Chasing bad products with bad policy

It is not all quiet on the western front this morning. The subprime mess has become so overwhelming that even a Republican president in the US is speaking out about "helping the people." Of course, ol' Georgie does it under the guise of "mortgage insurance" and "tax-cuts" but make no mistake about it, GW is bailing out big businesses and investors that made bad decisions by giving money to people who had no business owning homes that they couldn't afford.

But Georgie isn't alone. When Greenspan left the Fed, you'd think that the policies he'd implemented would have been scrutinized prior to their continued use. Apparently Bernanke isn't so much an analyst, more like he's a puppet on a Greenspan string with his statements this morning:

The adjustable-rate subprime mortgages originated in late 2005 and in 2006 have performed the worst, in part because of slippage in underwriting standards, reflected for example in high loan-to-value ratios and incomplete documentation. With many of these borrowers facing their first interest rate resets in coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further...

Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans.

It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions.

The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation.

On the other hand, the increased liquidity of home equity may lead consumer spending to respond more than in past years to changes in the values of their homes; some evidence does suggest that the correlation of consumption and house prices is higher in countries, like the United States, that have more sophisticated mortgage markets (Calza, Monacelli, and Stracca, 2007). Whether the development of home equity loans and easier mortgage refinancing has increased the magnitude of the real estate wealth effect--and if so, by how much--is a much-debated question that I will leave to another occasion.

So let's sum up these comments in plain language: ARM's are bad products, predatory even; pessimism in the global markets have led to greater than expected financial losses; the Fed should not bail out the bad product pushers and ignorant investors who bought products they didn't understand; despite housing sector crash, economic growth (and inflation) continue to rise; and surprise, surprise, when people have easy access to low-interest credit (HELOCs) they buy stuff they can't afford--and when that easy access disappears, they look for ways to not pay for what they bought.

Here's where Georgie steps in and turns the homeowner into the "victim."

Bush will direct Treasury Secretary Henry Paulson and Housing Secretary Alphonso Jackson to work on an initiative to help troubled mortgage holders get services and products they need to keep them from defaulting on their loans.

Bush also planned to:

- Urge Congress to pass Federal Housing Administration overhaul legislation that would give the FHA more flexibility in assisting mortgage holders with subprime mortgages.

- Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans.

- Call for rigorously enforcing predatory lending laws and strengthening lending practices.

On behalf of all sane, educated and aware investors out there, I'd just like to say thanks to Georgie and Benny for working so diligently to inspire confidence in our economic systems. I know, I know, we are different up here in The Best Place to Live on Earth TM.

This just in: apparently sane, educated and aware investors are a minority in the marketplace as markets react favorably to Georgie and Benny's "there, there, everything is going to be OK" speeches. How does dumping money into a sinking ship plug the leak?

Has it started?

Over the last week or so listings in our segment of the market have been going through a bit of a change. I'm not sure if the total listings in SFHs with suites have gone up (I haven't counted sales yet), but I do know that there have been multiple, substantial price changes downward. I also have noticed that quality has gone up. I don't know if this is the work of flippers, but it appears in photos at least, that the places listed in our price range (max $425K) look better kept than they did four months ago.

Another piece of anecdotal evidence: where we used to see places come onto the market at $419K or $424,900, we're now seeing $399K and $405K. Could it be that the tides have turned for agents? Are the RE professionals recommending lower starting prices for quicker sales? I'm guessing so. That small difference isn't much, either to us, or to a Realtor's commission. The quicker they sell a place, the sooner they get paid. After a couple of years of hectic sales, I'm sure the gang used to quick selling are just itching to get that turnover going again.

We've had to literally put the phone down twice this week as a preventative measure against getting sucked into looking and potentially buying something. We've been doing math like crazy lately, but every time we do, we make sure we do the math when that price has come down by $40K not twenty--that's only a 10% drop. Hopefully in the next few months we'll be doing the math on places that have dropped 15%.

Tuesday News Hunt

Just some highlights from a RE/money market-filled news day:

Foodflation rears its ugly head again.

While the BoC says that despite all the visible warning signs, inflation is, in fact, under control (yah right) and therefore likely won't be raising rates again in September.

Scotia Bank sees massive profit and claims little exposure to speculative ABCP markets.

Meanwhile RBC states ABCP risks tally to $1.1B; but remember that's barely 3% of annual operating profit.

CHIP finally has some legal competition in the "we'll steal your hard earned home right out from underneath you seniors' unsuspecting eyes" market.

South of the border, new home sales beat expectations, but sales of existing homes drag prices down 3.6%.

Closer to home, BC tops in RE prices, but income gains, not so much, despite record unemployment. BC's average income = $39,500 annually. Income growth gains are LOWEST IN ALL CANADIAN PROVINCES.

This is eerily similar to a certain name we all know and love, non?

"Ingenious" would-be landlords "bend" rules of the RTA to take advantage of uneducated, unsophisticated, first-time renters in a tight market: who would of thunk it?

Over to you...

Student Hunt in Victoria

Now before you drivers get too excited, we're not inventing a new game involving fast moving cars and a certain circular shaped traffic route with plenty of zebra-striped "target rich environments" on campus. Rather we're simply pointing out that students too are feeling the house hunting blues.

Maybe we'll start seeing ads on Craigslist like this:

FOR RENT: first time landlords, previously university students themselves, seek four international, female, quiet, studious, master's students to share one room with outhouse in back forty of scenic, serene, private, quiet, inner-city, farm-like, family home off West Saanich. Just 20 kilometres from campus, this unique opportunity provides all the benefits of close proximity to campus, yet 2 one-hour bus rides to school each day each way, will make you feel like you did when you spent the summer hopping trains all day while backpacking through Europe. No phone, no cable, no internet, no pets, no parties, no running water, no heat, no electricity included (or available). $2500 per month. ACT QUICKLY, this unit never lasts long. 420 Friendly.

