Questioning the CMHC

Canadian Mortgage Trends has an interesting interview with Pierre Serré, CMHC's Vice-President of Insurance Products and Business Development. There's a bit of discussion though not too much analysis of the interview over at Vancouver Condo. There's also a link to a really great piece on CMHC done by the America Canada blogger.

In the interview, Pierre doesn't really tell us anything too specific, and CMT seems to let him off a tad bit too easy IMO. Here's an example of what I mean:

CMT asks "What percentage of mortgagors put down only 5%, and how has this percentage changed in the past two years?"

Pierre responds: "While the recent CAAMP survey did not ask that question..."

CAAMP isn't CMHC. They're the Canadian Association of Accredited Mortgage Professionals. They sell CMHC backed products, but they aren't the CMHC. So Pierre doesn't answer the question but goes on to say the following:

"Their statistics show that only 9% of them have equity positions of less than 10%."

Here's my question, which is really CMT's question: What do CMHC's statistics show? Pierre never answers this question and what he does offer is just a bunch of spin.

"we have found that 73% of first-time purchasers used their own resources for a down payment"

So 27% don't. Is Pierre indirectly telling us that 27% of home buyers get their down payments as gifts or cash-backs? Sure looks like it. Is that statistic high? Seems like it to me. And it has absolutely nothing to do with equity position.

"75% of purchasers have a goal to be mortgage free sooner than their original amortization and 20% of recent purchasers report having made a lump sum payment to their mortgage. These results indicate that Canadians are astute mortgage consumers and manage their mortgages prudently"

I have a goal to win the lottery every Wednesday and Saturday. Whoop dee do. What Pierre is really telling us is only 26% of people with the "goal to be mortgage free sooner" are actually doing anything about it right now. That's not a good number and shouldn't be misconstrued as "astute mortgage consumers who manage their mortgages prudently." What this really indicates is 74% of mortgage consumers can't or won't pay down their mortgages faster at a time when interest rates allow them to. When interest rates jump by 1% or more, even if they want to, many mortgage payers won't be able to pay down faster. And again, the answer has nothing to do with true equity position.

The real trend is down on home equity in Canada, and remarkably so, over a period of maniacal home value appreciation, which probably explains why Pierre doesn't want to answer the question.

Let's look at another issue Pierre responds to. CMT asks: "What third parties oversee and regulate CMHC to ensure CMHC is insuring strong mortgages and not taking undue risk?"

Here's Pierre's response (excerpted):

"CMHC maintains capital reserves and premium reserves for future losses in accordance with guidelines set out by the Office of the Superintendent of Financial Institutions (OSFI), Canada’s mortgage insurance regulator. In fact, CMHC maintains capital reserves that are twice the minimum required by OSFI."

Coincidentally, CMHC is not actually regulated by the OSFI. They really only answer to cabinet and the Auditor General of Canada. So what does this really mean? Here we should be looking for ratios. How much asset reserve does CMHC hold to backstop it's growing portfolio of mortgage insurance liabilities? Here's their annual report. I've been reading it most of the night but haven't been able to make enough sense of it to quantify their capital reserve ratio. The best I've come up with is 1:33.5, but if that's accurate, and I'm certain it isn't, it actually exceeds the bank reserve ratio maximum of around 1:18. Perhaps one of you more financially literate readers will be able to nail the true number down in the comments?

The bottom line is this: CMHC only insures mortgages that banks wouldn't write if mortgage insurance didn't exist. By their very nature, CMHC only insures sub-prime mortgages despite the fact that they claim to have "stringent requirements at all levels of down payments to ensure borrowers are able to manage their debts prudently." What's more, CMHC has bought back almost all of the loans they've underwritten over the past 18 months allowing banks to double up on the number of sub-prime mortgages they've written and effectively doubled down on the insurance risk to CMHC. Take a look at this graphic and notice the changes from 2006 to 2008 and then the drastic jump to 2009:

They claim to be well capitalized, but what I want to see clarified is how. 2008 and 2009 were not good years for capital markets worldwide, so we know they didn't make good returns on their investments. 2008 saw roughly 75% of 2007 and 2009 sales volumes of homes, so we know they weren't collecting higher than usual premiums. Where did the capital come from that's necessary to back stop 180% compounded growth in exposure over 4 years? How does an insurance business maintain such growth (2006-2007 was 17%; 2007-2008 was 28%; and 2008-2009 is projected to be 41%)?

Perhaps the only move forward post-housing market meltdown will be to subject borrowers to the same strident restrictions as insurers are: that is, stress test lending. If a borrower wants $400K at 4% interest, they shouldn't get it unless they can handle the payments on $400K at 7% interest.

Haven't you heard?

Dear Landlord,

I'd like to take the opportunity to thank you for your warm seasons greetings I received from you today. I'd also like to confirm that I received your notice of rent increase form as well. The four months notice you've given me is generous.

I also want to thank you for not increasing my rent by the maximum allowable amount, instead choosing to keep the increase below 3% of my total, or about the price of a cold case of beer. I like beer. I like all kinds, but I'm especially partial to the kinds that only come in 1s or 6s. The premium kinds in other words. I can afford them; I earn a decent income and thanks to you subsidizing my lifestyle with market rent well below equivalent ownership costs I am able to drink a lot of premium beer each month--ask my wife, who is constantly reminding me that premium beer is creating premium pressure on my waistline. But I digress, and while beer is worthy of writing about anytime, my note to you has other purpose.

It's with beer in my mind, not affecting it mind you, that I kindly reject your annual rent increase for 2010. Now I know that inflation eats into your bottom line. I know this because the price of a six-pack of Heineken has increased lately too. We're all affected negatively by inflation. But inflation seems to swing both ways in some markets.

You see, things have changed over the past several months. Lots of people like me have moved on, to jobs elsewhere, to houses bought, to who knows where, but one thing is for sure, more have left than arrived--the For Rent sign on the front door reminds me of that each time I come and go myself.

I'm a good tenant. I pay my rent on time, I keep things clean and tidy, I don't lock myself out in the middle of the night (or day for that matter) and when something breaks I fix it myself if I can. You're lucky to have me. So I won't be paying you more next year.

It's simple really: the vacancy rate has climbed to a point where you can't be as choosy as you once were. In fact, it's climbed to a point where you may be lucky to even be able to choose. Come spring, it may have climbed to a point where you may have to drop rents or offer incentives to get a tenant to fill your vacant units. The last thing you need is for me to leave you over a cold case of beer. But remember, I like beer. Enough to leave you. And I don't want to allocate funds from other uses to make up for an unnecessary rent increase.

