Saturday, September 15, 2007

The winds of change: Y2ThisTimeIt'sDifferent

To say that there have been a lot of warning stories in the MSM this week would not, I repeat, NOT be an understatement. Here's an interesting one, thanks to Roger.

Of course, the highlights:

Tighter lending conditions around Canada's small but expanding subprime mortgage market could splash some cold water on Canada's housing sector in the months ahead.

Many of the mortgages... offered were to segments of the population, such as the self-employed and immigrants, that have been key drivers lately in the real estate market.

"If banks start holding back credit because they get nervous and ... credit-worthy borrowers can't access loans to make purchases, that could slow the economy,"

several subprime lenders are battening the hatches. Xceed raised its mortgage rates by 100 basis points in the past three weeks and Money Connect has also raised its mortgage rates. Money Connect CEO Maurice Forget said they've also withdrawn one type of product from the market aimed at self-employed people.

What could possibly be driving these mortgage lenders to change their products up here in Canada? After all, CMHC guarantees these types of loans against losses, don't they? That's what we hear up here whenever someone tells us we won't be like the US. You can read here for a little insight into the underlying trouble that will in fact spread northward, just as hit has hammered RE markets in Europe.

Meanwhile, there was more fallout from credit market turmoil. Investors hammered shares of Xceed Mortgage Corp. after the alternative mortgage lender suspended its dividend and warned that market upheaval could hurt its profitability for the rest of this year.

"At this time, we have no way of knowing how long the current market conditions will last," said Xceed chief executive Ivan Wahl. "For the duration of this period, it is going to be a difficult and challenging time for our industry, Xceed, and our investors."

On Aug. 13, Coventree disclosed it was having trouble rolling over its commercial paper while some lenders balked at its call for emergency funds.

Up here in Canada, where subprime lending is roughly an "expanding" 5% of the mortgage business, where it is expected that subprime should have no impact on the market whatsoever, it has suddenly become in vogue to blame subprime lending for the looming RE correction. But when you get someone saying that it is in fact subprime lending that has been a key driver in current market conditions, you kind of have to scratch your head a little.

What really got me though was that they're predicting that because of ABCPs now being worth less than the paper they occupy, credit-worthy borrowers won't get mortgages. I guess I'd better buy now before I'm kept out of the loans forever, then right :) ?

Think about how big a correction will be coming if subprime borrowers can't get mortgages and credit-worthy borrowers can't too. Only people with cash can buy. If this is true, and this happens, whoa is the homeowner who has to sell.

A little fun poll:

29 comments:

vg said...

glad you picked apart that article HHV,there were some disturbing statements in there from what the so called experts were telling us the past 6 months.

On BNN a few days ago they were discussing wether this 5% subprime segment is a big deal to worry about and the commentator said hey,5% is 5%,it can have an effect and is one segment that can't borrow anymore. You were left with the impression that I have always thought is that when any market is priced to perfection then it does not take much to tilt it the other way when the buying volume begins to subside.

I am really looking forward to this months numbers more than any other thru this whole boom. Even if we don't fall in price, I want to see declining sales from the previous month and the YOY is not even the slightest importance when a correction is imminent.

vg said...

what about this one , little too late,woulda popped this bubble many months ago.



Dodge regrets not ramping up rates

Bank of Canada Governor David Dodge said he should have driven up interest rates "harder" before the current global credit squeeze to tighten borrowing conditions, according to an interview published in The Economist.

In a mea culpa to financial markets, he said the central bank may have played a role in fomenting excesses in credit markets prior to the disruption stemming from rising defaults on payments by U.S. subprime mortgage holders.



http://www.thestar.com/Business/article/256880

hhv said...

it really puts % into scope when he says something like that about inflation that is running only 0.5% higher than target... so 5% subprime in the big scope of things is huge.

Po Boy said...

Good write up hhv and good points.
Was that meant to be whoa as in no more sales or woe as in "oh oh I think something hit the fan":)

Anonymous said...

Uh oh, a run on a bank in England.

http://www.canada.com/vancouversun/news/business/story.html?id=3cdb8239-d55d-4bd9-becd-f33cbc7d162e

S2

Anonymous said...