Quick thoughts on Penticton

Ms. HHV and I are up in Penticton this weekend to cheer on some compadre's competing in Ironman Canada today, and so I can sign up for next year... the swim start truly is the most amazing spectacle in sport. Almost 3000 racers left the beach together for what will be a 17 hour race for a few of them.

To say this town is booming is a considerable understatement. Condos going up everywhere. Beautiful place. Must be the Olympic factor. Or maybe it's the spillover from the real retirement capital of Canada 45 minutes up the 97?

Open thread for your comments, links etc... next post likely from Vancouver on Tuesday.

Do Something

Dear Victoria City Councilors:

As concerned residents of Victoria, who currently rent and watch the local real estate market closely, we write to implore you to consider further action on the affordable housing crisis. It is admirable that the city recognizes that coop housing collectives and non-profits working at eliminating homelessness do necessary work; however, these targeted efforts do little to nothing in the way of impacting real rents that hard working individuals and families pay.

My previous employer is facing a critical labour shortage. Its employees need only have a high school education. That employer offers above average wages and benefits too. But the lack of affordable rental housing is driving its employees, both new and old, out of the city. You see, it's not just Victoria that has extremely low unemployment. It's a Canada wide phenomena that is causing young people to examine the cost of living in Victoria and look at opportunities in cities with more affordable housing stock.

A developer has approached you with a proposal to build 39-units of rental stock for a guaranteed 10-year period of 10% below average rents. If you use today's current rental rates as per BC Statistics, the developer is promising 2-bedroom units at approximately $750.00 per month. For a young family earning roughly $50,000 per year, that rent would require roughly 20% of their gross monthly income. That kind of rent to income ratio would enable disciplined individuals and families to save a considerable down payment in order to own a similar sized home of their own in the future. Who knows, maybe they will see the benefit of ownership and even work to own the unit that they rent from the developer?

We know that Council is divided on this issue: some of you believe that adherence at all costs to the official community plan is paramount. But we think that Helen Hughes has a much more realistic outlook: "We have to think of the larger good in addition to the needs of the close proximity," Victoria councillor Helen Hughes said. "If we turn this down, we are saying to anyone else, 'Don't bother, because we don't care to look at this.' ... This could kick-start others to think this way."

Ms. Hughes is right. And she is in direct opposition to at least three of you--Mayor Alan Low, Coun. Pam Madoff and Coun. Geoff Young--who believe that building apartments equates to "destabilizing neighbourhoods." Mr. Young went so far as to even comment that "other developers will stampede to the city looking for similar concessions 'if we send a message that blockbusting is OK and we are prepared to throw community plans in the dumpster.'"

Mr. Young, we here at HouseHuntVictoria hope you are correct. While you see the development of similar rental housing on similar (to these proposed) terms as bad for your community plan, we see them as sustainable. We believe the average Victorian will agree as well. But we won't receive confirmation of that until you allow a public hearing, which it seems naysayers on Council are wanting to prevent from happening. Thankfully, naysayers are in the minority.

We encourage Council to consider other similar plans, in other locations like Fairfield, Fernwood, and Sears. If the real estate market has changed enough to have developers considering rental stock as a suitable alternative to the pump and dump process of condominium development the city should embrace and encourage sustainable, affordable growth for the people who want to live, work, pay taxes and raise families here. It is time for this city to send a message to its citizens, and people considering becoming citizens, that it wants to provide opportunities for sustainability and not just cater to wealthy Baby Boom-generation types seeking waterfront properties and luxury condominiums and the developers who cater to them.

To the immediate neighbours of proposed rental developments: we don't believe that rental housing equates to issues that can't be fixed. If you are concerned about traffic, work to address the reliance on cars made necessary by inadequate public transit and bike lanes in your neighbourhood. If you are concerned about crime, work to address the inadequate policing that the City of Victoria provides. If you are concerned about density, get over it. Density is a reality when people move into town. Your property's market value is directly related to the amount of people who want to live in Victoria, if you want to see your bubble-value remain long term, then you should work to encourage sustainable growth, otherwise businesses will suffer, young working people will leave and Boomers will move to where they truly can have it all.

Respectfully,

HouseHuntVictoria and Ms. HHV

Maybe this time it really is different?

I have to admit that four straight days of TSX increases has got me in a bit of an ignorant stupor. Beginning last Friday, when the US Fed dropped its short term interest rate by 5o points (0.5%), the markets have undergone a bit of stabilizing and a subsequent rally that has the TSX recovering 50% of its recent drop.

A recent Decima poll produced some rather unexpected (on my part) results:

The Canadian Press-Decima survey found that 55 per cent of respondents didn't think the market troubles herald a recession, compared with 22 per cent who were pessimistic. It also found that 66 per cent of respondents reported being unaffected by the financial tumult.

Another four per cent said they'd lost a lot of money, 17 per cent reported losing some money, and five per cent said they'd made money.

Almost half of the people surveyed said they felt the worst was over and the market will rise again soon, while 28 per cent said markets will continue to fall in the next few months.

I don't wish financial hardship on anyone. I think that savvy investors, both RE and equities, can avoid losing money in most market cycles by paying attention, getting good advice, and trusting their instincts. That said, from watching the markets with more care and attention, mostly due to this blog, for the past 8 months I'm surprised that more people aren't concerned about both over-inflated markets.

I consider myself fairly risk friendly. I like to play poker and I don't mind losing. I've found that by learning and paying better attention, I lose far less often. I have a similar outlook on the equities market: I'll take a chance with a percentage of my portfolio, rarely exceeding 20% speculation. The rest of my investments I consider value. That means I look for good deals. My favourite ratio is price to sales. I like to think that for every dollar of my own, I should get at least a dollar of the consumer's.