You might be wondering how I've come to realize this? Let me tell you: some people like to walk into Future Shop regularly to see if that 60" plasma flat screen has come down in price. Me? I like to check out vacant rental suites and see what I'm missing. Just the other day I was in one nice enough to make me think very seriously about moving. Sure it cost more per month, but it was worth every penny. I tried to negotiate with that landlord--they'd been trying to rent their new basement suite for over 3 weeks; I smelt a deal brewing.

That landlord had a false sense of the market though. They'd just bought the house and renovated it to create a suite, told me they wouldn't be able to afford their mortgage without it. It was nice, but they were asking too much, and they wanted someone in right away. Long story short, we gave them a call the next day and told them we'd take it in the middle of the month if they dropped the rent by $50/month or they gave us a 6 month lease instead of 12. They didn't feel they should have to do either. That was three weeks ago. I checked Craigslist while writing you this note and sure enough, there it still is, still vacant, and still asking too much. The money they left on the table in December by rejecting my offer would have more than made up the difference between my lower rent offer and their asking price over the course of the lease. But apparently they can't add months together in their calculations--they're probably part of this new "can I afford it this month" culture.

Do you see where I'm going with this? There's a lesson here. You want more money. I don't want to give it to you. I know there's a lot of unit choice out there, many of them nicer than where I live now. I could move, costing you money to advertise, clean, lost rent etc, and me some time and beer for the buddies with trucks who will help me out on moving day. I think the cost will be much greater for you than me. I'm willing to take a stand on this. Are you?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Best quote from that news story:

“It’s nerve-wracking because ... there’s not going to be anyone filling my place and that burden falls on you financially,” she said, adding she can’t afford the $2,130 mortgage without a little help.

“If I was to give anyone advice, it’s to not buy a place that you can’t afford on your own.”

I want to know how she got a mortgage for a two-bed condo she can't afford on her own? And they say there's no sub-prime lending in Canada. Sure.

BREAKING NEWS

News Release here. (H/T Skeptic)

The important bits:

The proposed OSFI changes will significantly decrease access to affordable mortgage loans for first time Canadian home-buyers and apartment investors as the Canada Mortgage and Housing "(CMHC)" securitization program is curtailed by changes to the capital governance rules that will restrict a financial institution's ability to generate Government guaranteed loans or require an injection of capital (equity).

CMHC's current securitization program supports affordable housing by enabling banks and financial institutions to issue more Government guaranteed loan products, thus making it possible for these institutions to provide credit to Canadians at lower interest rates as the securitization frees up space on their balance sheets. This allows these institutions to meet the demand for more mortgage loans than they otherwise could if they had to hold all the loans on their balance sheets, which are subject to several restrictive regulatory capital leverage ratios.

The OSFI's proposed policy will effectively tighten the capital governance rules and reduce an institutions capacity to generate these government backed mortgages.

"These are exactly the consequences that most of the academics, industry and political parties have openly said they do not want as they are all supportive of retaining the CMHC programs (supporting over 900,000 housing units worth $148 billion in 2008) instead of curtailing them" said Paul.

"CIBC senior economist, Benjamin Tal describes CMHC as the "secret weapon" and he credits CMHC's ability to provide inexpensive credit as one of the reasons Canadian banks did not need a bailout during the recent recession. (Globe and Mail, Report on Business October 17)"

Reading this release, it's an effective leak of plans by the Office of the Superintendent of Financial Institutions to end the CMHC buy-back of insured, "sub-prime" mortgages from the banks. Essentially, the Department of Finance is saying to institutions: "you've received all the support you're going to get from us."

What's next is anyone's guess. The author of the letter featured in the release believes this is bad for FTBers and the market in general. I'm inclined to believe him. If you're a FTBer looking to access more money than you ever should be able to using terms that are a fiscal time bomb for yourself, your family and Canada's taxpayers, you will find this to be terrible news. If you're a homeowner looking to sell your property, it appears the money for the greater fool may just dry up after all.

I dare say this may be the most fiscally conservative move the government has made since 2006.

Google won't win

At least not soon.

VancouverCondo.info has an interesting link to a Wall Street Journal article about how Google map-based open access listings may change the real estate transaction game.

I think they're over simplifying things just a tad too much. Essentially, the argument goes like this: MLS has map-based listings, Craigslist doesn't, enter Google who will, and suddenly real estate commissions are eroded by a technology-savvy generation and a bunch of HTML maps. If only.

As we've already discussed, the issue isn't the crappy website the CREA offers its customers. The issue is ownership of data. CREA and their member organizations (local real estate associations and agents) believe they own the data that you and I need to have access to in order to make educated decisions about general market conditions and individual market values simply because they've been able to collect it without outside interference for a generation. Can you think of any other market dealing with comparable valuations without any arms-length data transparency oversight or regulation?

They rent this data to us by way of a pseudo-monopolistic need to use a real estate agent in order to gain equitable access to 95% or more of the real estate marketplace. Essentially, and we've never seen a credible argument denying this, the CREA's claim to the data is "finders keepers."

I have no doubt that Google's real estate site will kick Realtor.ca's a$$. This isn't because Google is the sh&t when it comes to web design and functionality. It's because Realtor.ca uses Bing, which sucks more than Realtor.ca, and because Realtor.ca sucks period--on purpose.

Let me be very clear here: CREA doesn't want you and I to be empowered as real estate listing searchers. The opposite is true. CREA wants you and I to be so frustrated with the experience that we simply toss our hands in the air, give up and quit, and then call one of their members so they can rent an income.

Somewhere deep down inside that archaic industry association is a group of power-people still pissed that we aren't required to come into their office during bankers hours to flip through their three ring binder of listings--steadfastly refusing to adapt to a changing world where freedom of information is a given, rather than a "paid for"--doing everything in their power to prevent the game from changing.

So what's next? Google will get in the game, it's part of their Cyberdyne-like plan to take over the world. But the rules won't change. YET. Give it a decade.

Once Google has captured enough of the market transaction data (ten years worth should do it) and you and I are free to see the transaction history of listings at the click of a button without a rent-seeker getting in the way, the game will change. When that happens, the 1100 or so ambulance-chasing agents in this town will be reduced to the 300 or so who are actually worth their full commission because they give a damn, "get it", adapt to changing times, work their asses off, and care about their clients enough to be honest about the true state of the market rather than chasing their next commission without concern for their client's long-term financial security.

That day will be monumental. Perhaps it can be in February. We'll name it rent-freedom day and forever enshrine it with the distinction of being the event that leads our society to a stat holiday every month.

Banks versus Re/Max

Almost every major bank has released some kind of housing market economics report over the past several weeks that either pronounces the Canadian market to be in bubble territory or suggests that we may soon be there.

