will is Will Wertheim, a local realtor who posts the Vancouver RE statistics each week on his indispensable blog, agentwill.com. Recently he shared his current experiences in the market. Here’s Agent Will reporting from the trenches, 25 Mar 2010 8:45 am –

“Talking with mortgage brokers you’re seeing a lot of cash brought to the table. People buying those properties over a million dollars are plunking down 50%+ on them. Yes, there is a lot of rich foreign money coming in. I’m not selling those, though (not that I don’t want to). At the lower end we’re seeing buyers put down 10-15% on average and being pretty conservative with what they are buying. They may be approved for $500k but they’re looking at $400k or less as their max.

You look in the papers and media these past few months (at least what gets reposted on various sites in our community) and you see a lot of talk about prices, interest rates, and the future. I don’t understand that talk and I’ll tell you why. The Banks want to lend money. They only make money when they lend it. But they don’t just lend it to anyone… they only lend to those they deem credit worthy. They adjust the interest rate to reflect the risk. If the person is too risky then they won’t lend at all and the borrower has to go to a B or C lender which has far higher rates and will lend subsequently lower amounts of money. When media reports that “banks are worried” (and the reality for me is that I haven’t seen any worry) then I wonder if someone is saying a personal opinion or if the bank wants to reduce time spent on processing soon-to-be-rejected paperwork.

There’s also a lot of confusion about the HST and so many people think it applies to ALL housing. To every potential buyer I have had to explain (sometimes more than once) that it only will apply to wherever GST was applied (New housing over $525k, lawyers, realtor commissions paid by the seller, movers, materials for renos, contractors, strata management, utilities, etc.) and that means that purchasing a previously titled property will NOT pay HST.

[Results of a recent poll reported on in the G&M] jive exactly with what I’ve been seeing and saying here: “The survey showed six in 10 mortgage holders say they have taken advantage of current low rates to pay off more principal. It also revealed that 18 per cent of homeowners say they have made a lump sum payment on their mortgage and 16 per cent have doubled up payments to reduce the principal. ”

Again, 60% are paying off their mortgage faster, 18% have made lump sum payments, and 16% have doubled up payments. Question is if those 60% contain the 18% and the 16%, but still that is a very good number to see. And it only means that the other 40% have been going about their business and not taking advantage of the low interest rates. I wonder if maybe that is because the fixed rate still rules the vast majority of mortgages taken. Everyone I know on the variable is making extra payments or payments equal to what the fixed rate would be. Everyone.

Oh, and back to the “qualify for the higher fixed even if taking the variable”? I applaud that decision. But that’s just conservative lil’ ol Me. In my experience those who couldn’t really afford to buy are the least realistic, the biggest dreamers, and the greatest time wasters in my line of work. Yeah, they’re the ones watching the infomercials late at night.”

Mortgage Rates Rise; Financial Literacy Rates Unchanged

A number of Canadian banks have today raised their mortgage rates, with posted five year closed mortgages jumping from 5.25% to 5.85%. Here are some comments made by mortgage consumers below the Financial Post article, 29 Mar 2010. Thanks to metalhead at RE Talks for pointing them out. –

anonymous 29 Mar 2010 1:02 pm – “I still think its crazy to get a locked in mortgage. There aren’t many signs outside of Canada that things are back to normal. In fact its far from it. Right now I have a variable rate of 2.05%. How much could rates really go up with so much uncertainty. If they go up too fast our dollar will sky rocket and cause its own problems. I would get a variable rate which could save you hundreds of dollars per month compared to 5.86%, save the money you would have spent at the higher rate and then if interest rates climb you have a buffer to help you but if they don’t rise beyond the 5.86% then you have a lot of extra cash.”

anonymous 29 Mar 2010 12:41 pm – “I think a lot of the confusion comes when banks close your mortgage for 5 years on a fixed or variable rate, but they automatically amortize it over 25 years. So people think their house will be paid off in 5 years, when it’s just locking in a rate. That is what happened to me when I was 24 years old. I bought my first home, locked in the rate for 5 years only to find out in 5 years that I had put $15K against the principle and I still owed $200K! Then I went to renew, and finally when I asked them, they were amortizing the mortgage over 25 years again. So in total I would be paying off the mortgage over 30 years! I finally got smart and put a short amortization of 10 years and also started making annual payments on top of my mortgage, until I paid off the house 7 years later.”

And relevant confirmation from older discussion at the G&M:

ruthmatthews 14 Jan 2010 3:58 pm – “Most Canadians do not seem to know that in Canada every mortgage is open after five years and their interest rate can increase at that time UNLESS they have been able to lock in for say, seven, or ten years with specific mortgagees. The amortization period is just used to create a monthly payment to suit the financial ability of the mortgagor. I have spoken to a lot of home buyers who seem to think that if they have a 35 year amortiation with a monthly payment of $650, that this amount will be payable for 35 years.”

Less Helpful Mortgage Helpers: $43K Income; Old Rules $460K Mortgage; New Rules $230K Mortgage

Ed at vancouvercondo.info 27 Mar 2010 12:53 am asks “Is it just me or is this going to destroy the real estate market overnight?”, referencing this video describing one aspect of the new rules, those applying to how income from a ‘mortgage helper’ suite is applied in qualifying for a mortgage. No, Ed, it’s not just you. It is going to be interesting to observe how all these nudges towards tightening – Flaherty’s light taps on the brakes –  are going to affect a market that just may be teetering on a precipice.-vreaa

Kelowna mortgage broker Lewis MacDonald deserves a plug for walking us through the implication of the new rules:

[This is going to have an even bigger effect than this video implies because the kind of property that the $43K income individual now qualifies for is unlikely to have a $1,000 per month rental suite, or any rental suite. -vreaa]

“There are no homes in Vancouver for that price. No one seemed to get the irony of a realtor telling people there was nothing west of Sardis that a couple making $100K can afford.”

MarKoz e-mailed VREAA the following, 24 Mar 2010. Thanks, MarKoz.-

“The attached flyer was pushed through my mail slot today.  At first glance it is just a flyer soliciting listings.  At the bottom of the page is a handy guide to give prospective buyers an idea of how much house they can afford based on income.  Apparently a family with a gross income of $100,000 can afford a $348,000 “home” if they have 10% down.  Seems reasonable to me. The only problem is that there are no homes in Vancouver for that price (OK, maybe a few bachelor suites).  I showed it to co-workers and they all agreed she was way behind the times in terms of what people could really afford. No one seemed to get the irony of a realtor telling people there was nothing west of Sardis that a couple making $100K can afford.”

Former Risk Manager at RBC Concerned About Risk – “The forces of gravity are as potent in the residential real-estate market as they are in the physical world: House prices do go down.”

You have heard all these arguments before; on these pages and in posts at other blogs from various citizens concerned about a housing bubble in Vancouver. What’s different about the article on the op-ed page of today’s Globe and Mail, is that the concerns are voiced by a former senior manager in risk management at the Royal Bank of Canada. This is how paradigm shifts occur: first the loonie fringe shouts about something; then the blogosphere talks about it; then certain insiders voice it; and, in the end, the public accepts it.  Soon we will all have “known all along” that housing was in a bubble. -vreaa

Here are excerpts from ‘Why we need tougher mortgage rules’, by Louis Ganon, Globe and Mail, 23 Mar 2010 –

[T]he average price of existing homes in Canada [has] been on a tear, rising 19 per cent in the past year and leading many observers to believe an asset bubble was forming in the Canadian housing market.