During recessions the pickings are slim for this philosophy, mostly because the peeps aren't a buying. During periods of high inflation (like now, and yes I know that's unsupported) the pickings are also slim because stock prices are hyper-inflated. Long story short, I have some cash in my trading account that I can't find a suitable place to park. Usually in transitional markets the choices are plentiful. I don't believe that this market is in a transitional phase. And I do believe that is a direct result of Central Banks' irresponsible actions over the past few weeks... even years.

Take this headline for example: Central banks are stealing from the average citizen.

What happens when fiscal irresponsibility gets rewarded with bailouts? You get more fiscal irresponsibility.

But as our credit bubble undergoes an ugly unwinding, it's dawning on folks that central banks lie at the epicentre of the problem.

Andy Xie (Financial Times) writes: "The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people's money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naive investors deserve to be bailed out. They deserve what is coming to them.

"The central banks should focus on price stability, not financial market stability, and should provide liquidity only to contain the multiplier effect of the bubble bursting on the economy. Nor should central banks stimulate to avoid recession at any cost. Business cycles are not bad. Excesses must be followed with cleansing...

"Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former U.S. Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this 'central bank put.' As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan 'put' for good."

Now to paraphrase Mr. Wheaton (sorry couldn't resist one last poke): one person's opinion does not an expert analysis make. So I'll give you this one too, also from the same article:

U.S. Comptroller General David Walker was quoted Tuesday (also in the Financial Times), as follows: "Drawing parallels with the end of the Roman empire, Mr. Walker warned there were 'striking similarities' between America's current situation and the factors that brought down Rome, including 'declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.'"

I'm not suggesting that the doomsday scenario is imminent, but is it not telling of a considerable problem when federal financial leaders split on economic policy so diversely? What is it going to take for the markets to start paying attention? Given how interconnected the RE and stock markets have become since the dawn of the ABCP debt-funded retirement mutual fund mess, something drastic needs to take place in the stock market for the drastic correction I'm looking for in the local real estate market.

Press Freedom

The blogosphere is great for press freedom. The anonymity that blogging provides allows some of us to attack mainstream media and the business world with great gusto. That same anonymity though can be reason enough to take what is written in the blogosphere with a giant-sized portion of sea salt; especially here at HHV :)

When mainstream media looks at a story from a different angle and presents something other than the cod swaddle marketing mumbo jumbo we've all come to know and love (not), I applaud. It takes some serious chutzpah to tackle issues that local businesses may have a fundamental interest in keeping quiet. When an author signs his or her name to a piece of writing, I'm inclined to believe she or he as well as his or her editor has done their due diligence and checked facts. Which is exactly why this story bothers me so much.

The article, authored by Mr. Clarke, discussed the case of a Broadmead resident who saved $13,000 by purchasing a Mercedes ML350 in Portland rather than from a local dealer.

Dave Wheaton Pontiac Buick GMC Ltd. dealer principal Dave Wheaton said, "I was upset with the paper for doing it because it was one person's opinion" - referring to Ms. Schevenius. "And they are by no stretch of the imagination an expert at it. And why that was news I don't know."

As a result of the article, Mr. Wheaton said, "I barked at them. But that's normal. They have a responsibility to their readers. But they also have a responsibility to the business community as well. And that was a poor article. And it's just not true."

So said newspaper runs an article suggesting readers can save considerable money in the used car market south of the border. Local businessman (sells cars of all things) complains that the article is untrue, poorly written and "just one person's opinion." What did this article say? I'll republish the article in its entirety for your perusal:

Strong Canadian dollar encourages car buyers to cross the border

Rebecca Schevenius has always been willing to go that extra mile for a good bargain.

Or, in the case of the Mercedes ML350 she purchased last month, an extra 300 miles.

Schevenius, a Broadmead resident, says she saved about $13,000 by shopping for the vehicle on the Internet and then flying down to Portland to pick it up.

Prices for quality used cars in the U.S., historically lower than in B.C. to begin with, have become even more attractive due to the strong Canadian dollar.

"With the foreign exchange rate the way it is, it really is on the purchaser's side to go down to the states and buy a car," Schevenius said. "I love a good bargain."

The Mercedes, listed at $22,000 in Portland, would have cost closer to $38,000 north of the border. Even after the taxes were paid, the savings more than justified the time and airfare it took to bring the vehicle back.

Vehicle importers do not have to pay duty on car made within the borders of the North American free Trade Agreement, she said.

Schevenius and a friend are planning to publish an 18-page how-to pamphlet entitled "How to Import a Car into Canada" for others interested in testing the cross-border used car market.

She said it's important to sign a purchase agreement ahead of time stipulating the vehicle must pass a mechanical test. If the deal in Portland fell through, Schevenius had a list of other possible vehicles to buy in the area as a back-up plan.

Peter Tolsma of Sussex Insurance in Langford said the rising Canadian dollar - sitting at 95 cents US as of Friday - has piqued interest from cross-border buyers of in both new and used cars.

"There is way more interest and it's probably not as difficult as most people think," he said.

"A lot of it is just sheer number. Take California, it has about 25 million people and there's just a lot more cars available."

However, new car dealers say the market isn't big enough to have an impact on them.

"I haven't really come across that many because we're on the Island so it's a bit different, but I know some of the dealers near borders are conscious they are losing a few deals to that," said Saunders Subaru sales manager Edie Foster. "Most of those people are going down for really exotic or expensive vehicles."

Industry Canada estimates that Canadians purchased more than 112,000 cars from the U.S. in 2006.

Seems balanced and objective to me. But the editor of the paper has been fired. The author resigned unexpectedly and without public explanation. We know Wheaton was pissed. We also know Wheaton wasn't exactly accurate in his "just one person's opinion" assessment either unless, Foster, Tolsma and Schevenius are one and the same. The author used one private citizen and two industry representatives including a sales manager for his "untrue" article. Wheaton claims to have little to no economic sway over the paper, but given his already proven false comments about this article I'm disinclined to extend him the benefit of the doubt here.

