Saturday, December 15, 2007

A few ramblings

A few people I know just closed on houses this week.

One couple bought a $400K "investment property" up island. It has two units, so "double cash flow" as they call it. Their monthly hit to income after they collect "expected" rents = $700. Sounds like a good deal to me, not!

Another group of three just bought an old house on a busy street. No Realtor could tell them the last time it was owner occupied. I actually lived beside this place about 15 years ago in a really disgusting 2-bed basement suite. It was a slumlord place back then and the same guy owned both houses. Nothing ever got fixed or cleaned. They bought this place because it has three suites in it. They will live in two of them and rent out the third. This apparently was their "last chance to get in the market." Parents gave them the 10% down payment. They paid over $450K.

Across town in an area best known for troubled teens and drugs, another couple bought a triplex (again unauthorized). 2 bed main suite with two self contained 1 bed units underneath. Cost? $540K.

People have lost their minds in this town. It really is irrational. None of these people looked at the state of the market or the greater economic trends. None of them care. They all think RE only ever goes up in Victoria.

I didn't say a word to anyone other than ask the question "Did you look at the market?" Their responses ranged from "my Realtor told me I got a great deal" to "RE always beats the stock market."

On another note, it seems as though the credit crunch is quickly spiraling out of control in Canada as the banks gave a collective FU to those that bought their should have been junk- bond rated ABCP over the past several years.

Here's why you should care about the credit crunch:
Canadians are already getting hit in the pocketbook by the debt-market crisis, and it could get a lot worse.

"It could get a lot more difficult for consumers to get any type of mortgage loan or any type of personal loan," as debt markets tighten up," says Fred Lazar, a professor at the Schulich School of Business at York University in Toronto, sounding a wakeup call for consumers dulled by the big numbers and ugly acronyms of the steadily escalating credit-crunch story.

"I would compare what's going on now with the onset of the Depression period in the late 1920s and early 1930s," says Steven Hochberg, chief market analyst with Atlanta-based Elliott Wave International. "The potential is for it to be a lot worse simply because of the amount of credit outstanding." The total credit-market debt as a percentage of gross domestic product is more than double what it was during the Great Depression, he says.

For about two months now, the banks have been quietly reducing the discount they provide on mortgages. Canadians now negotiating a variable rate mortgage can get .60 percentage points off the prime rate. Two months ago they were getting .90 percentage points off.

With prime at 6%, the difference between a mortgage rate of 5.4% versus 5.1% could mean almost $15,000 extra in interest on an average Canadian home over 25 years (based on a 10% downpayment.)

"Appraisers are saying, 'I don't want this to come back at me.' If the appraisal comes in under purchase price, the purchaser says 'I'm paying too much, I want out,'" he says.

The last thing you want to do is expand your debt obligations. "This means hard times. It remains a reduction in the standard of living as everybody gets their house in order. It's going to be the way it used to be," says the market analyst.

some fallout from the ABCP crisis has already been felt with the $1.2-billion University of Western Ontario pension plan for 6,300 faculty and staff restricting redemptions on some of its funds in early November.

"They were doing alternative lending with high ratio mortgages -- that part of the business might dry up," he says, referring to people with little equity and lots of debt. And the market to buy that securitized debt is disappearing.


Anonymous said...

I'm with you 100%. Can't believe that people are still buying here, in spite of all the evidence mounting to the south, plus west of Victoria.

roger said...


Enjoyed reading that article that you posted. The impact of the credit crunch on the average person was clearly explained.

I was down at my bank the other day and was talking to the financial adviser. He said that the .6% discounts on variables will be available for December and then will be reduced to .5% in January according to an internal bank memo.

This ABCP commercial paper fiasco is getting worse. There was an article in the Globe talking about the Montreal Accord on frozen ABCP. Investor group misses debt deal deadline

Friday was the deadline for the Crawford Committee to lay out a proposal to swap more than $30-billion of the short term assets for more stable, tradeable long-term notes. But after tense last-minute talks with Canadian banks about backup loan commitments, the committee was unable to finalize a deal and was forced to ask for another month to keep working.

The stakes are high, because a failure would send shock waves through financial markets, and ensure that investors in the paper lose a great deal of money.

roger said...

Sorry to hear that your friends are buying at the peak. Especially the ones up island where there is not much more chance of appreciation for years to come. I don't think folks will catch on until the MSM, VREB and VIREB publish the bad news.

A year from now there will be a lot of money to be made selling crying towels

A quick comment on this months RE activity and stats for December. According to PCS, a number of properties have gone off the market (expired, cancelled) and not been re-listed. Many don't want Ken Lowball tromping past the Xmas tree. However, in the last two weeks there have been a number of new listings - especially condos. I have also seen several real estate agents advertising that they have listings lined up for January. December and January are slow months as shown here. More inventory and slow sales is good for bears.

A warning to bears. You will see in this graph that sales are low in December and January. This means that a few high end sales can significantly distort the average selling price and result in VREB spin. If these sales do not happen the average sales price will be lower than November and VREB will probably report that the number of MLS sales is higher (more spin). If we are lucky both figures will drop and the media might start reporting we are heading downhill.

hhv said...


"Sorry to hear that your friends are buying at the peak. Especially the ones up island where there is not much more chance of appreciation for years to come."

I'm no longer emotionally invested in my friends decisions, nor should I be. The way I see it I'm a disillusioned Bear blogger who has as tainted a view of the irrationality as Realtors do. In fact, most of the Realtors I know don't care about markets, they care about selling homes. Fair enough.