If raising lending standards made so much sense, why wouldn’t the Big Five raise them on their own instead of asking Ottawa to beef up the rules? The reason is simple. The Big Five, as it turns out, aren’t the only game in town. A unilateral move on their part, as beneficial as it might have been for the system, might have backfired by allowing their more venturesome competitors to fill the void and gain market share at the Big Five’s expense.

In Canada, more risky mortgages (those with a down payment of less than 20 per cent) are insured by the Canada Mortgage and Housing Corp., whose chief mandate is to “promote” home ownership. As long as CMHC is willing to “insure” the mortgages, there’s no stopping less picky lenders from lending. Essentially, CMHC provides a back door through which low-quality mortgages can creep into the system. And if something goes wrong and CMHC can’t absorb the losses, who will have to foot the bill? You guessed it: We will.

These [the upcoming tighter rules] are all positive changes that will reduce the leverage in the system and make it safer, but Ottawa could have gone further. Reducing the maximum amortization period from 35 years to 30 would have been a smart move, and raising the minimum down payment from 5 per cent to 10 per cent would have made a great deal of sense. [Agree -ed.].

..the forces of gravity are as potent in the residential real-estate market as they are in the physical world: House prices do go down.

…when central banks start tightening monetary policy to mop up excess liquidity and stave off inflationary expectations and when capital markets start pushing back against massive government deficit funding and corporate debt rollovers, interest rates will have nowhere to go but up. So we can bet that mortgage servicing costs will also go up.

“His friend had booked multiple units at a pre-sale last year and is now hard pressed to off-load them. It was really shocking when he then said that I do not need to spend a penny in down-payment, even with the new rules.”

AlmostPefect at vancouvercondo.info 23 Mar 2010 3:55 pm –

“A friend of mine who has a real estate business called to let me know there are townhouses selling in Surrey at a reduced price. His friend had booked multiple units at a pre-sale last year and is now hard pressed to off-load them. I was not interested at all but just prolonged the conversation to get a feel of what is happening out there. It was really shocking when he then said that I do not need to spend a penny in down-payment, even with the new rules. I don’t know the details but it sounded like showing a higher appraised value for securing a mortgage that will then cover full reduced purchase price. Are these kinds of frauds common?”

Income vs House Price Changes 1996-2009

There is no way of explaining this chart other than via a bubble in housing prices. -vreaa

from Alexandre Pestov’s ‘The Elusive Canadian Housing Bubble’ Feb 2010

“I had a couple in my Vancouver office this week. Annual income $40k, riddled with consumer debts, zero down payment. They want to buy for $675k. This is what this bubble has created, a bunch of fools completely disconnected from reality.”

Ultraman at greaterfool.ca 19 Mar 2010 11:00 pm –

“I had a couple in my Vancouver office this week. Annual income $40k, riddled with consumer debts, zero dollar for down payment, credit score in the crapper. I asked them just for fun how much they wanted to buy for, going back and forth between each other arguing whether $675k was too much. Anyway the appointment came quickly to a close. This is what this bubble has created, a bunch of fools completely disconnected from reality. People that thinks that a $850k mortgage is normal. I tell you [of] the life of a lender these days.“

New Mortgage Rules Will Result In 20-25% Drop In Purchasing Power For Most FTBs

The new mortgage rules mean that buyers with less than 20% down, requiring CMHC backed mortgages, will have to be able to afford monthly payments at the posted 5 year mortgage rates. This represents an effective 2% rise in mortgage rates, and, because rates are currently so low, it represents a relatively large decrease in purchasing power. It is hard to see how this will not apply downward pressure on prices. -vreaa

The Pope, at vancouvercondo.info, 7 Mar 2010 –

Household income: $100,000
Down payment $30,000
Monthly loan credit card payments: Zero
Term: 25 years Property taxes: $2000 Condo fees: Zero
3 year discount rate: 3.29% – you can borrow $491,551
5 year posted rate: 5.39% – you can borrow $397,349

VHB, at vancouvercondo.info, 7 Mar 2010 10:32 pm –

I worked through an example with 5% downpayment, 6K/year property taxes and 5.4% vs 3.3%. I get a drop of 23.9% in the price you can pay if you are maxing out.

Lending Stories – “A friend works for BC assessments. Nearly all buyers these days are mortgaged to the hilt… 95% loan to value.”

gse36 at RE Talks 15 Feb 2010 12:32 pm – “I was speaking to a mortgage broker. He showed me his past 10 deals. Of these, 4 were mortgage renewals for >100% PP. It’s kind of crazy. Like a guy buys a downtown loft $515k in 2005. Now takes out a new mortgage at $569k.”

grantness at RE Talks 15 Feb 2010 12:39 pm – “A friend works for BC assessments. He sees mortgage details all day long. Last night he told me nearly all buyers these days are mortgaged to the hilt… 95% LTV [loan to value].”

gse at RE Talks 15 Feb 2010 1:14 pm – “That’s very consistent with CMHC figures of avg 6% downpayment, across Canada, since 2007.”

Flaherty Taps Gently On The Brakes – “I just got pre-approved yesterday. According to the “experts”, I can buy a $700,000 house with 10% down on a 30 year term with my $93,000/year salary.”

Minister of Finance Flaherty today announced that, as of 19 April 2010, mortgage lending in Canada will have to be just a tiny bit tighter. Borrowers must qualify at a 5 year rate; equity withdrawal from a property is lowered to 90% (current 95%!); down payment on non-owner occupied properties is raised to 20% (current 5%). The very idea that there may be individuals in Vancouver who have extracted funds out of properties up to 95% of their current inflated values is completely mind-boggling. 90% is still speculation of the highest degree. It’ll be interesting to see how the Vancouver RE vehicle responds to this tap on the brakes. -vreaa

The banks will still offer a lot to buyers under the new rules.  White Payer (vancouvercondo.info 16 Feb 2010 at 10:11 am) would likely still get offered the terms they describe here –

“I just got pre-approved yesterday. According to the “experts”, I can buy a $700,000 house with 10% down on a 30 year term with my $93,000/year salary. Isn’t that just about what the Van income/price multiple is?” [Actually, at the current average Vancouver price/income multiple of 9.3, White Payer would be able to buy a property for $865,000 -ed.]

Flaherty Will Tighten – Spot The Vancouver Sun’s Freudian Slip

Okay, this is it. Metaphors involving nails and coffins, straws and camel’s backs, come to mind. At the very least, a shot across the bow of the SS Vancouver RE. After the message has been semaphored  for weeks, Captain Flaherty will announce tomorrow how he will somehow restrict mortgages without scuttling the fleet. Flagship Vancouver Sun, the local RE regatta organizer, made a wishful flub in breaking this news. Take it up with your therapist, VancSun!  Spot the slip in the article below. [or run your mouse over the article for the answer] -vreaa

Federal Government Set To Restrict Mortgages, Canwest News Services, 15 Feb 2010 7:02 pm

Former BOC Governor David Dodge – “RE Fundamentals DO matter; These prices look pretty high by any conventional measure.”