OK, OK, rant over. Why is this story on a RE blog? When business interferes with press freedom, word needs to get out. The car business is big business for sure, but locally it pales in comparison to the business of real estate development; you know that industry which gets two sections of the paper devoted to it every Saturday. What kind of message does this send to reporters who seek to report private people's opinions on the RE market? So much for balanced reporting. Thanks Mr Wheaton, it's a good thing I don't buy domestic cars anyway.

Cool Condos

Market conditions aside, we have to admit that there are some pretty interesting buildings around. This post is a collection of some units in buildings we'd likely consider quite seriously given different prices/incomes.

And as a complete aside, in the search for these listings, I did find one condo marketeer refer to the north-end of downtown as Victoria's new "Yaletown?"--I actually threw up a little in my mouth at that... now on with the show:

This building, and this unit, is just off Government St on Chatham. I know someone who has lived here now for 3 years or so and loves the place. The loft units make great use of limited space, and while my friend lives alone, I know Ms. HHV and I could do well in a place this size, in this location, with this layout, for the next five years or so.

The building is mixed use; there is a school of Traditional Chinese Medicine on the ground floor. There are also several townhouses. For us to buy here we'd have to have two things this particular listing doesn't seem to have: a deck (my friend's is great, small, but BBQ friendly and surprisingly sun-drenched) and a parking spot. Ms. HHV won't likely be working downtown anytime soon.


Show suites are now open at The Palladium. When I was a kid, I did my fair share of sailing out of RVYC in Uplands. Whenever we needed new sails or other sail-related materials, we came to this building. This used to be, after being a church amongst other things, the location of an alternative used record shop, a musical instrument sales/rental business, and the Hood Sails loft in town. That sail loft was a pretty cool place to visit if you were a young sailor in town. I can rarely drive past without fondly remembering my times there. That's the kind of story that it's marketers might fixate on in sales presentations.

We won't consider buying here. Not only because we can't stomach the current price, but also because I can't handle the neighborhood. Sure you've got a great bakery across the road. And two great pieces of architecture in St. John's Church and the Conservatory just a block away in either direction. But you also have the Ministry that doles out the dole every week directly across the street, and just another 500 meters or so is the old/new location of Our Place. I commend the work that both those places do. They are unfortunately overly-necessary components of contemporary life in Victoria. But we'd prefer not to live anywhere near them, despite the stories of my childhood I could tell my dinner guests.


If strip clubs are your thing, then you should check out this unit in the Monaco building (where Mountain Equipment Coop is on Government). An electrician friend of mine worked on this building when the conversion was taking place. His stories of "creative marketing techniques" by the ladies working across the street in Monty's were legendary at last summer's BBQs. The building is obviously one of Victoria's oldest at 1888 origination. We think the place, despite its across the street neighbours, is just plain cool. I've heard first hand that quality is pretty good too.
One building I can't wait to see is The Leiser on lower Yates. Under different pricing structures, we may consider this one seriously. It's far enough from some of the "blights" of downtown and close to fantastic restaurants and pubs. It even has a 10-year property tax holiday. But if it is not sound proofed enough, the street noise from local nightspots might make the Leiser experience less than savory. It will be interesting to see who the development leases the ground floor commercial space to. Likely another (yawn) coffee shop. As if the five that already exist in a one-block radius won't be enough.

Got any favourites in the unique condo developments downtown of your own to share?

Notable News Quotes: Y2ThisTimeIt'sDifferent

Catching up on news now that I'm back home. Here's some standouts from several hours of reading:

Potential crises brewed in all corners of the world—including a bomb ticking in Canada’s commercial paper market. (G&M Saturday)

Bond traders are consuming paxil like it’s candy from a Pez dispenser. (G&M Saturday)

On Asset Backed Commercial Paper (ABCPs): call it a mutual fund of loans with a maturity date… as for the “asset-backed” part – that’s to give investors a sense of security, to compensate for the fact they have no clue what they’re buying. (G&M Saturday)

Our opinion is that natural economic cycles are bigger than anything the Fed can do and natural cycles always win—a cycle delayed only gets bigger and more dangerous. (G&M Saturday)

Taking out a mortgage with little or no down payment, interest-only payments, or an amortization period greater than 25 years is essentially the same as renting, unless you can deduct some of the interest against rental or business income. In fact, it may even be more costly than renting, if the property falls in value while you own it (Edmonton Journal, Today)

People with 40-year mortgages are also taking on car loans, lines of credit and making minimum monthly credit card payments which barely service the 22-per-cent interest they're paying. (Edmonton Journal, today)

45 per cent of Canadians underestimate the lifetime cost of a mortgage.Only one-fifth of respondents correctly answered that due to interest payments, the average Canadian homeowner will ultimately pay in the range of 151 to 200 per cent of the original loan amount over the course of a 25-year mortgage. (Edmonton Journal, today)

Canada's current real estate bubble is likely to burst within three to five years at the outside. (Edmonton Journal, today)

New on the horizon are 40-year, no-down-payment and no-interest mortgages, which produce little if any home equity. (Edmonton Journal, today) Seemingly celebrated here? (tongue in cheek)

In March, a lender said it was responding to "continued demand for flexible mortgage options that make buying a home easier for Canadians."

It also cited a Canadian Mortgage and Housing Corporation survey showing "40 per cent of Canadian mortgage consumers are willing to make higher mortgage payments if it means they can buy a home sooner with a smaller down payment.(Edmonton Journal, today)

Makes for some interesting reading, non? H/T to anon in previous thread for Journal article.

Falling over bags of cash

So I was walking down the streets of downtown Calgary, AB for the past few days and have bruised knees and sore ankles from tripping over other people's dropped bags of cash. I'd ask someone for the time, they'd give it to me and a $5 dollar bill for my trouble. Cash is king and there is plenty of new royalty in Cowtown.