And now Re/Max comes up with a gem: Housing market to soar in 2010. I won't link to their advertorial here because I want to save readers from the sick taste of bile it inspires. But I will say this: I think they may be right. And by they, I mean both the banks and Re/Max. We are in a bubble and I believe housing prices will continue to rise in 2010.

Yesterday the federal government announced that almost all of it's stimulus funds are committed. What this really means is the money will be flowing next year. Whenever governments rush to spend money, contractors jack prices. Next year could be a great year, one of the best on record even, for Canada's bloated construction sector.

Government spending, and the subsequent consumer spending it will trigger, will be inflationary. Prices will rise.

I don't believe house prices will fall until interest rates rise by at least 1%. When that happens, look out.

The tipping point

Two articles indicate we've reached it again.

The first, RBC's affordability report (H/T to Kunwak) says "Homeownership... became more expensive in the most recent quarter... and isn't likely to get more affordable, according to a report by RBC Economics Research"

and the second, Scotiabank's hint of a bubble, "...real estate prices are inflated, but they're unlikely to correct themselves in the short term, a Bank of Nova Scotia report suggests"

scream out the end is nigh! if you read between the lines.

Here's a little history for readers needing a reminder about what led to the original correction in Canada: HIGH HOME PRICES AND RISING INTEREST RATES. Sorry to scream at you, but we really do need to be clear on this.

The real estate industry and their parrots in the MSM repeated ad naseum throughout the "downturn" that it was external factors--recession, fear, global warming eating all the available land--that led to price reductions. Readers of HHV know it wasn't.

It really is simple: when the median income family can't afford the median house, prices are pressured to decline. Three inputs effect affordability: income, price and interest rates.

I've painted you a crude picture to demonstrate current conditions:

Prices are rising, interest rates are rising and incomes are falling. I wonder which way the market will head over the next 12 to 24 months? *scratches head*

First-time-buyer delusion

One of the common reasons we hear in the local media, and echoed by our friends and family, of people who buy for the first time in this market, is "I'm tired of living in a dark, dingy, mouldy basement suite."

I always laugh. "Why not move into a Fairfield/James Bay above ground condo/apartment then?"

It seems that the only way out of the rental trap of overpaying for under-cared-for rental suites is to buy them. It's as if owning that mouldy, dark, dingy place somehow makes it ok?

It makes no sense. The average FTBer in this town is either:

1. Paying Oak Bay waterfront prices for a new condo in Langford on a busy street, or
2. Over-leveraging to get into a "fixer-upper" 3 bed 2 bath SFH with a basement suite (in "move-in" condition no doubt) that hasn't seen a coat of paint or a new roof in 30 years

Victoria has a serious problem. For a city so gorgeous, with so much wealth tied up in real estate, it has a serious lack for quality properties. And I'm not just talking about the ones on the market either.

Drive through Fernwood/Mount Tolmie on a rainy day. Look at peoples yards and roofs, look where the water is collecting and draining back into homes. Drive through James Bay and look at the 50-year-old concrete condo buildings with moss-infected balconies. Take a drive through the neighbourhoods of Mayfair, Cook St, Hillside and Maplewood and see old homes on big pieces of land. Sure, some of them have been looked after, but many, and I mean many, homes sit under-cared for.

Compare those homes to the ones on the market. Scratch the surface of cosmetic clean-up inspired by the selling comments of realtors in the know and you'll find a myriad of home owning headaches never found on a listing brochure.

The Victoria real estate market is like walking into Future Shop to buy an old-school 13 channel tube TV when you could go almost anywhere else and find a 1080p plasma flat screen for less money. Except our Future Shop is volume selling like it's Boxing Day all year. Go figure.

CMHC insured mortgages are sub-prime

Lot's of confusion about sub-prime mortgages in Canada. We hear things like Canada doesn't have sub-prime mortgages; we don't have adjustable rate mortgages either; our banks are solid and prudent and we'll never have a sub-prime problem because Canadians are by their very nature risk adverse and prudent. I call bullsh&t.

Apparently so does the CEO of ING. The problem lies in the narrow definition of sub-prime in Canada. People believe--incorrectly--that sub-prime refers only to poor credit rated borrowers. In fact, sub-prime is a category of mortgage debt that would not be granted to borrowers without either

1. a higher interest rate to price in the risk of the credit worthiness of the borrower, or
2. some form of insurance to protect the lender

In Canada, a conventional mortgage is one that includes a down payment greater than 20 per cent of the purchase price. Every mortgage written on down payments less than 20 per cent are unconventional and, by law, require mortgage insurance, mostly backed by the CMHC, regardless of the credit rating of the borrower. You may have flawless credit, but if you don't have 20 per cent to put down, you're a risky client for the banks (without the CMHC that is).

There is no arguing that CMHC has allowed millions of Canadians to own homes earlier than they otherwise would have. Banks would not take on the risk of these debtors if it weren't for the CMHC. The real estate industry applauds this practice. The scheme is so brilliant it's disgusting. The scheme has created market manipulation on a scale that is economically unmeasurable. In 2009, the CMHC will insure $600 billion in mortgage debt that otherwise wouldn't be written by the banks.

The Canadian taxpayer is now the world's largest holder of sub-prime mortgage debt. All of it Canadian, much of it packaged up as mortgage backed securities and sold to the government.

Here's a quote from the ING guy:

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think,"

We have no idea how the Canadian sub-prime mortgage market will unravel, or even if it will. We do know the government will intervene to prevent its unraveling. The government faces a massive economic dilemma though: any policy changes will likely lead to downwards price pressure, and that is a very slippery slope that ends in economic calamity.

Breaking: Competition Bureau says CREA fees and commissions are uncompetitive

The Competition Bureau's report hasn't been released on their website yet, but the Toronto Star has picked up this story (we don't expect the TC to ever do so, but I digress).

the bureau has concluded the Canadian Real Estate Association (CREA) has anticompetitive rules and must change its ways

the bureau's findings are expected to have a profound impact on the real estate industry -- by permitting more innovative discount brokers into the market while allowing sellers to list their properties less expensively on the Multiple Listing Service

The Bureau is concerned that CREA's rules have restricted consumer choice and limited the scope of alternative business models

The Bureau's position is that if CREA does not remove these restrictions, the Commissioner of Competition will initiate an application before the Competition Tribunal

CREA decided not to go before the tribunal, which can administer penalties, but is pursuing a settlement agreement with the bureau

This is the gist of it so far: CREA has a monopoly on residential real estate buying and selling and admit that they do (by not elevating this to the Tribunal).