There is now a large chorus of voices calling for tightening of Canada’s mortgage lending standards. And many respectable players have joined the group in recent weeks. We suspect that this is all in preparation for the actual move itself, so that it can seem to be inevitable (which it is) and seem to come from a consensus (thus there is less ability to lay blame). Note that David Dodge refers specifically to fundamentals like “the ratio of house prices to incomes and rents to house prices”,  factors that those bullish Vancouver RE have argued are irrelevant. -vreaa

From The Globe and Mail, 14 Feb 2010, ‘Dodge suggests Feds should cool house market’ –

“Canada should be bracing itself for the reality that house prices are more likely to go down than up in the next few years, says former Bank of Canada governor David Dodge. “These prices look pretty high by any conventional measure,” he said in an interview, citing measures such as the ratio of house prices to incomes and rents to house prices. “So, the likelihood of house prices falling a bit over the next few years is probably somewhat greater than that they would rise over the next few years.” “Whether there’s a bubble or not you can only see after the fact,” he added. But it wouldn’t take a bubble bursting to cause consumers pain. If your house price goes down 10 per cent and you’ve borrowed 95 per cent of its value, all of a sudden you’d be in hot water, Mr. Dodge noted.”

“Mr. Dodge said he has never been comfortable with the idea that people can buy homes with down-payments of as little as five per cent. Whether increasing it to 7.5 per cent or 10 per cent, he would be supportive of raising the minimum payment. He added that it would be possible for Canada Mortgage and Housing Corp. to rein in the market on its own, without an official move by government, by tightening the requirements for mortgage insurance. That’s what the Crown corporation used to do when he worked there in the “old days” (the 1970s), he said. For instance, it could tell banks that in order for a mortgage borrower to qualify for insurance, even if they’re just getting a three-year variable rate mortgage, they have to be evaluated to ensure that they could afford a five-year rate on a mortgage with a 25-year amortization. The Crown corporation is currently looking at such options, according to sources.”

“The ‘financial advisor’ STRONGLY ENCOURAGED me to get a supersized and unnecessary mortgage for a piece of lower mainland RE. He kept pushing.”

Mark Carney may be asking borrowers and lenders to be prudent, but we are hearing lots of stories suggesting that his pleas are being ignored. Here’s an example of a prudent customer and an imprudent lender. -vreaa

This from Vankouver at greaterfool.ca 12 Feb 2010 2:17 pm –

“I’m an under 35er and I went to the bank yesterday to max out my rrsp and instead the ‘financial advisor’ STRONGLY ENCOURAGED me to get a supersized and unnecessary mortgage (for a piece of lower mainland RE), and if I didn’t….. I would end up hurting myself in the long run such that I may NEVER get a mortagage from a bank again ever!!! Despite me indicating that I had no desire to be in debt in this economic environment (for a number of highly practical reasons), the ‘financial advisor’ kept pushing. In the second attempt, he cited that home owners made 10-17% (on paper only) when the housing market here jumped up again…so I said, interesting but, people like me made about 50% buying and selling stocks in the market last year. After he saw he couldn’t break me, he finally let me get my rrsp sorted. Some advisor.”

“Debt is invisible but your beautiful home and toys are there for all to see.”

This gem of a bubble quote from Krashproof at greaterfool.ca (12 Feb 2010 6:44 am). We couldn’t resist archiving it. –

“Debt is invisible but your beautiful home and toys are there for all to see.”

“As an accountant I see lots of financial information. People who earn $40k per year shouldn’t have $700k in debt. They’ve taken out mortgages to buy principal residences, and then added a couple of rental properties for good measure.”

From anonymousAA at vancouvercondo.info 9 Feb 2010 11:10 am –

“It’s tax time, and as an accountant I see a lot of financial information. I really don’t like what I’m seeing. Excuse me, but people who earn $40k per year really shouldn’t have $700k in debt (and that’s just the mortgages!) And it’s not just one or two clients, it’s quite a few. They’ve taken out these mortgages to buy principal residences, and then added a couple of rental properties for good measure. Ever get that sick, worried feeling in your stomach? Yes, this would be one of those times.”

Victoria – “And you think we have not created a casino mentality?”

This anecdote is third hand. It comes from a speculator in Victoria, and has already been headlined at greaterfool.ca, and commented on, there, by Garth Turner. It deals, however, with a sentiment that is so seminal to the Vancouver bubble that we have felt moved to archive it here. -vreaa

“I bought a new condo, 2000 sq ft, facing the ocean on ocean frontage in 2007 for $1,200,000 A rental agency has advised me not to take short term tenants since possible damages to the condo may deflate the value. I partly financed by taking a conventional mortgage on my present home property for $875,000 prime minus .69%. Current rate is 1.56%. My home property is appraised at $1,700,000 (2007).(Prime ocean front). I rejected an offer of $1,600,000 in 2008. The market is firming up again in the Victoria area. We intend to move to the condo when the house is sold. My question: I would love to deduct the mortgage interest on the condo! How can this be done?”

[Garth Turner comments – “Just to put this in Dick-and-Jim terms for the feds: Guy with inflated property borrows 50% of its value to buy a spec property with 72% financing. He is able to get a mortgage at 1.56%, which is the current rate of inflation, which also means the money is free. Guy is a tool. His action serves only to pump up real estate values further, thanks to absurd interest rates, orchestrated by the Bank of Canada. He now wants to deduct the interest on his free mortgage money from his taxable income, which means other taxpayers (who don’t have $2.7 million in real estate) would pay half his costs for him. And you think we have not created a casino mentality?”]

“Rein Us In” – Canada’s top bankers are pushing the government to clamp down on the mortgage market to cool off the rise in home prices.

From The Globe and Mail 6 Feb 2010 12:00 am –

Canada’s top bankers are pushing the government to clamp down on the mortgage market to cool off the rise in home prices. … The heads of the country’s six largest banks have privately told policy makers that they fear the wide-ranging economic fallout of a U.S. style binge-and-collapse in housing. … The chief executives of the Big Six made their point last November, when they met with Bank of Canada Governor Mark Carney. The country’s top commercial bankers, who between them control more than three-quarters of the country’s $940-billion mortgage market, said then that they wanted the government to look at far-reaching options, such as raising the minimum down payment to as much as 10 per cent and shortening the maximum amortization period to 30 years. … Mr. Carney didn’t disagree, according to people familiar with the November talks. … However, the real key is convincing Finance Minister Jim Flaherty.

Much of the population’s net worth is tied up in their houses, and the concern is that if tighter rules caused home prices to fall, consumers would rein in their spending.

“Some people talk about 10 per cent down payments, and we would have serious concerns with that,” said Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals.

“I know a couple who bought a house for $3 million plus. Put about $800k down from their previous house which was mostly paid off, but that’s still a huge freaking whack of new debt.”

People who have apparently taken profits, but then simply used them to leverage up, are now in positions that are even more vulnerable to price drops. In the following example, a 25% pull-back in prices will wipe out 100% of the owners’ $800K equity. -vreaa

This from betamax at RE Talks 4 Feb 2010 12:10 am –

“I know a couple who bought a house for $3 million plus. Put about $800k down from their previous house which was mostly paid off, but that’s still a huge freaking whack of new debt. They thought they’d only be able to get a mortgage for $1 million based on earnings and were thrilled when the bank let them go into hock for more than twice that.”

“Got Rich Off Vancouver Real Estate” stories – “I knew a guy who basically was dumb as a doorknob, ended up buying a house that was on a half acre, for next to nothing, and sold it for about $600,000 more than he paid.”