On a more serious note, there are stark differences in the Calgary RE market to that of Victoria. First off, Calgary suffers no perceived shortage of land. I use perceived here a purpose; I don't believe for one minute that Victoria suffers from a shortage of land either, rather we suffer from a shortage of will to develop infrastructure that would support outward growth. We also have plenty more NIMBY's than they do, but that's another story altogether. Anyway, my point here is one about perception, and the difference between Calgary and Victoria as I interpret it. In Calgary, they see opportunity and challenges, they work to fix them, and they grow as a result. And as a secondary outcome, their massive growth has, despite the overwhelming price increases in RE, kept their prices more in-line with fundamentals.

How can I say this? My sister bought a house in Airdrie, 30 kilometres north of downtown. She paid less than $300K last year (she bought before completion and closed in the last 7 months) and between her and her partner pay out less than 35% of their after-tax income in mortgage and property tax payments for a 2200 SF home. That's the suburbs you say, and not actually in Calgary. You're right. But considering that in heavy rush hour traffic it took me less than 25 minutes to pull into the downtown hotel parking lot (4th Ave and 5th St) of the convention I was attending every day I'd say it's reasonable enough.

Compare that to the nearest bedroom community of Victoria in Langford. $300K doesn't even buy you an 800 SF brand new, two-bedroom condo before completion. And you can't get downtown in 25 minutes during rush hour. So, the price difference here, only taking price per square foot into consideration is $375/SF in Victoria compared to $136/SF in Calgary, or $239/SF. It is comparing apples to doughnuts for certain, but I'll go on record anytime, anywhere with this statement: the lifestyle that Victoria offers, with the weather that Victoria has, is not worth $239/SF in purchase price, especially when you consider incomes. Calgarians are making, on average, almost 20-30% more for semi-professional and professional jobs.

Guess what? Calgary's market isn't as hot as it used to be. Where slick ads used to sell homes, show homes, and lots of them (in my sister's community of less than 300 homes, there are more than 2-dozen show homes), are now necessary to entice buyers into new communities. And communities they are. In Victoria, developers market pseudo-villages to older buyers. In Calgary, developers market new communities, with all the amenities--schools, shopping, daycares--to younger, getting-established types. I wonder which is the more sustainable market for a city to grow with?

The downtown markets are, of course, completely different and likely far more comparable. But that isn't the point of my comparison. I'm comparing products that fit our economic criteria in two vastly different locations with different appeals and different drawbacks. I've lived in both towns and like them for different reasons. Calgary wins this comparison, for me alone, without fail, on any conditions I may place on the comparison.

Open Thread

I'm on the road this week so posting will be sporadic. Here's an open thread for you to post your links and comments.

Anyone else getting tired of reading "Markets depressed by credit squeeze?"

I was on "On the Island" a CBC radio show yesterday morning. I'm glad they're trying to balance out their stories on local real estate by getting "outside the industry perspectives."

I'm in Calgary today: let's say the real estate "sights" are completely different here.

The Day Victoria's Bubble Burst

I'm taking some creative license today. My words are normal. Ben Stein's quoted words are italicized. Take this for what it's worth: hopefully an entertaining read.

My pal Pat M. just bought a bungalow on Oak Street, in Richmond, for 60 percent of what it sold for in 2007. Down the street from me here in Delta, four houses have been on the market since 2006. The asking prices now are about one-third less than they were three years ago. Up and down Yaletown in the Downtown core, apartment houses built during the great boom of 2004-2007, lie empty, boarded up, not one unit sold, in bankruptcy, with banks holding title.

Victorians do not like to believe they could learn anything from Vancouver, but perhaps in this one case they might try.

The Vancouver residential real estate boom began in about 2003. It was not just a boom. It was a superboom, with miserable bungalows in East Van running up from $140,000 in 2003 to $600,000 by 2007. Two-story wartime houses off Commercial went from $250,000 to $450,000 and then over a million.

One-bedroom condos in Yaletown were built and sold for $350,000 - what a house in Richmond had been five years before. Every day, home buyers would look at the prices and say, ''It can't go on.'' But every day, for five years, it did go on. Middle-class families were priced out of the market, and the brokers said, ''But the rich will always be able to buy.'' Ordinary rich people were squeezed out of the market in some areas, but the brokers said, ''Never mind, the movie business people will buy anything.'' The movie business fell into a depression in 2007, and the brokers said, ''The foreigners are buying. Compared with Paris or Toronto, real estate in Vancouver is a bargain.''

Everyone wanted to get in to the game, get the down payment on a condo, somehow struggle with the payments for a year, then sell out and get rich quick. Inflation pushed housing prices into the stratosphere. But even when inflation stopped, brokers said, ''The prices have nothing to do with inflation. Everyone on earth wants to live in Vancouver. The price will go up forever here, no matter what else happens in the rest of the country.''

Then the music stopped, some afternoon in late-2007. As if a spell had fallen over the city, suddenly things began to stay on the market for three months, six months, a year, two years. Buyers disappeared. Asking prices stayed high, but nothing sold.

The great Vancouver real estate boom was over. Prices had gotten so high that they could no longer be justified by inflationary expectations, or the influx of foreigners, or the climate, or for any other reason.

Now, just short days later, those brokers who are still in the game tell sellers to expect that their houses will be on the market for two years. Other brokers have sold their BMW's and are now working as "talent-finders'' or public-relations people, dreaming of the days when they worked for 6 percent of infinity.