Here's where things get really interesting. This is the list of rules that the Bureau wants changed:

1. Listing realtors must act as the agent of the seller

2. The listing realtor must receive and present all offers to the seller

3. No posting of property information is allowed on the Multiple Listing Service without an agent representing the seller for the term of the contract

Changes to these rules would mean offers could be sent directly to the seller without the involvement of the listing agent, and consumers could probably have their listings posted on the MLS for a small fee

The issue of agency doesn't really interest me as much as the issue of listing fees for MLS does. Good agents will innovate and adapt and continue to make great money. But the effective break on the MLS monopoly (where 90%+ of all homes sold are listed) is a landmark decision and will forever change real estate transactions in Canada should these changes come to pass. This is a very good thing IMHO.

Buying a house is not an investment

Home owners are stupid

Or at least many of them are. Here's proof (H/T to S2 for the link):

Who needs to save for retirement when your home is the new RRSP?

"House prices will not go up forever," says Mr. Tal... "Home valuations can go down," he cautions.

"If planning is done right, it shouldn't be a large part of your retirement..."

"People are buying houses that are larger than they can afford and larger than they need."

Canadians [have] so much wealth invested in their homes that an increasing number are turning to reverse mortgages to fund retirement.

"Our recent research indicates 77% of senior net worth is in home equity, and 17% view their home as their retirement fund,"

84% of seniors don't want to leave their home.

On a $400,000 house, you could probably get a reverse mortgage of $120,000, at an interest rate of 4.9%. You don't have to make payments, but that debt will grow quickly.

Welcome to Canada, where debt is the new savings and spending is the new investment. For F&%$'s sake people, when are you going to learn that wrapping a car loan into your mortgage or spending 65% of your take home income on shelter does not equal the smart financial planning you think it does?

More must reading (H/T to Reid)

Diane Francis tells it like it is

This article merit's no highlights or editing, re-posted in full:

Ottawa has been creating a housing bubble in Canada with taxpayer money, which is why residential real estate prices rise in defiance of high unemployment and recession.

Ottawa's low interest rate policy and Crown agency Canada Mortgage and Housing Corporation's dramatic increase in mortgage backstopping, for people who put only 5% down, have pushed up activity and prices.

Some, such as Post reader and accountant Derek Bruce, worry that the Tories are allowing CMHC to become like Freddie and Fannie south of the border, a rogue financial institution the size of one of our Big Five commercial banks.

In March, CMHC was allowed to insure up to $600-billion in mortgages, up from $450-billion the year before, a CMHC spokesman said yesterday.

"Last year alone, CHMC did 919,780 deals worth a staggering $148-billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to $600-billion, or about double what it was two years ago," wrote author and former MP Garth Turner.

This is a looming problem that flies in the face of Ottawa's smugness about its superior regulatory regime and Canadian banking conservatism. For starters, CMHC is as big as a bank and not regulated.

It's a mortgage slush fund that distorts the market. It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone. It rewards those willing to speculate with leverage and discriminates against those who are prudent. It's unfair because the Canadian banks charge the same mortgage interest rates to those who put only 5% down with CMHC backing as those with skin in the game and large down payments.

Thus Canada's real estate markets are hitting highs in the middle of the worst recession since the Depression.

"Since CMHC is insuring so many mortgages, the banks have no incentive to test the credit-worthiness of home purchasers. Then the mortgages can be neatly packed into MBS securities and have a CMHC 100% Canadian guarantee on the back of the investments, thus insuring end-investors these papers are insured from loss," Bruce wrote.

Some may argue this is simply another stimulus strategy, but this is cancelled out by the fact that it encourages bad and unfair behaviour and banking practices. It also has serious monetary/currency implications because air will eventually have to be let out of the bubble by imposing higher interest rates. This will mean a higher Canadian dollar.

The question is why should taxpayers be involved in this when it shoots them collectively in the foot? Why shouldn't banks have skin in the game? And homebuyers? If not, why shouldn't they share the upside with taxpayers? This amounts to a subsidy to our highly profitable commercial banks, real estate developers and speculators. The greater good would be served if housing prices fell to where a fair and unfettered market dictates, thus squeezing out real estate inflation and creating sound ownership opportunities.

A similar bubble was attacked by Australia, where interest rates jumped to 3.25% (from 0.5%) and damage, as a result of a higher currency value, resulted.

Clearly, CMHC must be reined in and regulated properly.

Yes, this is a bubble. Yes, it's been fueled and guaranteed by Canadian taxpayer's money. Yes, you should be angry. Yes, when the president of the VREB states he sees no downside risk to Victoria real estate prices and sales volumes he is clearly ignoring the facts.

The Daily on Shaw

Tune into The Daily on Shaw beginning at 11pm tTuesday until 4pm Wednesday afternoon for a chance to see real estate reporting including a blogger's viewpoint for the first time in Victoria. Did an interview via Google Talk this morning, hopefully the message gets across. Let me know if you see it and how you think it turns out please.

Peak real estate

H/T to Tim Ayres for the graphic.

Peak average price for a Victoria single family home was April 2008 at $626,000. In September 2009, average prices hit $619,000. In April 2008, the average mortgage interest rate for a 5 year term was roughly 7% before discounting. In September 2009, the average 5 year term was 5.5% before discounting. Folks, we have a conundrum.

Mortgage rates for 5 year fixed terms are on the rise. Mortgage rates for variables are starting to drop because lenders are discounting them again in order to keep their sales volumes up.

The graph above clearly demonstrates the disconnect between mortgage rates and payments that occurred over the past 5 years because of escalating prices. Is this a permanent disconnect or a bubble signal?

Have we reached peak average prices based on average income affordability? I think we have. I believe that prices corrected between April 2008 and January 2009 because, first, we reached peak price based on affordability, and second, we then had significant supply increases due to weakening demand.

We have no more mortgage wiggle room. Unless the powers that be extend amortization periods again (that ship has sailed IMO), the only affordability room that economically exists is on the price side. From here on in, for every percent that interest rates rise, there will be (the laws of economics demands there must be) a corresponding drop in prices to correct for affordability. Any further increases in average prices will be attributable to a disproportionate number of million dollar plus homes selling month to month (much like we witnessed in September).

The fall trend

Supply and demand ratios in Victoria may be the ultimate indicator of market trends for us watchers. Typically, supply and demand dance in unison throughout the year: spring's foxtrot morphs to the hand jive by the early summer until fall's traditional swing slows into the winter waltz.

But 2008 and 2009 have been anything but typical. After a lacklustre summer and fall of 2008, sales volumes were slow to trot January through March 2009. And then the Bank of Canada got the dance started with party favours not seen for 7 years: ultra-low interest rates.

It's important to provide some historical comparison in order to understand what is happening today. In 2007, between September and December, total listings dropped from just under 3400 to about 2800. In January 2008, total listings began piling up (nearly 2000 more listings than sales over 9 months) into the summer and by September reached nearly 4800, meanwhile sales volumes were plummeting.