Here’s the flip side of the last post, but it illustrates the same point. When it’s so easy to make a fortune flipping houses, why do anything else? -vreaa

At RE Talks (2 Feb 7:27 pm), a poster tellingly called FuturePorscheOwner asked if anybody knew any “Got Rich Off Vancouver Real Estate” stories –

FuturePorscheOwner 2 Feb 2010 7:27 pm – “I knew a guy who basically was dumb as a doorknob, ended up buying a house that was a half acre, for next to nothing, and sold it for about $600,000 more than he paid. The guy sold a couple of years ago, [and] bought the fancy toys that come along with having half a million in the bank.”

unicas 2 feb 2010 11:33 pm – “As accountant, I have met many people who became multi millionaires through real estate investment, too many. None of those people are the analytical types who talk about fundamentals, rates, charts. Most are not what you would call savvy business people. Let me give one recent example.  I know a couple, in their mid 40s, since 1997. They became my clients in 2003. Between 1997 and 2006, they bought and sold 3 times, each time they became $200K richer. In 2006, they built a 4,000 sqft house near a golf court in North Van for around $900k. In 2007, they came to my office and told me they were interested in buying two properties near Taylor way. The properties were next to each other, each over 13,000 sqft lot owned by the same owner for $1.7 mil. They said they planned to tear off the houses, build one for themselves and one to sell. They wanted to ask my opinion. I said “Look, we are almost at peak, construction costs are at all time highs, I like the idea, but timing is not good”. They went ahead anyway. Just last month, 3 years later, they came to my office again, for a different kind of consultation. They just completed building a 6,000 sqft monster house that they planned to move in. Just one problem: A broker made an offer to buy it for his client for $3 million. Their cost? $850K for the land plus $200 per sqft (building cost of $1.2 mil.), so they would pocket almost one million, with their other old house still there waiting to be tore off, another million coming. And they just sold their North Van home for 1.5 million.
While I prepare my $150 bill for half an hour of consulting, I was thinking, hell, what do I know?”

Vancouver Renter writes “Dear Mr Flaherty, Mr Harper, and Mr Carney, I feel compelled to let you know how your policies have affected me and my family.”

Asset bubbles skew and distort the playing field, and honest, taxpaying citizens justifiably feel unfairly treated. This is very, very bad for our society. We all benefit if we live under circumstances where honest efforts and hard work are fairly rewarded. The politicians holding Canada’s financial policy strings are doing absolutely nothing to limit the housing bubble that is perverting circumstances in this fashion, and which is destined to severely injure many Canadians. They know there is a problem, but would rather steer a course for re-election than genuinely improve the country’s financial outlook. History will judge them poorly.  -vreaa

This from Vancouver Renter at greaterfool.ca 3 Feb 2010 3:28 am –

“Dear Mr Flaherty, Mr Harper, and Mr Carney,

I feel compelled to let you know how your policies have affected me and my family.

First, a little bit about me. Unlike many Canadians, I’ve got some cash – not enough to be considered “rich” but enough to raise an eyebrow or two. I didn’t inherit it, win it, marry into it, or obtain it through illegal activity. It’s a result of hard work, living below my means, and most importantly taking entrepreneurial risks.

Over the years, I’ve been one of those fellows who have repeatedly incorporated startup businesses and have created jobs for Canadians, with the hope that I would reap the financial rewards. Along the way it usually didn’t turn out that way, as most of my businesses failed and I lost much of my invested time and money. And believe me, there have been periods of my life where the time invested has been equivalent to 60+ unpaid hours per week. It hasn’t been easy. But I learned from my mistakes and, eventually, one of my ventures paid off and produced a bit of a windfall for me and my little family.

This brings me to the real estate situation in Vancouver, which is where I was born and have lived my entire life.

Even though I have savings, your easy money policies have allowed practically anyone to compete with me in purchasing a house for my family. If I attempt to place a reasonable offer for a house, I know there will be a dozen young kids with no savings and horrifically large pre-approved mortgages outbidding me and driving the price of these shacks in Vancouver ever higher.

But these buyers do not appreciate how long and hard one has to work, risk, and save to actually come up with the cash to buy a house at these levels. A representative example is my son’s preschool teacher who recently informed me, “I bought a place! I got a 1.75% mortgage and my bank helped me to open up a line of credit to come up with the down payment!”

At the other end of the spectrum, higher end houses are being bid up by foreign buyers. A news article appearing in the Vancouver Sun this morning provides evidence of this, with its revelation that higher-priced properties in the west side of Vancouver, Burnaby, Richmond, and the Tri Cities are experiencing the most sales. These happen to be areas in which Asian demand is high.

Now I know how it works in Canada; If you object to selling out your city to the highest (foreign) bidder you are called a “racist”. But let me say this. In the process of earning my nest egg, I paid plenty of taxes to Canada and BC all along the way: payroll taxes, corporate income taxes, personal income taxes, capital gain taxes, worker’s comp, etc that were used to build the infrastructure and fund social programs. These taxes and regulations often brought me and my businesses to their knees.

Yet, through association with several new Canadians, I know many foreigners have built their wealth without facing the same levels of taxation, legal obstacles, fair pay for workers, and environmental concerns in their home countries. And, as politically incorrect as it is to state, from what I have seen, experienced, and read, I’m convinced that much of this foreign money is dirty – generated through crime and corruption.

How can I reasonably compete with these foreign buyers? How can our children be expected to compete?

So, in spite of my successes, I am living, along with my wife and kids, in an older, very modest rental house. And I feel stuck. Renting has its benefits, but I’m also under the thumb of my landlord.

The easy money and immigration policies of the federal government and the Bank of Canada have resulted in a personal dilemma. I can’t afford a house of reasonable quality in Vancouver. So I’m left with three choices:

1. Rent indefinitely.
2. Blow my life savings on an over-priced, tear down dump.
3. Move away from all our friends and family in Vancouver so that I can provide a quality house and better standard of living for my family. And if we move away from Vancouver, it may make sense for us to move away from Canada altogether.

It simply makes no sense to me that this government is maintaining policies that reward only those with nothing to lose (new buyers with no savings) and those who make their riches in offshore businesses.

I’m convinced that, in the end, it is our younger people and children who will be paying a huge price for these short-sighted policies. Does anyone in Canada believe that our children will be enjoying a higher standard of living than our past generations? I certainly don’t.”

Update 3 Feb 2010 – As if to illustrate the points made in the preamble, here is a poster at greaterfool.ca (omg 3 Feb 2010 3:36 pm) advising Vancouver Renter to stop being a such an honest citizen. Welcome to “the new morality” –

“Hold out man, renting ain’t so bad especially when you see your landlord shelling out thousand on upkeep. Alternatively, have you looked into transferring all you assets to your wife and kids. Then you personally buy with 5% down. Usually banks want it to be a matrimonial house – ie both names on the mortgage but in this climate you should be able to get a mortgage in just your name. So if RE continue to go up your’re at least in the market. If things take a dive then you simply default and go into personal bankruptcy. Your assest are in your wife and kids names and beyond the creditors reach. This will be the new morality of the next decade.”

Mortgage broker: “In a fragile housing market you don’t want to impose too many restraints”; Credit Counsellor: “Some people should never buy a home”

It seems the “real estate community” will say anything they can to keep the market as hot as possible, for as long as possible, regardless of the ultimate consequences for borrowers. Like the credit counsellor, we see reason for alarm. -vreaa

These from the Financial Post 22 Jan 2010 ‘Don’t Bite Off More Mortgage Than You Can Chew’ –

The real estate community is fighting against changes that would make it harder to buy a home. This month, the Canadian Association of Accredited Mortgage Professionals (CAAMP) produced a study it says shows an overwhelming percentage of Canadians are shielded from potential interest rate hikes because they opted for fixed-rate products. But that study also showed a huge portion of those consumers would be in big trouble if they had to come up with a larger down payment. Will Dunning, chief economist for CAAMP, said 65% had down payments that were worth 10% or less of the value of the home being bought. “Absolutely,” says Mr. Dunning, about whether a change would take some consumers out of the market. “In a fragile housing market you don’t want to impose too many restraints.”