Not long ago, I was in Vic West looking at condos, talking with recent buyers, would-be buyers, brokers. The conversation is eerily familiar. Listen to the buyers: ''Of course, we'll take two extra jobs and avoid having kids to buy this studio apartment facing a gas station for $250,000. Next year, it'll be $350,000.'' And the brokers: ''Of course, there aren't many Canadians who can afford to buy here any longer. But there will always be rich foreigners. Victoria is the most beautiful city in the world. Victoria is unique, and two bedrooms in Esquimalt should cost half a million dollars.''

Do not believe it. Trees do not grow to the sky, and the great Victoria condo boom will eventually go the way of the great Vancouver bubble. Yes, Victoria apartments were underpriced for years. Yes, Victoria is an exciting place. Yes, there are a lot of rich people who like Victoria. Yes and yes and yes. But no real estate bubble ever goes on forever, and the day when everyone agrees that it will go on forever is usually the day it ends.

Maybe this boom will go on a little longer. Maybe, as some of my banker friends tell me, it has already started to totter. Who knows, exactly? But when buyers consider tying themselves in knots to get onto the housing merry-go-round, in the certain belief that they have a sure thing by the tail, they might remember the housing boom in Vancouver and the shuttered condos in Yaletown. The only thing certain about housing bubbles is that they never last.

H/T to the anon in previous post for the link, and to Tony Danza for sourcing it out originally in comments on VancouverCondo.info

I'm sure I've broken a few creative licenses and performed several copyright infringements, so this post may disappear suddenly and without notice.

Finally, a HUGE sorry to Ben Stein for completely re-wording and ruining what was otherwise a great piece of writing.

CIBC Spells out their losses

Here. Central banks DUMP cash into markets.

The Canadian Imperial Bank of Commerce says it has about $1.7 billion US at risk in bets on the troubled U.S. mortgage market — as much as $1 billion of it relating to subprime, or junk, mortgages.

It said it will write off about $290 million of the total in its next quarterly earnings report and still show better profits than analysts had been predicting.

CIBC's share price opened at $91.50, up $3.99 on the Toronto Stock Exchange.

CIBC is likely to be one of a string of Canadian banks reporting exposure to the U.S. mortgage crisis...

Some of the bets have been covered with offsetting bets, the statement said

CIBC gambles with its investors money. Canadians buy financial stocks driving up the TSX. Crazy world we live in. This will make things worse, not better long term. Read all about it here.

FTBs apparently don't make good landlords

According to the Residential Tenancy Branch, dispute arbitration cases are up 40% compared to last year. The TC covers this story here. Reasons for rising number of arbitration cases:

1. low vacancy rates: [landlords] "don't cut as much slack to tenants because they don't have to"
   
2. expensive housing market: "noting rising costs have left some people struggling to pay bills and mortgages"
   
3. rising number of secondary suites: "Most of the growth in rental units has been secondary suites, but [the suite owners] are not professional landlords," she said. "What you have are people who don't know the law renting [units] out to tenants and doing stuff on the fly. They don't provide written agreements, they don't provide rent receipts and they figure they can kick people out whenever they want because it's a 'my home, my rules' mentality."

Points one and two seem fairly straight forward and don't need much in the way of HHV colour commentary. Which leaves us with point number three. Yes, homeowners aren't typically professional landlords; some may be, but most are not. Most new suites are there because they are the only way that home gets owned in this market. Most incomes won't support "average" mortgages without mortgage helpers. And guess what? Those suites for rent are now commanding outrageous prices in excess of what apartment units go for. And most suites are anything but sweet.

Low vacancy rates mean that suite rentals are in a seller's market. That means cash strapped FTBs don't need to spend much on beautification or upkeep. And many won't know the long standing issues that came with their house when they bought it. I can imagine the phone calls:

tenant: "uh, Mr. Johnson, um, I don't know how to tell you this, but, whenever you and Ms. Johnson have a shower the downstairs sink overflows."
landlord: "you're kidding right."
tenant: "uh, no."
landlord: silence
tenant: "uh, can you fix it, the carpet's starting to stink."
landlord: "can it wait two weeks, we just got paid and the mortgage is due, interest rates just went up a quarter point and we're eating Kraft dinner? We have nothing left."

You get my meaning on that one. No surprise that there is a lack of paperwork happening with these suites. Why? Because many people, especially us young folk who have grown up with law-breaking sympathies tied to the marijuana culture, shirk our civic duties to pay taxes and play within the rules of the system. So they don't leave a paper trail, don't claim the rental income and don't "believe" their tenant has any rights because they don't play the game on the level.

CondoHype! Inspired: "Radius Reality"

We've really enjoyed CondoHype's! writing these past few months. If I could write with half the wit or vocabulary of he/she, I might get the traffic of Victoria's Truth. Alas, I don't. None-the-less, in honour of CondoHype, I give you this attempt at satire:

Radius Reality: Episode One...

You may not be able to read it, but Radius promises an episode of Melrose Place if you only buy a unit in the "village" where beautiful, sexy, successful singles (some being politically-correct single parents) own. Note the way people look at each other: men look at younger women, women look emotional, and the add speculates on "connections" with your neighbours--ah, the old village euphemism rears its ugly head. Last I heard, people buy a roof over their heads because they need shelter not a dating service: talk about a new wave of post-materialist values. (And you can get free dating sites on the Internet)


Wow, this ad promises you childcare, an exercise facility and ample opportunities to check out "hot chicks" riding Segways in those "new" tight jean styles. And at a $250,000 "starting" price, Radius can only be targeting the First Time Buyer and those that must choose between owning a house and owning a car. Don't worry, another ad espouses the non-need that owning a car will be if you live at Radius.


I don't think Ms. HHV would appreciate me addressing the blatant sexism going on in this ad, so I won't. I didn't think this kind of advertising would invade sleepy, old, target the boomers Victoria.

Local Sub-Prime?