Cue 2009, total listings never piled up. For whatever reason, homeowners didn't feel this spring and summer was the time to sell. But buyer's were--and continue to--buy any quality product that comes on the market. Sales to new listings ratios remain tight and total listings have consistently dropped since April, hence the rise in prices. What lies ahead for the remainder of 2009? All signs point to a mirroring of 2007 listings and sales volumes, without the corresponding jump in prices.

To gain further insight, and a from-the-ground industry perspective, I engaged Tim Ayres, Sooke-based REALTOR® in an e-mail question and answer session (answers in italics):

Despite the very high sales volumes, sellers just aren't listing their properties like they did last year. Is this because prospective sellers may be sitting on the sidelines expecting prices to rise again so they'll wait till next year to maximize ROI?

This is a really tough question. I think a lot of it has to do with new construction basically coming to a standstill late last year and early this year. The excess inventory (especially condos/townhouses) seems to have been snapped up with the low interest rates and relatively stable employment in our region. I'm not sure why anyone would be waiting.

If you have a house under $600K in Victoria/Saanich or under $500K in Sooke/west shore, it's selling like hotcakes, and you should definitely strike when the iron is hot. I've got at least three or four buyers I can't find houses for at the moment. Not just first-timers either. I don't think prices will increase too much year over year at the end of it all, especially when you exclude luxury/waterfront properties.

I think that we're reaching that affordability threshold again, when people will start to lose interest, despite the low interest rates. BCREA did a presentation at the board election the other day showing an interesting affordability graph (I will try and find the relevant slide) that would show what I mean.

Typically the fall months have sales declines because of 90 day closings and the holidays, do you see the high volume sales trend continuing through October and November? If so, do you see total listings remaining stable or declining further as we near the end of the year?

My guess is that listings will continue to decline. IMO, if we didn't see listings go up in September, we're not going to see them increase at all this fall. Stay the same or go down.

Obviously low interest rates have brought a lot of buyers into the market. Especially the first timers. Do you see a correlating trend in the move up market? Especially with the older home buyers--the boomers in the last decades of their working lives--are they buying and selling more, less or the same as in previous years?

I really can't comment too much on this one - I haven't been monitoring statistical trends as closely as some. I would guess that with all the equity and real estate market turbulence over the past year that many boomers/near-retirees are staying put until they feel confident about their financial position, especially if the house is paid off. I could be totally out to lunch, though.

Is it safe for me to assume that the largest actor group in the local market then is first time buyers? If that is the case, are sellers selling to buy up in the market or are they selling and leaving town, selling and renting etc?

No, I think there are plenty of upper-end listings selling too, so there must be lots of move-ups too. But I think a large part of the surge is first-time buyers, no doubt. Lots were scared off by prices and rising interest rates, and there is a lot of pent-up demand, and not enough good product out there.

If you look at the bottom end of the market, there are a lot of houses under $450K, but so many of them are junk! They aren't selling. What's selling is the nicer ones that are still reasonably priced - people are willing to pay a little more if they're not getting junky houses. Perhaps this has helped prices appear to have been escalating in that market segment. I have been looking with one couple in the Victoria core area for about 4 months now. You should see the junk that comes on the market and what prices they want. Properties that would have been priced $379K 4-6 months ago are trying for $429K or $439K, it's ridiculous - they won't sell. So naturally, the properly priced homes that are in good shape get snapped up.

I find Tim's responses interesting and appreciate his frankness. His answers confirmed my assumptions moving forward. Until we see sales volumes drop sharply, or listings volumes jump by 25% or so, I don't see any downward price pressure. As long as the sales to new listings ratio stays above 65%, total listing volumes will continue to decline.

September sales...

Continue to buck the 2008 plunging trend. VREB release here. Cue the TC hyper-echo chamber now. BREAKING: COMMENTS ARE ON! COMMENTS ARE ON! (for how long? your guess is as good as mine)

Tim Ayres gives you the spin free stats via Twitter:

Month-end Victoria Real Estate Board stats:
Sales: 776
New listings: 1129
Total active listings: 3419

Last month's numbers:

Total sales: 764
New Listings: 1094
Total Active Listings: 3509

Current ratios:

Sales to new listings ratio: 68%
Sales to active listings ratio: 23%
MOM volume change: +2%
YOY SFH price change: +12%

Who could have seen this coming? (yes that's a big fat tongue in my cheek).

Headlines you won't see in the TC

What a joke the Times Colonist has become. After weeks of being scooped by the G&M on the Bear Mountain story, the TC get's it in the kiester again:

A $6.74-million chunk of prime real estate that was once slated for an upscale condominium tower known as Soaring Peaks at Bear Mountain Resort near Victoria was sold to the municipality of Langford yesterday for just $350,000.

If this isn't front page news in Victoria, I don't know what is. Oh, wait, apparently it's Wendy the Whippet.

Bear Mountain is crumbling. The TC wants you to read about a celebrity dog.

Nothing could be better confirmation that advertising makes the news in the TC. Pathetic.

Canada's proactive bank bailout

And they said we are different here. Of course, they were right: we bail our banks out before they need to be. Apparently, the proactive bail out program will continue:

The banking industry has been pressing the Finance Minister to extend the length of the program because they continue to benefit from it and because there is still the possibility that liquidity pressures could re-emerge.

I think we should make no mistakes about what is happening here. It is very clear that mortgage holders don't want to be lending at today's rates. There is tremendous risk for lenders with home ownership rates at all time highs, home prices at all time highs and interest rates at their lowest in history. There is no wiggle room, the banks would usually price in the risk with higher interest rates, but because they know if they did that, market prices would fall, they don't want to. Thankfully, they have the Canadian taxpayer.

I'd write more, but I came across a piece of writing that has already summed up the issue better than I can:

True, Canadian banks have avoided some of the sillier extremes, particularly those related to off-balance sheet leverage. But the key problem in Canada is precisely the same as it is in the other western countries now experiencing bank solvency crises. Home prices have grown to an abnormally high multiple of employment income, supported by a rapid expansion in mortgage debt.

The key difference between Canada and other markets is that in Canada the cost of bad home loans have been socialized in advance. In Canada, we didn’t need to disguise our sub-prime excesses within dubious mortgage-backed securities. Why create an alphabet soup of bogus AAA paper when our government provides seemingly limitless quantities of underpriced mortgage insurance? As a formula for creating housing froth it has been virtually unbeatable. Housing markets may be cratering throughout the world, yet one observes a perverse new high in Canadian real estate prices in May of 2009.