I'm torn really. Some of those friends are more like family. I want this market to correct big time, so that we can get in at a price that makes sense, but hate to see anyone get hurt in that process. As it hits closer to home, that torn feeling is far stronger.

I also understand the broader economic consequences of a major housing downturn. It could well cost either Ms. HHV or me our income stream, and I know that rents won't be heading down anytime soon. I have genuine concern that this whole thing is going to be ugly for some time. I'm actively learning about hedging and short selling right now in the anticipation of, if nothing else, not losing my shirt entirely on the way down.

vg said...

Scary stories HHV, just shows how much dumb money and dumb parents there is still out there. If one opens up there eyes even the slightest to what is going on out there right now with this subprime/ABCP stuff right here in good ole Canada you would see it is not the time to buy. Seeing the negative cash flow one is the scariest being up island.

Good to see you are learning to short, I havent shorted a stock yet but my first NASDAQ option put/short went well making a triple in a couple of weeks or so. My suggestion is to be nimble, I could have traded it a few times and made way more than sitting there riding it up and down. Stock shorting is a little less profitable shorting just the stock but it is easier on the nerves then the indexes if you got all your sell signals down tight. I'm waiting til the new year to start seriously shorting again,could be some rallies here as gloomy as the markets look.

Sorry for the off topic.

had enough said...

I think I read on an earlier blog that economists are predicting that the bubble is even larger here than in the U.S.

Your friends were not forced to buy property. They are adults.

roger said...


Those of us reading this blog and the Victoria Housing blog have been trying to understand the current market and predict the future. This has led to many interesting discussions.

I found this pdf paper by shiller to be highly informative.

This paper looks at a broad array of evidence concerning the recent boom in home prices, and considers what this means for future home prices and the economy. It does not appear possible to explain the boom in terms of fundamentals such as rents or construction costs. A psychological theory, that represents the boom as taking place because of a feedback mechanism or social epidemic that encourages a view of housing as an important investment opportunity, fits the evidence better. The paper concludes that while it is possible that prices will continue to go up as is commonly expected, there is a high probability of steady and substantial real home price declines extending over years to come.

The paper is rather lengthy but I encourage readers to take the time to read it if you want a balanced view of what is going on in housing prices today.

Anonymous said...

I lived in Victoria a few years ago and was back there this past week and I couldn't believe the number of rubby-dub wannabes and helplessly lost people roaming the streets inside of Pandora towards town. Things really do look bad on the social welfare front. A friend in town told me he doesn't go downtown anymore unless he has a very good reason. It's ugly. Just like the downtown eastside but not as well contained. I've come to expect that for Vancouver, but Victoria!? Anybody buying down there is nuts.

vg said...

US recession odds are increasing by the day,every morning someone new is jumping on the bandwagon so they don't get left out when it hits. Even Greenspan got into it last week again with more gloomy talk. Those who are loading up their debt levels now with overvalued assets are in for a whoopin.

This was on CBS Marketwatch this weekend:

Fasten your seat belts, economy getting bumpy

WASHINGTON (MarketWatch) -- Investors! Please return to your seats and make sure your seatbelts are securely fastened: The economic outlook is going to get bumpy.

Economists are increasing the odds of a recession next year, at the same time inflation is looking downright scary.
So make sure you are seated before peeking at the data.
"The economy is weakening rapidly," said Kurt Karl, chief U.S. economist for Swiss Re. "I'm at 45% probability of recession and it is rising."
"It is going to be a bumpy landing. Whether it is a hard landing or a soft landing depends on what seat you are in," said David Wyss, chief economist at Standard & Poor's.
This week's calendar returns to the principal cause of the current woes, the weak U.S. housing market.
There is not expected to be any good news from this sector.
On Tuesday, the Commerce Department will report on housing starts and building permits for November. On Monday, the National Association of Home Builders will release its housing market index, a sentiment survey of builders.
Economists surveyed by MarketWatch expect housing starts to fall 3.3% in November to a seasonally adjusted annual rate of 1.19 million from 1.23 million in October. Starts have fallen to a level that's off about 50 % from the peak.

"We built too many houses at too high a price. So prices have to go down, and we've got to stop building houses for a while to get rid of the excess inventory out there," Wyss said.

Wyss said that homeowners are reluctant to sell their homes for less money than they could have gotten a few years back.
"They are past that now," he said.
But economists don't think the decline is finished.

Karl of Swiss Re expects housing starts to fall below 1 million units for a quarter. The last time this happened was in the first quarter of 1991, when the average was 894,000 units. It just so happens this was during a recession.


And people are convinced that nothing is going to happen in Victoria let alone BC.

roger said...

Canadian Mortgage News & Trends reports that Moneyconnect is now the latest Canadian casualty of the subprime fallout.

Moneyconnect's slogan is We don't conform™. which is very appropriate for a company that started in February and has has "Suspended new loan originations until further notice," according to a company release today.

Don't worry folks - subprime is not a problem that affects Canada. Just read CIBC outlook negative on mortgage exposure-S&P

roger said...

Remember that hot real estate market in Alberta?

Real estate boom finished in Edmonton: report

I can't believe that buyers in Vancouver and Alberta would rather buy in California than Victoria!!

Canadians finding big bang for their buck in desert real estate

Two years ago, Trevor and Carolyn Roberts were dismissing dreams of buying a desert retirement home to escape the frigid weather that defines their lives in Calgary and Vancouver.

But with the financial exchange rate turning in the Canadians' favor and hitting a three-decade high, Roberts and countless other Canadians are finding a big bang for their buck in the Coachella Valley real estate market.


This is from Slate.

"The cockeyed optimists of the NAR"