In case you were wondering why the markets have declined by almost 5% this week to build to a 3-week loss of over 10%, we give you this local example of the wide-spread problems that are expanding into non-sub-prime territory in the US:

Reflections is having trouble pre-selling its units. Until it gets 65% of the building sold, bankers won't lend them the construction seed money to finish the project. It sat for the better part of a year with little to no work being done while salespeople worked in overdrive. It quickly became apparent that something creative needed to be done.

Enter Canada's version of the Alternative Rate Mortgage. The developers at Reflections are offering you a teaser rate. Now they don't have any control over the actual interest rates you'll be charged by your bank. But they do have control over how much you will have to pay in total. The monthly payment on a $340K condo is roughly $1800/month (40-year amortization, 6% interest, 0% down). Developer drops the price by $10K, and your monthly payment is still unattractive. So what are they going to do?

How about tease you with cheap mortgage payments for a year? Which is exactly what they have done. You pay them full price ($344K or $334, depending if you read or heard the add) and they give you a cash-back option equal to half your mortgage payments for one year (12 x $900 or so). At last count, they had 10 units for sale under this scheme and 3 units sold leaving another 7 to go.

Now I know some of you are going to claim this isn't sub-prime. And your right. The lender will still need to qualify the buyers and the buyers will still be required to purchase mortgage insurance. But what this has done is artificially inflate the purchase price of the condo. How can I say this? Because they'd have no trouble selling the units if they dropped the price down to what consumers are willing to spend.

Just how big is this problem? In the Victoria market it's--as far as I know--contained to Reflections. But think how wide-spread this credit issue is throughout our economy. Bought a car recently? Did you get 0% or 7% financing? My guess is you got much lower than 7% if you financed through the dealer's creditors. Bought furniture? Did you "buy now and do not pay for one full year?" How about electronics?

You may have noticed that prices in these categories aren't really inflated, but the demand has been. This is why I argue vehemently that true inflation numbers are much higher than the CPI suggests. Demand has been inflated too. And when people borrow to spend now it creates long-term economic consequences in much the same way that increased prices do.

It's these types of new-fangled credit schemes, targeting those that don't qualify for traditional credit products, that have created the largest credit bubble in world history. In the US it seeped into over 20% of the housing market. Up here in Canada, experts are claiming it's only 5% of our housing market. But the problem is so much bigger than the so-called sub-prime debtors because many so-called "prime" candidates--you know, people with good credit--have taken advantage of loose lending so that they can over extend themselves too.

When assets start to decline and the real interest rates start to kick in, those "prime" buyers look twice at their debts and usually stop spending. They want to consolidate into the cheapest interest bearing vehicle (the HELOC) but their home's value has dropped and they can't get one. They either walk away or get forced out of their assets (homes) because lenders need to get something for the debts they are owed. And good creditors become "victims" of their own desires to have everything now and lenders/retailers desires to provide everything now for a price that won't drive you out of your home. Oh, the irony.

If I had a nickel for every teaser interest rate pre-approved credit card I've been offered by mail or over the phone I wouldn't need to work. Guess what? I haven't worked much over the past 4 years while I've been in university. Don't you think I shouldn't be offered pre-approved 0%-for-the-first-year credit cards with limits totaling 25% of my yearly gross income? I do. So I say no. I bet I'm in the minority on that one though.

Painful economic times are coming. And they are deserved.

Have No Fear...

The Bank of Canada is Here!

In light of current market conditions, the Bank of Canada would like to assure financial market participants and the public that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of financial markets.

These activities are part of the Bank's normal operational duties relating to the stability and efficient function of Canada's financial system. The Bank is closely monitoring developments, and will deal with issues as they arise.

Now correct me if I am wrong, but isn't this just the bank stating "don't worry, if interest rates have got you down, we'll just print more money to keep things flowing"?

I'm no economic expert. All of my formal economics training has come in the form of a single 300-level Canadian Political Economy course at UVic. But I don't see how this could possibly be celebrated as a good thing. Let's look at what's happened in markets over the past 5-6 years:

• Dot Com burst leads to liquidity issues
• September 11, 2001 creates market uncertainty
• US Fed, quickly followed by BoC, drop interest rates (in the US almost to nothing; Canada bottoms at 2.25%)
• Corporations and individuals borrow and spend
• Stock market rises considerably over a 3 year period
• Housing markets in the US and Canada go on a wild ride up where not only month over month inflation but year over year inflation numbers are so mind boggling that 24-year-old would be Donald Trumps borrow excessively, lie on mortgage applications and artificially inflate neighbourhoods
• Housing markets in Victoria go on a wild ride upwards fuelled by 65-year-old would be Donald Trumps spending like Victoria Beckham on third, fourth and in some cases even fifth speculative non-rental pool properties, thus artificially inflating property values
• 2007: bottom falls out of loose lending practices in the US, sub-prime market blamed
• Later 2007: sub-prime woes quickly blamed for foreclosures on properties held by prime mortgages (you know, the zero risk folks) who would simply rather not own a declining asset and get stuck paying for ridiculous over-inflated prices
• Cramer calls Armageddon, demands Fed drop rates, Fed doesn't, markets plunge
  
• Stock markets start bouncing around like a 2-year-old blowing raspberries on a jolly jumper; traders continue making money hand over fist
  
• BoC says: "don't worry, we'll print more money, nothing to see here, but we're going to raise rates none-the-less"

Am I the only one left scratching my head? Seems to me the writing is on the wall, the BoC is acknowledging it, but no one is bothering to read it.

Forgive my tongue-in-cheek brief, historically inaccurate, based-on-truth synopsis of market activity into 12 points, but you get my meaning, non?

Giving Back

Quite often the tone of this blog is overcome by negativity; it's par for the course of being a RE bear in a boomtown. This post seeks to correct that, even if just for a day.

The August long weekend is our favourite weekend in Victoria. The Symphony Splash has been a tradition for Ms. HHV and I since we met and long before. If the reports leading up to this year's rendition were correct, we owe a debt of thanks to RE developers Bayview. Even if they were slightly exaggerated for marketing effect, good on Bayview for announcing a 5-year deal to keep the show running.