The key to Canada’s bubbly housing success been the CMHC . The Canada Mortgage and Housing Corporation writes guarantees on most Canadian mortgages originated at greater than 80% Loan-to-Value. This agency has been on a massive expansion binge of late. In 2008, a year of synchronized global recession, the CMHC expanded its mortgage insurance in force by a whopping 18%. CMHC now guarantees $407.7 Billion of high loan-to-value mortgages and an additional $233.9 Billion of securitized mortgages.

In all, the CMHC mortgage guarantees are equal to slightly more than half of Canada’s GDP. Against this total, CMHC has miniscule equity capital of $8.1 Billion. How is it that more than $630 Billion of dodgy mortgages can be guaranteed by an entity posting just over 1% in equity? This is a question that curiously appears to have escaped the notice of Canada’s top notch financial regulators.

The role of the Canadian banks has been to commit capital to CMHC-insured mortgages as quickly as they receive applications. It is not mortgage lending in the traditional sense, more like underwriting government bonds and taking a 150 basis point spread as compensation. In this way, the Canadian real-estate bubble looks a lot like its American cousin. Home loans are being written for those who likely cannot pay by lenders who pass through the credit risk to a third party. However, in the case of Canada, the third party is our own government and not the Chinese or Saudis who snapped up American mortgage paper.

All of the above was quoted word for word from Geoff Castle's blog. The comments over there, on this post anyway, seem to be very intelligent. Discuss away here if you'd like.

This buying boom makes no sense

Even to some of Canada's so-called real estate experts. An interesting article appeared yesterday in the Financial Post that quoted a survey of some real estate agents. I question the validity of the agents equals experts assumptions being made here, but none-the-less it provides some interesting insights into the opinion formation of one group of so-called real estate experts.

As always with national surveys, it's difficult to glean any local relevance, in terms of hard data or fact for those of us who place import on such things. But that said, from knowledge of past national surveys and hard local data, I'd say its safe to assume that applied in Victoria, the answers to these questions become more firm. As in more agents would believe these statements than in other parts of the nation--as a group, they've drunk deep from the fountain of real estate "truth" and therefore have more firm belief; if real estate were a religion, and agents were its prophets, Victoria's agents would likely be classified as fundamentalists. Of course, there are exceptions to that rule.

Here's the highlights (emphasis mine, paraphrased etc):

• Even the real estate industry in Canada is having a hard time swallowing the complete turnaround in the housing market (a dubious claim based not on hard evidence)
  
• A new survey from Royal LePage Real Estate Services Ltd. found more than a quarter of its agents do not believe the housing market's current strength is sustainable
• 61% of agents surveyed believe the market is sustainable
• 28% don't and another 11% didn't know
• 36% of agents who believe the market is unsustainable say the recovery will end with interest rates climbing, which they say is inevitable
• Another 20% of that group says there is no job/income growth to sustain prices
• Overall, 66% of those surveyed said low interest rates were the number one reason behind the recent strength of the housing market. No other category even got a double digit response.
• Of course, Phil Soper sees sustainability, as he's ever the eternal optimist

Those numbers really are remarkable given the headline "Even Canada's real estate industry questions housing turnaround."

What I read was few agents cared enough to understand the reason why the market shifted so dramatically so swiftly. After all, the majority feel the market is sustainable. Only 28% don't. I'd wager the 11% of "don't knows" are really the 11% of agents making 60% of the commissions--they don't care, because they sell houses in all market conditions and make lots of money doing it too.

I don't think we should give any weight to this kind of survey. To quote Jim Sutherland in BC Business magazine:

Anyone who’s read a real estate article or two will be familiar with the oft-quoted usual suspects: developers, realtors, condo marketers, economists working for banks, real estate companies and government agencies. Undeniably these are well-qualified people who know a great deal about the subject. Most of them even work in the field, and of course anyone who’s ever held a job knows what “work” means. Between reports, secondments, committee meetings, ancillary projects, emails, phone calls, lunch dates and farewell gatherings in the boardroom, if these experts spend two or three hours a week thinking and writing about real estate, they’re performing some kind of magic. No wonder so many of them were caught flat-footed by last year’s sudden downturn, then blindsided again when things picked up this spring.

In other words, for all their so-called expert status, they really don't spend much time establishing credibility for their opinions.

August numbers

Preliminary numbers are out via @TimAyres on Twitter. Confirmed now on VREB too.

Total sales: 764

New Listings: 1094

Total Active Listings: 3509

Sales to new listings ratio: 70%

Sales to active listings ratio: 22%

MOM volume change: -19%

YOY SFH price change: +8%

Highlights from the spin cycle, er presser:

• it is usual for sales to slow in August
• the average price was affected by 17 sales of over $1 million... included two sales of over $4 million
• The median price increased $20,000 to $540,000
• Sales so far this year are running over six per cent higher than in the first eight months of last year

Once again, trends tell the story. And the story is sales and listings volumes are declining, as they always do, but the sales to new listings ratio is actually climbing, keeping prices on a flat line for the time being.

Expect in about 3 hours time, the TC will run a headline like: Prices, Volumes Jump in August: Buy now or be priced out forever.

But they should be running a headline like: Despite record low interest rates, buyers still not buying like they did in 2005, 2006 and 2007.

And sales are falling at a faster rate in August 2009 than in the previous 4 years.

Thanks Roger for great graphs again.

Trends tell the story

Cheers Roger for being so cool about sharing material, you're an open source hero.

Every spring/summer, buyers buy and sellers sell more units than every fall/winter. Of course, the MSM proclaims this perfectly normal cycle as something more newsworthy than it really is. There is no disputing that this summer

Roger's done up some dandy graphs demonstrating the trend as we move into the fall. This first graph shows you the three month trend of new listings (green) and sales (blue).

Please note that sales have been fairly consistent through these months (which is not grossly abnormal, though I would have expected the peak volume month to be May or June, not July) but they have still declined into August.

This next graph really shows the decline over time. Each bar shows the total of the previous four week's activity.

This last graph makes it look like total listings are falling off a cliff. They are not. This is perfectly normal and inventory, while not high, is certainly not at a level that will support sustained upwards price pressure.

Months of inventory for the week ending August 21 is: 4.7 ish. Average prices were flat or falling between July and August. The rest of the year should show declining sales volumes, flat inventory levels and I would guesstimate an average SFH price drop from today's levels by about 5%, showing an annual average price change of + or - 3% from 2008. Industry will spin this as "stable." I'll tell you I think the numbers are really a disappointment considering the volume of FTBer's brought into the market by "free" money. The bubble didn't burst, but it didn't get hyper-inflated either. What will happen next remains to be seen.

VREB miscommunication

Over the weekend, the VREB published this in the local paper (H/T to Roger and GoneTooFar for links). Through crafty layout, they made their advertisement look like a factual education piece. But it was so full of fallacies that we can't just let it go un-responded to, can we?