“They might buy a home with a smallish down payment but then they furnish it on their credit card,” said Ms. Jaggernath, director of education at the Vancouver-based Credit Counselling Society. “It is not unusual to see people spending 60% of their net income on housing costs.” More than one person has walked into her agency with credit problems caused by taking on too much house. “Some people want to travel to Mexico three times a year but they can’t. Some people should never buy a home,” says Ms. Jaggernath. It’s too bad we can’t go on vacation with 5% down and pay for it over the next 35 years. There would be a lot of Canadians lying on a Mexican beach right now.

“How much do your neighbours owe on their mortgage?”

Many Canadian home owners have borrowed money against the increasing market prices of their homes. These title search examples are from Toronto. We’d expect there to be many such examples in Vancouver. -vreaa

From the Globe and Mail 28 Jan 2010 1:16 pm –

No. 17
Purchased by Dave and Chloe in January, 2004
Paid: $1,284,912
Mortgage: $300,000 (five years, 4.89%)
In 2009, the couple took out a second mortgage for $600,000 (“on demand,” prime plus 7%)

No. 37
Purchased by Rebecca and Domenic in December, 2006
Paid: $1,129,948
Mortgage: $730,000 (five years, 5.25%)
In 2009, the couple took out a second mortgage for $500,000 (“on demand,” prime plus 6%). A third mortgage was secured in November, 2009, for $580,000 (“on demand,” terms unknown)

No.18
Purchased by Geoffrey (all names have been changed) in April, 2004
Paid: $1,440,059
Mortgage: $1,275,000 (five years, 0.24% below prime)
Monthly payment: $6,555.17
In 2005, Geoffrey took out a second mortgage for $4 million (five years, prime plus 5%), secured by 200-plus acres of property north of Toronto.

“My friends told me that if they sold their Vancouver rental condos now, they would break even on one and take a loss on the other.”

We’re at all-time high prices, and some investors are somehow already in trouble. What happens when the variable rate goes up and prices start dropping? -vreaa.

This from Real Estate Watcher at greaterfool.ca 18 Jan 2010 2:00 am –

“I have friends that bought investment property over the past two years. They have rental condos in the Greater Vancouver area. They told me that if they sold the properties now they would be break even on one and take a loss on the other. They said that it is best to wait five years for the market to recover, then the property will regain its value. This is when it gets painful. I don’t have the heart to them that I think the market is on a long slow ride to the bottom and will not be going back to the its inflated price range for a very long time. I think many of us will see friends and family that bought into the real estate hype and will soon have big financial losses.”

“I have a number of variable rate mortgages right now at 1.35%”

Any cheaper and it really is free money. -vreaa

This from a property investor named thadeus at RE Talks 18 Jan 2010 –

“For the record, I have a number of variable rate mortgages right now at 1.35% … I also have properties with a fixed rate of 5.49% and they still cashflow each month.”

$2,900,000 Foreclosure: 5662 Chancellor Blvd, Vancouver; near UBC.

It’s not only the people at the bottom of the food chain who will run into problems with debt. -vreaa

“5662 Chancellor Blvd, Vancouver (UBC)  4192 sqft; 78 x 181 ft lot; Built 1929

For Sale $2,900,000     Foreclosure.“

“We have a savings account we call our “higher interest rates in 2014″ fund. We save about $1500/month into that.”

Without any doubt, the best current forum for Vancouver RE market discussion is vancouvercondo.info, hosted by ‘the pope’. Readers of VREAA know that we owe many of the anecdotes archived here to posters at VCI. In a recent article, ‘Say Goodbye To Free Money’, the pope asked a series of questions aim to assess how people were preparing for future tighter lending. Here’s one response from a relatively well prepared owner. -vreaa

DP at vancouvercondo.info 12 Jan 2010 3:46 pm –

“How are you preparing for higher rates?
We have a 30yr amortization period on our mortgage (which is $500K), but do monthly payments as if it was a 25yr. We also have a savings account we call our “higher interest rates in 2014″ fund. We save about $1500/month into that.

If you hold a mortgage are you locking in or are you counting on the low rates of today continuing for a lot longer?
Locked in.   4.05% until end of term in March 2014. Probably should have opted for the variable rate and locked in when rates started going up and benefit from a year or two of low variable rate. Live and learn.

If you’ve got cash, where are you sticking it?
Extra top-up mortgage payments (about $250/month), savings account (about $1500/month), and investing in index funds (only $200/month). Losing out on investment returns now, but it’s worth it for us. The trade-off is in 2014 when mortgage is due, we have security of having about $450K left on our mortgage, with $90K sitting in cash which we can use to reduce mortgage to deal with higher interest rates.

Do you hold equities in markets that will be negatively affected by higher rates?
Of course.“

“Don’t buy a house because you think the price is going to go up. It’s absolutely not debatable that housing prices cannot rise faster than incomes over the long term.”

Most 2010-outlook industry reports have estimated that housing prices will gain significantly again this year. The Vancouver Sun, essentially an RE industry mouthpiece through the boom, continues to print cheerleading articles, but has once or twice published words of prudence. This article of caution from the Vancouver Sun/Financial Post 8 Jan 2010. Some excerpts –

As Canada’s red-hot real estate market shows no signs of slowing down in 2010, analysts are beginning to caution some buyers that their best move may be to step to the sidelines.

“If you’re somebody in a situation that you have only five per cent down and you’re stretching to get in the market with a 35-year amortization, I think that would be a very precarious situation right now.” … “If you’re sitting on a pile of cash and looking to move into the real estate market, it would almost be a no-brainer to just wait for lower prices.” (Robert Kavcic, BMO Capital market economist).

“It’s absolutely not debatable that housing prices cannot rise faster than incomes over the long term.”… “If I didn’t personally have most of my wealth tied up in housing, this would not be the time that I would choose to jump in.” … “Don’t buy [a house] because you think the price is going to go up.”(Will Strange, professor of real estate and urban economics at the Rotman School of Management).

“We’re certainly urging people to error on the side of caution. If you’re paying an amount of money, whatever that might be, that you couldn’t sustain if interest rates rose by say 25 or 30 per cent — I can see that being a problem for a lot of people.” (Bruce Cran, president of the Consumers’ Association of Canada.)

“I am a West-coast Real Estate Appraiser who considered this market over-priced in January 2006.”

There are a minority of RE industry insiders who privately see the market as unsustainable but who publicly have to conform with herd mentality or risk losing work. This phenomenon is common in the mutual fund industry, where it is more important for managers to move with the herd than to be right about market direction. -vreaa

In a post discussing a possible price drop before or after the Olympics, real estate appraiser gordon at greaterfool.ca 2 Jan 2010 7:09 pm ends thus –

“-Thoughts from a west coast real estate appraiser who considered this market over priced in January 2006.” [paraphrased for headline -ed.].

Profile of the Buyers: “Ten of my acquaintances, all in their early thirties, have bought real estate in or around Vancouver since Spring 2009.”