Hi! I posted this on PBs blog too! I am interested in opinions.
Okay. Opinions Please.

I was told that - the markets will not cool since there is so much employment growth in Victoria (I thought it was only in the construction sector).

Could someone please comment?

The U.S. is going to keep lowering interest rates and just ride on inflation for the next 5, 10 years. (Wouldn't that cause an economic disaster)

Could someone please comment?

Everyone wants to live in Victoria so it is immune from any downturn (I thought the population was not really growing and only 2% are out-of-towners)

Could someone please comment?

Village said...

Because I always have an opinion... ;)

I was told that - the markets will not cool since there is so much employment growth in Victoria (I thought it was only in the construction sector).

I think the state of government coffers have a large effect on the local economy. Good economy leads to good tax revenue leads to government spending. I wouldn't be surprised to see Victoria lag the downturn do to the time gap between falling taxes and government layoffs.


The U.S. is going to keep lowering interest rates and just ride on inflation for the next 5, 10 years. (Wouldn't that cause an economic disaster)


Yes/No/Depends. It seems world banks are hell bent on devaluing their currencies to compete with countries that export heavily such as China. If they won't revalue their currency themselves, we force it by debasing ours. Economic disaster, depends largely on how attached to the US dollar the world economy is. Or if it's managed to divest itself enough. Get ready for expensive must have items that you require everyday. As we pull something like 2 billion additional people out of 3rd world status in China/India I can't imagine that staying low.

Everyone wants to live in Victoria so it is immune from any downturn (I thought the population was not really growing and only 2% are out-of-towners)

Nothing is immune. Some places can weather the storm better then others, but immune no. Core Victoria won't give up as much gains, but places on the fringes Sooke, Shawnigan Lake etcetra will.

hhv said...

Everyone wants to live in Victoria so it is immune from any downturn (I thought the population was not really growing and only 2% are out-of-towners)

You thought right. Everyone wants to be here is a myth. Right now, everyone is moving to Saskatchewan, Regina and Winnipeg.

The U.S. is going to keep lowering interest rates and just ride on inflation for the next 5, 10 years. (Wouldn't that cause an economic disaster)

Whoever told you this doesn't even read the financial section of the newspapers, apparently. So I wouldn't trust them economically speaking.

I was told that - the markets will not cool since there is so much employment growth in Victoria (I thought it was only in the construction sector).

Unemployment numbers have nothing to do with the RE market. If people's real wages kept pace with the run-up we wouldn't have a bubble. If low-unemployment led to above average wage increases, then I'd have a different opinion. People are still working lots of low-end, low pay jobs.

Sure everyone is hiring, but until you see kids in the malls making $14-$15 bucks an hour slinging burgers and pops, we can't claim wage inflation. Wage inflation has happened, is happening, in trades. But trades is a small sector compared to retail and services. Mom and pop industry is still the number on employer in BC and Victoria... they're still paying under $10/hour.

Anonymous said...

"Some places can weather the storm better then others, but immune no. Core Victoria won't give up as much gains, but places on the fringes Sooke, Shawnigan Lake etcetra will."

Not exactly true.
Imagine real estate prices as a stone dropped into a pond.

In a "normal" or traditional market.

Prices start first to go up at the epicentre ie Oak Bay and parts of Victoria. The adjoining areas follow, all the way out to the rural areas.

In a market contraction. The opposite is true. Prices first start to decline in the rural areas and wave back into the central areas.

This is why you hear the real estate mantra "location, location, location" The epicenter location are the first to expierence the increase and last to feel the fall. But all do fall, at a similar percentage. The difference is 10% in Oak Bay is heck of a lot of money as opposed to 10% in Sooke.

In a bursting bubble market - everywhere gets slammed at once.

Siobhan

Roger said...

From the Toronto Star

Is U.S. heading for recession?

www.thestar.com/Business/article/257091

Remember:
Even if the U.S. goes into a recession it will NOT affect Victoria. We are immune to these type of events. The 2010 Olympics, construction and natuaral resources are our buffer.