I won't cut and paste the whole thing. But I'll rebut a few points below.

• If you are 35 now and just buying your first home, you will likely be mortgage-free when you are 60 and sitting comfortably on a considerable asset.

Maybe. If you take out a 25 year mortgage. But the average first time buyer in Victoria these days doesn't. 35 year amortizations have become the new norm at today's prices. So while past experience suggests this claim may be accurate, it is completely unknown, and relatively unlikely, that future experience will prove this theory correct. You see, 25 years ago, a 25 year mortgage was normal. And it was normal for people to pay off their mortgages in 25 years or less.

Today, normal is entering the property ladder, using extended amortizations and moving through the market in multiple transactions, constantly refinancing and removing equity from homes to purchase new homes worth more. We don't know what future experience will be in terms of mortgage pay downs because we've never seen the kind of mortgage product innovation we have today during past real estate cycles. The VREB is applying the old rules to a new game and expecting the same outcomes. I say the ref should be calling a penalty on that play.

• Buying a home is a very effective way of saving regularly over many years. Even if you never buy into another retirement or investment plan, you are effectively putting money away for the future.

What this point should have said was "Buying a home is a very EXPENSIVE way of saving regularly." Can you think of a financial product that is more expensive to purchase, costs you more to sell, costs you more to maintain, costs you more to service and gives you worse liquidity? I can't. Some rough back of the napkin math I did on the weekend on a $375K purchase worked out to be an approximate 35 year cost of $1.25M. In other words, just to break even, you'd have to sell that property for $1.25M once you'd completely paid it off, and then where would you live? That's highly possible as it's only a 3.4% annual ROI, but I can think of many more effective ways to save and invest less money for greater 35 year returns at far less cost and far greater liquidity.

Furthermore, any other industry that offers the consumer an investment product or investment advice has mandatory disclosure requirements on every piece of advertising it does. Why is the real estate industry allowed to market their products as investments with no mandatory disclosure statements, no requirements whatsoever about qualifying consumers etc and no industry financial regulatory oversight?

• Owning a home of your own means you and your family can set down roots, get to know your community and involve yourselves in it.

This is true. Our communities hate renters. Renters are a scourge. An infestation. They destroy communities. So naturally, communities exclude renters and excluded people tend to be rootless and uninvolved. It's a vicious cycle. You owe it to your families to never let this happen to you. Be a Star-bellied Sneech, not one without.

If I'm a member of the VREB, I'm embarrassed by this advertorial. I also find it odd that in the middle of a great big first time buying boom, the VREB felt it wise use of dollars to try to further appeal to first time buyers. Could they know something we haven't seen yet? Like maybe the buying is slowing down again and that FTBers are either exhausted or parked on the sidelines expecting to pay less again in the near future?

Are buyer's agents redundant?

Let me start out by stating clearly that this post is not an attack on BC's REALTORS®.

I've often stated in the past that when buying real estate, it's in the best interest of the buyer to use a dedicated buyer's agent. After a conversation a while back with someone who has taught me a lot about real estate, and subsequent self deliberation and research, I've changed my mind.

Dual agency is the way to go for me.

Here's what the BCREA has to say about dual agency (warning PDF):

Dual agency occurs when a Brokerage is representing both the buyer and the seller in the same transaction. Since the Brokerage has promised a duty of confidentiality, loyalty and full disclosure to both parties simultaneously, it is necessary to limit these duties in this situation, if both parties consent.

Sure, you need to get consent. But what agent out there isn't going to try to double-end a potential deal? Which brokerage isn't going to encourage their agents to attempt this? And how many sellers will object to seeing an offer? I'm guessing few.

Here's why I'm leaning towards dual agency buying deals:

Average single family home price is currently $565K. Average commissions are 6% on first $100,000 and 3% on the rest ($6000 + $13,950 = $19,950). If you use a buyer's agent, the deal is usually split 50/50. So each agent walks away from the deal with almost $10,000 that they then in turn split with their brokerages.

I'm not sure how many agents get to double end deals or how often they do, but I'm guessing it's not a common occurrence. I'm also thinking it's a mighty big carrot to get a deal done. And those "bonus bucks" present some wiggle room for everyone involved in making the deal happen.

Let's say I pop into an open house, like what I see, and decide to make an offer. I call the listing agent, let them know I'm pre-approved, and I'm ready to make an offer with few subjects.

The listing agent will have to do two things, get me to sign a dual agency agreement, and then get the seller to do the same--all before any offer is presented. This triggers two events: 1) the agent knows they have an opportunity to get a deal done and 2) the seller gets excited that an offer is coming in and their house may sell.

I've already decided what I'm willing to pay for the home. Let's say the list price is $565K. My price on the home is $545K. I know the place has been on the market for a month and that no previous offers have been presented. I offer $530K subject to inspection (I have my own inspector, not the inspector referred by the agent). The dual agency agent must present this offer to their seller as they are now equally representing me and the seller.

The seller is likely initially disappointed by what they would consider a low-ball offer given the current market. The agent though is also representing me now too and has a duty to try to get the seller to counter to keep the negotiations open (and a financial incentive to get a deal done for themselves).

The agent brings the seller's counter offer back to me: $557K. The negotiation has started and everyone is invested in getting the deal done (at least they think I'm invested, but I'm an unemotional party to the deal who will walk before paying more than I'm willing to).

I give the agent my counter, and tell them to instruct the seller that this is my final offer and set a time limit to respond (4 hours) as there are other homes I am interested in: $545K subject to inspection, flexible on the possession date but not shorter than 15 days and not longer than 75 days.

Negotiating the deal now falls completely to the seller and the dual agency agent. The seller has an offer, but it falls short of their expectations and they know they need to pay commission too. They also know that the agent stands to gain substantially more than if there were two involved.

They were prepared to pay almost $20K in commission, and they priced that into the price of their home. They expected to walk away from the sale with somewhere in the neighbourhood of $535K to $545K. They would have liked to have seen a sale price of $550-$555K, a difference of only about $5K-$10K from the current offer; coincidentally, just about the amount of the "bonus bucks" the agent is set to earn.

Selling houses costs money. It costs money to the seller, but smart sellers price the commission into the sale price of the home. But selling houses also costs a lot of money to the agents. Having that house sit on the market longer means more dollars spent advertising, more time spent marketing, more time spent in open houses and less time spent selling other homes or with loved ones.

Do you think making that sale is worth meeting the seller somewhere in the middle to that agent?

"Tell you what, let's get this deal done. I'll drop my commission from you to $16K even. You'll get very close to your price and everyone will be happy. OK?"