This indispensable post,  from a commenter at greaterfool.ca, profiles young Vancouver FTBs and their financing habits. -vreaa

This from Flavor Flav at greaterfool.ca 1 Jan 2010 7:05 pm –

“As a long-time bear on Vancouver real estate, I’m interested in who is paying these high prices and why. Among my acquaintances, 2009 was the year of the first time buyer. I am a Vancouver resident and a renter in my early thirties. Around 10 of my acquaintances (all roughly my age) bought real estate in or around Vancouver since Spring 2009. Almost all of them were first time buyers. Generally speaking, I think the Bank of Canada’s low interest rate policies are the main reason why these people bought. The rate cuts were timely in the sense that they saved the herd psychology from turning negative. Prices only dropped for a brief amount of time – not long enough to cause a rush to the exits. … Almost none of the buyers I know had large down payments. None of them, to my knowledge, considered valuation metrics like price to monthly rent multiples, or how much negative cash flow would be if they were to estimate the property’s merits as a rental property. They just got qualified for a mortgage and looked at the required monthly payments (affordable in the short term). I don’t believe that any of these people think that Vancouver real estate could ever go down significantly in the future and stay down for any length of time. Many of them viewed the slight decline in prices we saw in 2009 as a generational buying opportunity for real estate. I think many of them had also been impatiently waiting to buy and when prices were down somewhat and rates were down a lot they pulled the trigger. I don’t know whether many of them chose a fixed rate mortgage but I doubt that more than 1/3 of them would have. It is now hard for me to think of anyone I know who has had consistent employment in Vancouver for 5 years and still rents. I guess that the theoretical reason to lower interest rates in a recession is to promote borrowing and investment so that businesses can easily finance new capital goods, hire people, etc. However, I’ve seen very little of this activity among my group of acquaintances and quite a bit of speculation in asset markets (real estate and stocks). I guess it’s obvious that we are now to a large extent an asset price (bubble) driven economy. Since asset prices are already so detached from fundamentals, it appears that ever-increasing amounts of credit (and willing/qualified borrowers) are needed to keep things going. I won’t be surprised at all if government and the BOC do all sorts of creative things to maintain the fantasy of ever-increasing real estate prices despite lagging income for the average person. It’s either that or throw all these recent first time buyers under the bus big time.”

“My brother in law just bought his 3rd investment property… This is the same person who would crap his pants if he had to bet $100 on roulette.”

A bull market leads participants to become complacent. Buyers simply don’t see the real risks in betting on continued RE price rises. They wouldn’t dream of buying stocks with 20:1 leverage, or of going to a casino, yet they take very large risks in RE without a blink.  -vreaa

This from oh crap at vancouvercondo.info 29 Dec 2009 3:10 am –

“My brother in law just bought his 3rd investment property, taking advantage of these low interest rates. Overextended to the extreme. This is the same person who would crap his pants if he had to bet $100 on roulette.”

“They went to the ‘RE-ATM’ to do repairs, but only spent half the money on fixing up the house.”

These responses came to a vreaa request at RE Talks (22 Dec 2009 10:32 am) for stories about Pre-2000 owners who have borrowed more against their holdings as prices rose.–

Danigirl 22Dec 2009 12:36 pm – “I knew one person (closely) who increased his mortage every time he re-mortgaged, for at least 2 go-arounds I am aware of. I believe he even broke the mortgage once in 2005 or 6 under the guise of “getting a better rate” and “just happened to consolidate” some debts into the mortgage at the same time. My best guess, he was going backwards close to 20K a year for at least 5 years, and figured that’d all be fine because he bought his house 20 years ago and, it covered the debt. On paper it did, but, he was mining his equity out far, far faster than it was re-growing.”

underdog 22 Dec 2009 12:54 pm – “I have a neighbour whose rental in Surrey was discovered being used for a grow-op about 18 months ago. They went to the ‘RE-atm’ to do repairs, but only spent half the money on fixing up the house. Since the husband was laid off from the construction industry, the rest was used to ‘supplement’ income. Talking with the tenant, the house was ‘assessed’ again 7 months ago and another equity withdrawal was made, ostensively to do more repairs on the garage/deck. The repairs they did were laughable (not hard to see why the husband is still out of work if his trade is construction) and everything done on the cheap. The tenant says the landlord was going on about how times are ‘tough’ with the husband out of work. Three weeks ago the tenant was advised they wanted to set up another assessment for another ‘withdrawal’ on equity. Landlord is hoping home values (withdrawal limits) have gone up. My understanding is they bought the place for $200,000 and comparable homes in the area are now selling for $475,000. Tenant says landlord seems to think bank should be appraising at $500,000 – $520,000, so I suspect they have maxed the home atm to the $475,000 amount – at the very least. Tenant also commented that landlord was convinced that rates would not be going up for a very long time. I’m willing to bet they are the equivalent of a 0/35 borrower right now.”

canadian 22 Dec 2009 2:44 pm – “I know this family, bought a mega-mansion and a rancher since husband is in mortgage industry and seems to making a huge moolah. Moved to mega mansion and rented both rancher and their old house. Come on, who sells real estate in lower mainland? It only goes up! They saw me as some kinda alien with 3 horns and 1 eye when I spoke my mind out about why I am not buying. Just a year ago – the hubby had a constipated look on his face – as everything was not going as per his plans. Now it seems that the valve down there has been opened good by Carney-Flaherty-CMHC trio, so he is back to his standard rumblings about how [price drops] would never happen here. He gave me that “35% drop? are you crazy” look. “

“25% of buyers won’t be able to purchase anymore.”

The tightening of mortgage lending criteria will likely herald the end of the current RE market cycle. -vreaa.

This from mortgage broker Marcus Tzaferis on CBCs The National 22 Dec 2009 (also cited in good articles at canadianmortgagetrends.com and greaterfool.ca) –

“25% of buyers… these people that are buying with 5% down, and those that are buying with 35-year amortizations… won’t be able to purchase anymore.”

“I’m a lender for a large Credit Union in Vancouver. Refinancing either in form of Line of Credits or second mortgage is huge business. People have used their houses as ATMs in a very big way.”

This from Ultraman at greaterfool.ca 22 Dec 2009 1:50 pm –

“I’m a lender for a large Credit Union in Vancouver, refinancing either in form of Line of Credits or second mortgage is huge business. Yes, people have used their house as an ATM in a very big way.”

“I inform buyers of the inevitable ‘market adjustment’ soon to come, and most of them give you a nod of acknowledgment and then ask what maximum home they are able to purchase with their pre-approved ultra-low variable rate mortgage.”

The bankers nod sagely and call for ‘prudence’, but, Canadians, being human, take as much as they think they can get. -vreaa

This gem from insider ckung at RE Talks 22 Dec 2009 9:57 am –

“People sometimes become quite irrational when it comes to buying real estate, especially when  supported by bullish notions. I should know, I work with Buyers whom I have informed of the inevitable “market adjustment” soon to come, and most of them will give you a nod of acknowledgment and then ask what is the maximum home they are able to purchase with their pre-approved ultra-low variable rate mortgage. The general mentality is that when rates rise, most buyers think, optimistically, that their financial situation somehow would have strengthened and improved to be able cope with it when the adjustment occurs.”

“This is starting to worry me more than before, and this is the first time that I am considering unloading my purchase into next year’s spring bounce.”