We're not big on crowds so we rarely go downtown for festivals or Canada Day. But Symphony Splash is a must-not-miss event simply because of the spectacle. We typically see 2 or 3 symphony concerts at the Royal each year, but nothing beats the outdoor experience. We sit in awe, lose ourselves in the sounds, and look at the sights of one of the most beautiful cities we've ever seen.

So thank you Bayview for giving back to the community which is likely giving you more than you could have ever dreamed of. Thank you Farmer Construction for the fireworks. And because I'm in a gratitude-filled mood: thank you Avia-West for supporting competitive cycling in the cycling capital of Canada (one of my other loves).

WATCH THIS

H/T to Olives for the link.

More:



Take this with a grain of salt of course. Victoria is different; we don't have adjustable rate mortgages. But if you don't think our economies are interconnected, think again. Remember this is coming from the man, Jim Cramer, who not more than a year ago was preaching that the sub-prime mortgage crisis was contained. Well, Cramer, not so much eh? View more Cramer content here.

Y2ThisTimeIt'sDifferent

If you're a regular reader of this blog, this next statement will come as no surprise:

INFLATION IS NOT JUST 2-3%, REGARDLESS OF WHAT THE CPI SAYS

Need proof? How about the impending Latte Recession?

For years, Starbucks has claimed its perpetually growing chain of stores was resistant to blips in the U.S. economy. But this week it tempered that message, implying its customers might actually be cutting back on that extra Frappuccino

...taken a hit as consumers trim spending in the face of higher gasoline and food prices (remember, CPI doesn't include these, they're too "volatile")

Get ready for more stories in the near future about FOODFLATION!

Ethanol demand drives up costs for summer BBQers

Get ready for the 5 dollar loaf of Wonder Bread

And you thought gas was expensive? Time to get on the porridge bandwagon.

How does this impact the local RE market? September is the next expected interest rate hike. Bond yields will rise, sending mortgage rates higher. Think you that we may get another central bank rate hike come December?

UPDATE: Thanks S2 for the links.

Your home may not be the investment you think it is

Best in the West yes, but best overall? Think again.

Volatile Day and Market Commentary: Oh, Happy Day!

Stock markets around the globe are taking a big-time hit again today.

The 40 year mortgage is the most popular mortgage product in Canada says the CBC, despite the extra $70K one would pay in interest versus the 25-year option on a $250K mortgage. Canadians are, in fact, stupid: like this article suggests.

VREB have their July numbers out today; rather quick I might add:

Sales of homes and other properties in the Greater Victoria area continued to show exceptional strength last month reaching the highest level for the month of July in over 15 years. There were 922 sales through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®) in July, up over 36 per cent from the 677 sales in the same month a year ago. There were 949 sales in June of this year. Meantime, 27 sales of over $1 million helped push the average price of single family homes sold in July to another record high of $574,753; the median price was considerably lower at $515,000; the six-month average was $560,393.

Victoria Real Estate Board President, Bev McIvor, says the continued strength of the market is remarkable, "Despite the significant increases in prices that we have seen in recent years, the total number of sales shows that demand remains very strong. The number of sales so far this year is running over 11 per cent higher than in the first seven months of last year while the six month average price for single family homes has risen over seven per cent since the beginning of the year."

The average price for all condominiums sold in July was $306,668; the average for the last six months was $311,568. The median was again lower at $268,000. The average price for townhomes last month was $402,558; the average for the last six months was $397,434. The median was $379,900.

MLS® sales last month included 499 single family homes, 241 condominiums, 106 townhomes and 22 manufactured homes.

There were 3,402, properties listed for sale on the MLS® system at the end of last month, up from the 3,318 properties in the same month a year ago.

We should notice several things about this month-end report that aren't the same as previous ones. I've highlighted them above.

Despite record numbers of sales, 7% return on your investment if you've bought in the last 12 months should have you worried, non? Had you bought with the intention of trading up/flipping, you haven't broke even yet when you consider that 6% of your sale price will go to your Realtor and that other 1% goes to property transfer tax. Sounds like not too many of these get-rich-quick believers are getting rich.

Condos are, in fact, according to VREB, coming down in price. Anyone who tells you different doesn't read this monthly update obviously. If you're thinking of buying a condo: WAIT.

I can't remember any other monthly summary that included the numbers necessary to do a listings-to-sales ratio calculation (in case you're interested it's about 26%). The changes that MLS made to their website have made it very difficult to track (just ask Prairie Boy at Victoria's Truth), nice of them to do it for us, eh? Can we say that too much self-regulation is not necessarily a good thing in this market? But a listings-to-sales ratio of 26% is a great thing for this market.

I also need to point out that whoever writes the MLS sales stats update has worse math skills than I do (is that possible?). I tallied their total sales (868) and then looked at the total they gave us (922) for a difference of 54. The only logical explanation is that 54 sales went through the board that weren't on MLS, which is highly likely, and that I can adjust my sales/listings ratio from 26% up to--wait for it--a staggering 27%. Today is a good day to be a RE bear.

UPDATE: OK, after some careful reasoned analysis, I realize I got a bit ahead of myself with this post. After having done our segment analysis yesterday and counting barely one-month's inventory supply in SFH and just slightly more in condos, I was overly excited about 4-months general market supply. A more realistic "Oh, Happy Day!" for bears will be when inventory approaches double what we have today.

The likelihood of 6000-plus properties for sale in Victoria seems far-fetched. I'm guessing that we're more likely to see a considerable drop in sales before we see a doubling of listings. Maybe it will be a combination of declining sales and ever more listings that is the undoing of this market. I don't see any signs of that happening right now. I'll leave this post untouched as a reminder to not think out loud on screen anymore... :)