Roger said...

From the Toronto Star

Is the U.S. heading for recession?

www.thestar.com/Business/article/257091

Relax folks - no problem: Even if the U.S goes into recession it will not affect Victoria. The 2010 Olympics, real estate construction and natural resources shield us from this type of world-wide event.

olives said...

Roger - you forgot to mention our rainy weather and old people

Anonymous said...

Also, don't forget that we are a university town (you know, along the same lines as Cambridge MA, New Haven CT and Oxford, England), and a government town.

Money just flows here. :)

S2

Village said...

Anon @ 5:00pm

I think you're referring to the same report I read regarding housing price declines. Can't find it to refresh my memory.

I don't recall it being so linear with equal drops across the regions. And that outlying regions suffered the longest and hardest price drops. Price compression needs to be rung out of the system as well which further forces prices down further then what core area's experience. Not that the core won't be repriced but it's not a flat reprice across the board.

Roger said...

Prices are already dropping in Central Victoria (James Bay, Fairfield, Rockland, Mayfair,Downtown) as shown in the data I graphed from VREB statistics.

http://tinyurl.com/2r9jt8

You won't find these graphs on VREB or in the Times Colonist for obvious reasons!!

Read more at members.shaw.ca/needinbox

Roger said...

jmk

Any comments on the graphs in my last post? Your bull perspective would be interesting.

Roger

JMK said...

Sure, if being a "bull" means not believing in the inevitability of the 20-50% drop being hyped here (BTW, I think you are heading towards owing me a beer, as I am very dubious that you will get to -10% for the year that you were arguing for in early spring).

Anyhow, my impression from your graph is that this year looks just like last year, except about 8% higher.

Anonymous said...

Interesting article on the credit problems in the UK. My RE agent said Victoria is immune from anything.

http://www.dailymail.co.uk/pages/live/articles/columnists/columnists.html?in_article_id=482156&in_page_id=1772&in_author_id=256&in_check=N

greg said...

jmk -

so if we get 20-50% drops in 3 or 4 yers, we lose your bet?

I'll happily lose that bet and take off 20%.

JMK said...

I may be misremembering, but I believe the bet was -10% by the end of the year. IIRC, I'd predicted +5 to +8%, which looks to be about correct.

Of course if you get your -20% windfall you will have won a much better bet. Just so long as you recognize that it is a bet and not a sure thing.

greg said...

Not at all jmk, I can look at a chart of past corrections near and far, and I am on very solid ground regarding the imminent correction.

35% over 3 years sounds about right.

Anonymous said...

A realtor on the bull site I'm on just posted this news release from the BC Real Estate Association:

"Home sales continue at torrid pace"

http://www.bcrea.bc.ca/news_room/2007-08.pdf

S2

vg said...

Another schizoid media pump. It's the mid month pump job that says "we are on fire!" but things should slow unless something like a recesssion or interest rates go up, well duhh.

So in other words we are correcting anyhow, but if things don't go as predicted things could get right ugly as affordability has eroded to the point only the true suckers are left buying.

Anonymous said...

Ahhh, vg, you always make sense of realty speak.

S2

vg said...

thanks S2,it's not a pleasant task but someone has to do it. :)


Is this what we have to look forward to seeing more of ? :


449,000 Central Saanich, British Columbia

MLS®: 235672 ( Single Family )
DEAL COLLAPSED! BACK ON MARKET!

Anonymous said...

Another page full and some on SFH's under $450,000 as well......inventory creeping up.

Roger said...

Listings are really piling up now. You can get all the listings for the last 24 hours @

http://tinyurl.com/3bxsd7

I wonder how sales are doing? Any readers out there with Private Client Services (PCS) accounts that care to comment?

Anonymous said...

Roger,

Nothing over $800,00 selling. Some people are asking stupid prices for crap. I never saw this before. Anything that does sell under $800,000 is selling under asking.

hhv said...

Roger,

inventory is climbing at the same pace as sales in the SFH under $425K segment. Sales are taking about 3-5 weeks for the most part.