In July 2008 Canada’s Finance Minister Jim Flaherty bumped up lending requirements, making it necessary for all property buyers to save, beg, borrow, or steal at least a 5% downpayment. Vancouver RE started a  descent that month that ran 15% before being halted by the free money made necessary by the fall 2008 stock market crash. Prices are now back to the July 2008 highs. Now Flaherty fears a nation-wide housing bubble, and is threatening to drop amortization periods to 25 years and raise downpayments (most likely to 10%). His announcement today is discussed in a Financial Post piece by Ian McGugan 21 Dec 2009. Global TV, in perhaps the most bearish BC RE piece it has ever aired, today (21 Dec 2009) talked of ‘bubbles’ and ‘speculators’ and printed clearly that ‘Tighter rules could shut down 25% of the market’. Whatever exactly ‘shut down’ means, it doesn’t sound good. Despite all this, it is remarkable how long it is taking for local Vancouverites to cotton on. Are all the speculators going to be trying to unload with perfect timing in the spring of 2010? After the Olympics, before the stricter mortgage requirements, before the HST, before the interest rate rises? If they do, the annual spring bounce could be a rout. -vreaa

This from rofina at RE Talks 21 Dec 2009 6:33 pm –

“This is starting to worry me more than before, and this is the first time that I am considering unloading my purchase into next year’s spring bounce.”

“We ended up with a mortgage offer 7 times our household salary.”

Lenders are clearly encouraging people to overextend their borrowing. At the same time they are calling for ‘prudence’. This is hypocrisy. -vreaa

This from junius at greaterfool.ca 21 Dec 2009 12:03 am –

“Three months ago my wife and I were considering moving up in the market and went to a mortgage broker introduced to us by a friend. We ended up with an offer 7 times our household salary. [Our household salary] is more than twice the provincial average. We were shocked. However all our friends here in Vancouver hit us with the usual bubbly baloney such as “housing prices never go down” and “there isn’t enough land” and the ever popular “you just gotta play big to win big.” Fortunately my father (a retired contractor) and my mother (a nearly retired real estate agent) talked us out of it.”

“So it looks like I am wrong about 0/40 mortgages!”

Even some industry insiders don’t understand the terms of their own mortgages, or the products that their clients have been using to purchase RE. -vreaa

Finance Minister Jim Flaherty now says he may tighten mortgage eligibility rules. Excerpts from a consequent discussion at RE Talks, starting 21 Dec 2009 8:42 am –

MikeStewartRealtor (realtor) – “I have a 40 year amortization mortgage on one of my properties and my broker told me that is the way it will stay for the life of the mortgage. [see below -ed.] I am going to confirm this closer to the end of term, but this my understanding from him.”

MikeStewartRealtor (realtor) – “Where did you guys hear about zero down purchases here in Canada? I’ve done hundreds of deals and none have been zero down like you get in the US.”

Marco911 (mortgage broker) – “Almost all of the deals I have done were 0% down. Lenders want something but how they get that something is up to how creative the buyer/seller is.”

MikeStewartRealtor (realtor) – “I have many clients who have bought properties with lines of credit, but a mortgage was not involved. Please share with me your experiences of buying property with mortgages in Greater Vancouver with zero down. I am very interested to hear more especially these so-called 0/40 mortgages…”

silverman (realtor) – “I don’t know anybody who bought with zero down either. Even if the banks could approve such a thing, what seller in his right mind would accept an offer with zero deposit?”

MikeStewartRealtor (realtor) – “So it looks like I am wrong about 0/40 mortgages! I checked with Doug Atkinson at the Centum office attached to my office and 0/40 mortgages were allowed for a few years. He also said that my 40 amortization does not last the life of the mortgage. He also said with a 0/40 mortgages the client had to qualify for a 25 year amortization. I guess the lender would also supply the deposit.”

talking – “So, if Flaherty changes the rules on mortgages back to 25 yr max and some poor guy put 5% down with a 35 year mortgage, his mortgage will become a 25 year mortgage upon renewal? That’s gonna kill a lot of people, considering how many are already stretched at a 35/40 yr mortgage at historically low interest rates.”

Banks Are Tightening Non-Mortgage Lending

Mortgage rates remain very, very low. In fact, RBC even further reduced some fixed rates recently (albeit by as little as 0.1%). At the same time, banks are starting to tighten lending on loans that are not government backed. -vreaa

This from OttawaMike at greaterfool.ca 20 Dec 2009 10:32 am –

“The subject of banks resetting HELOC’s and even calling lines of credit came up [on greaterfool.ca] a few times in past. This week I heard from 3 people who were hit. One colleague has an I.T. consulting firm with 5 employees and lots of work in the pipeline. The bank arbitrarily called his LOC and left him scrambling. Two other home owners I know had their HELOC rates increased 1.25%. All these individuals are low-risk/high-equity customers, but I guess CMHC won’t backstop those products.”

“The bank wanted to give us $700,000 and we make $115,000 together.”

In times of typical interest rate levels, buying a house for more than three times household income is seen as imprudent. When the average price to income ratio is four or more, it is argued that housing has reached ‘extremely unaffordable’ levels. In Vancouver, average homes now have prices 10 times average incomes. Where do households get the funds to make these bids? Here’s an example of a bank offering a household a mortgage of 6 times their annual income. -vreaa

This from Dan at greaterfool.ca 19 Dec 2009 7:16 pm –

“The banks will give a loan to anyone. Just go to the bank and see. The bank wanted to give us $700,000 and we make $115,000 together.”

And a second example from CalgaryBoy 20 Dec 2009 5:11 am –

“Yeah, the bank also wanted to give me $458, 000 and I make $68, 000 a year. I walked out of there thinking there is absolutely no way I can carry that big of a mortgage. People I know were all happy for me the bank gave me such a figure, the same people telling me to buy buy buy.”

—

Garth Turner highlighted these two comments in his post the next day, 20 Dec 2009. That brought more comments from people who had been offered loans larger than they had requested. Samples –

T.O. Bubble Boy 20 Dec 2009 11:21 pm – “A few months ago we went into my local bank branch to get a pre-approval so that we could continue looking around. I had stated that I only wanted a pre-approval for an amount that was about 2.5x my income. They offered a much higher pre-approval amount (4x-5x I believe). Also, the mortgage “specialist” said that everyone would apply with 2 incomes, even if 1 is about to be cut.”

“28 per cent of Canadian homeowners over the age of 50 plan to sell their houses to fund their retirements”

Rising interest rates will likely cause the beginning of the coming Vancouver RE price descent. The middle of the crash will be fueled by the panic of speculators. But the slow coup de grâce will likely come from the boomers unloading their housing nest-eggs. -vreaa

These statistics and then commentary from the Macleans.ca article by Jason Kirby 17 Dec 2009 9:33 am –

– 38.5 per cent of wealth in Canada is now tied to home ownership, up dramatically from 16.3 per cent two decades ago

– As of 2006, nearly 69 per cent of Canadian households owned their own homes, up from 63.6 per cent a decade earlier. [Figure will now be >69% -ed.]

– Between 1999 and 2007 home values in Canada rose 66 per cent, leaving Canadians feeling a lot wealthier. After falling around eight per cent during the recession, prices are virtually back to where they were at the peak.

– Average savings had fallen to just $2,000 a year, or less than three per cent of disposable income, putting Canada well behind other developed countries like France (12 per cent) and Germany (11 per cent).

– 28 per cent of Canadian homeowners over the age of 50 plan to sell their houses to fund their retirements, according to a survey by Royal LePage in 2006

– An estimated 37 per cent of Canadians over the age of 55 still have outstanding mortgages.

“Assuming you still plan to use your house as a retirement vehicle, there’s something else to think about­—you’re not alone. Millions of Canadians are all betting on the same strategy, and that could lead to serious problems down the road. One very real fear is that the barrage of boomers expected to retire between now and 2030 will drive down the housing market. There may simply not be enough younger buyers to absorb all those condos and townhouses boomers hope to unload. For one thing, the net growth in the number of new households forming in Canada each year—a key driver of the residential real estate market—is expected to slow, from 1.4 per cent in 2007 to 0.8 per cent in 2030. By that year, when all the boomers will have turned 65, it’s estimated there will be just two workers for each retiree. “If everybody comes on the market at the same time, prices are going to go lower,” says Merrick. “The people at the top who are planning to use their homes for retirement are going to face major downward pressure, because if there’s no one feeding the market at the bottom, there’s no one who can move up and buy your house. Demographics say it all.”

Vancouver Sun – “Debt-laden B.C. homeowners warned of interest-rates squeeze”

The BOC, the 5 major banks, realtors’ associations, mortgage brokers, previously bullish commentators, ALL warning of housing price downside. What’s next? A cautionary article in the Vancouver Sun! -vreaa

17 Dec 2009, Derrick Penner, Vancouver Sun. Excerpts –

Homeowners are being warned any rise in interest rates later next year risks putting a financial squeeze on the large number of debt-laden Canadians who took out variable mortgages at rock-bottom rates. This is a particular concern in Metro Vancouver, Canada’s most expensive housing market, where buyers have been drawn into the market in numbers large enough to drive prices back up to near their previous peaks following the recent market correction.

“Canadians are potentially leaving themselves wide open for significant financial obligations once interest rates begin to rise,” the Mortgage Brokers Association of B.C. said in a statement Wednesday [16 Dec 2009]. The association estimated that some 40 per cent of homebuyers are taking on variable mortgages. “There certainly has been more of a trend for people deciding to choose variable rates,” association president Joe Santos said in an interview. Dos Santos said his biggest concern from rising rates mortgage rates is with buyers who purchased homes in 2006 and 2007, when credit was a little more easily obtained and borrowers could get 100-per-cent mortgages, than he is for recent buyers who have taken out variable mortgages. “I think [steep rate increases] would certainly create some issues for some consumers who were stretched when they initially qualified [for mortgages],” he said. Recent buyers, Santos said, would have qualified under rules that call for an ability to pay a higher rate than the current variable rate and should have room in their budgets for bigger mortgage payments.

…..the bold prediction of economist and author Jeff Rubin that the jump in rates could be as steep as three to four percentage points over the next two years as the Bank of Canada raises rates to keep inflation caused by increasing energy costs in check. That increase could add up to $1,000 dollars a month to the payment on a typical-for-Metro-Vancouver $400,000 mortgage.

Cameron Muir, chief economist for the B.C. Real Estate Association, is forecasting mortgage rates might increase 1.30 percentage points on short-term mortgages and perhaps 0.75 of a percentage point on five-year rates by the start of 2011. That modest increase in interest rates will still dampen sales as they combine with Metro Vancouver’s high prices, he added.

Oshawa – “My spouse is a financial planner, working almost exclusively with middle class working families, and the horror stories I hear are unbelievable.”

This anecdote from Oshawa is from somebody who sees ‘horror’ for some in the future. -vreaa

‘From Canada’ at G&M 15 Dec 2009 8:11 am writes –

“My spouse is a financial planner, working almost exclusively with middle class working families, and the horror stories I hear are unbelievable. People living in houses they bought 10 years ago owing more than they originally paid due to refinancing for one reason or another. Young couples buying homes with 5% down, 35 year amortization, with mortgages totalling 6 to 7 years total income because the interest rates are so low that they now qualify for larger monthly payments.”

“The Sutton rate is almost impossible to qualify for, my agent told me he is very frustrated with this marketing gimmick.”

Is this a case of a lender trying to lure borrowers with unobtainable headline rates, a borrower with too large a downpayment to qualify for CMHC insurance, or a lender seeing higher risk in a RE portfolio than is immediately apparent? -vreaa

A poster at RE Talks made a comment 2 Dec 2009 about Sutton 5 year fixed rates of 3.6%. This was followed by this comprehensive revelation from westar99 13 Dec 2009 4:32 pm –

“The Sutton rate is almost impossible to qualify for, [even though] I had a Sutton agent last spring [2009] when I bought a new place. I had a great credit score, late thirties, no dependents, $160,000 per year upper management salary, employed for more than five years at the same company, a 50% $400,000 cash down payment from the sale of my paid off old property towards an $800,000 property, two cash flow positive investment properties with 30% of the value in equity and an investment portfolio/RRSP’s worth $300,000, nothing outstanding for any line of credit, and they still turned me down. But then they told me I could qualify for another “special” deal which was slightly worse than the rate I negotiated with RBC. My Sutton agent told me that he hasn’t had one client who qualified, and they even turned down a dentist client of his. He told me he is very frustrated with this marketing “gimmick”.

David Rosenberg – “Is the Canadian housing market in a bubble? It sure looks that way.”

More and more mainstream commentators are declaring the Canadian housing market very significantly overvalued, and it is now commonplace to see the MSM use the term ‘bubble’ to describe it. -vreaa

David Rosenberg (Previously of BMO and Merrill Lynch, now at Gluskin Sheff + Associates) has been a sensible and moderate voice over the last decade, and is never moved to sensationalism. Here are extracts from an article by Rosenberg G&M 11 Dec 2009 –

“Is the Canadian housing market in a bubble? It sure looks that way… Looking at Canadian home prices in relation to personal incomes or residential rent, what we have found is that housing values are anywhere between 15 per cent and 35 per cent above levels we would label as being consistent with the fundamentals. If being 15-per-cent to 35-per-cent overvalued isn’t a bubble, then it’s the next closest thing.”

[UPDATE: In the Breakfast with Dave release from gluskinsheff.com 10 Dec 2009, Dave adds “We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows.”]

“You can’t have a home price bubble without a dramatic credit expansion. Over the past year, residential mortgage balances have risen 7 per cent, which …in the context of deflating personal incomes, is huge. ..Mortgage debt relative to Canadian household incomes just moved above 70 per cent for the very first time ever from just over 65 per cent a year ago.”

“What is fascinating is that mortgages on the books of the chartered banks have actually declined over the last 12 months, while the issuance of securitized mortgage products has ballooned by nearly 40 per cent and 100 per cent of them been insured by the government (over the past two years, 90 per cent were insured).”

It seems that the BOC wants people to overextend with free money, but also wants to be able to later say that they warned against that.

The Bank of Canada AGAIN issued a statement that announced ongoing rock bottom low interest rates, and AGAIN asked Canadians to be prudent in their borrowing and lending. Isn’t there an inherent contradiction in this statement? Aren’t Canadians naturally going to take advantage of free money? Aren’t some going to be imprudent? It seems that the BOC wants people to overextend with  free money, but also wants to be able to later say that they warned against that.  -vreaa

This from the BOC statement, a quoted at the G&M 10 Dec 2009 –

“Households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates.”

“Financial institutions need to carefully consider the aggregate risk to their entire portfolio of household exposures when evaluating even an insured mortgage, since a household defaulting on an insured mortgage would likely be unable to meet its other debt obligations.”

“[The] upward trend [in Canadian household debt as a share of personal disposable income] implies that households have a growing vulnerability to additional adverse shocks.” [such as rising interest rates? -ed.]