I think this gets the deal done--I could be wrong.

Of course, there are a handful of variables that will influence this scenario, including the state of the market and the buyer's, the agent's and seller's abilities to negotiate. But considering the complications of the alternative, I think my money will be on handling my own negotiation when I find the right time to buy because there is more money in play and therefore more negotiation room.

Please remember, I'm not an agent, I've made some assumptions about dual agency that some posters may be able to clarify/correct in comments, I'm not currently negotiating deals and I won't buy when everyone else is nor will I engage in multiple offer scenarios so I've ruled them out of this hypothetical situation.

Please tell me your thoughts in comments, I'll be interested in hearing the discussion.

Front page news

I don't know who was more excited by the news of a 19-year high in July sales volume this morning, the VREB or the TC. Both should be ecstatic with themselves, after all, they both managed to get themselves on the front page of the Vancouver Sun for a stretch of hours on a day when Vancouver discovered it's 17th homicide of the year--and they say the news media is all doom and gloom.

A very interesting thing occurred though; two papers, same story, but one major difference. Apparently, in Vancouver they invite readers to engage with the story by allowing comments. Shocker, I know. I was almost as taken aback as I was last month when the TC had comments turned on, oh so briefly, for a real estate story.

I grabbed screen shots, because, well, pictures or it didn't happen and all that. Here they are:

No comments.


Well, would you look at that! Front page news on the Sun and comments too to boot! Welcome to the interwebs, where you can read and engage, what a new fangled crazy idea!

Now, I know, I know, you're probably thinking I've spent the better part of the day with a bottle and now I'm just ranting a wee bit too much about something that really is inconsequential.

"Where's the story" you say, "this is nothing new. After all, 933 homes were traded last month, shouldn't we be talking about that?"

Well we would be, except an interesting exchange took place today on Twitter that tells a whole other story. This tweet prompted it all:

@timescolonist: That's hot! Greater Victoria's housing market regains its sizzle, with most sales in July since '90.

To which our regular, no nonsense analyst Roger responded:

@NeedsAnalysis: @timescolonist Too bad you closed the reader comments on the article. If you want to see reader feedback go here. (thanks for the link BTW!)

Of course, me being the surly, sarcastic personality I can be at times, I had to add:

@househuntvic: @NeedsAnalysis I think @timescolonist has a "push" only twitter account. Just like their real estate reporting, it's set to "regurgitate."

Well, I was wrong, and I say I was wrong, because whoever tweets on behalf of the TC, responded a couple of hours later:

@timescolonist:@NeedsAnalysis @HouseHuntVic We aren't opening comments on all stories as we must watch them & we're a bit short-staffed this week. Sorry!

Sometimes I wish I liked the sound of my recorded voice enough to record the laughter I emitted when I read that tweet so we could all share in the hilarity that overwhelmed me. I was lucky I didn't have a mouthful of coffee at the time or my laptop would have been toast. I'm glad I restrained myself long enough to let Roger intervene with something considerably less sarcastic and inflammatory than I would have posted:

@NeedsAnalysis: @timescolonist Tnx for reply. Unfortunately the TC has not allowed readers to respond to real estate stories very often in the past.

and

@timescolonist Many think it is because you don't do in depth investigative journalism on real estate and don't want to offend advertisers.

You know, I'm actually starting to feel sorry for the people stuck in the rot that is quickly overwhelming "journalism." After all, they've lived so long in a world where the ability to challenge their journalistic authority was mediated by two-day delivery paper mail and an editorial panel too consumed by the task of ensuring the city's social page photo content contained the appropriate image mix of advertorial clients' partners and children to bother approving half of the incoherent letters to the editor from the poor schleps with an axe to grind about public breast feeding or concert goers dancing in the seated area of the new arena.

At least they are starting to listen:

@timescolonist: @NeedsAnalysis Even on good days, we can't open comments on everything. But we'll make a note about real estate stories. Thx for feedback.

Which is the whole point of my post. I won't flatter myself by thinking the writers and editors spend too much time reading my blog (given the short staffed situation over there and all), but we have confirmation of their knowledge of my little internet corner here. So editors et al, one simple request: do some digging on your local real estate stories.

By republishing VREB press releases with a couple of original phrases tossed in for copyright purposes you only confirm your own irrelevance in the local real estate "news" scene. After all, in the Google age, if people want to just read the press release they can Google it. (I know some great SEO types who can help you crack the top page if you're interested)

Here's an original story idea I'd love to see you pick up: use Roger's Buy versus Wait spreadsheet to run financial calculations on the implications of buying versus renting over the near future. There, I've HARO'd for the day. HHV out.

The buying opportunity

Some of you will remember last fall, during the worst stock market crash in recent memory, the Prime Minister of Canada declared a "buying opportunity." Many Canadians, and not just politicians, vilified him for his unsolicited financial advice.

I thought it'd be a fun little exercise to track what has occurred since then and maybe offer some reasons why we are where we find ourselves today--in a place that no one in these parts has accurately predicted.

On October 7, 2008, the TSX was at 9,829 points.
It "bottomed" on March 9, 2009 at 7,566 points.
Today, the TSX is at 10,936 and climbing.

If you rushed out and bought an index fund on October 8, 2008, you'd be "up" about 9% today. If you were patient and picked a better buying moment, you could be "up" almost 31%.

Considering all that has gone on in the global financial market, I find these numbers remarkable. At the same time, I struggle to explain the index numbers as a whole on the basis of any sound fundamental analysis (although when you look at individual stocks, you can see stars, dogs and reasonable valuations, especially in some financial stocks).

What happened in the local housing market?

Median Greater Victoria price in October 2008: $495K
Median in June 2009: $530K

July numbers are out, along with hyper-spin, and the median price dropped to $520K. My earlier guess was off, I had expected price hikes, avg and median prices both declined MOM. What this indicates is that it is properties priced below $500K that continue to fly off the shelf as fast as they are listed while properties priced $600K or more move slowly if at all. Official sales stats are: 516 single family homes, 252 condominiums and 103 townhouses or 933 in total--the highest July sales volume in 19 years.

The "buying opportunity" in housing occurred exactly 3 months after the fall declaration: interest rates dropped to equal the lowest on record and buyers bought. But real estate analysts should be concerned that previous high water marks weren't surpassed--considering the frenzy during the fall of 2007 and spring of 2008 was happening with interest rates more than 2% higher than today's.

These are weird and wacky times. I suspect we will be offered new buying opportunities in the near future.

Premature declarations

In probably the most famous premature declaration in modern history, W declared mission accompished in Iraq long before the war even began.

Today, Carney declared the recession is over before it even hit bottom. Of course, that's CanWest's headline. Over at Real Financial News Central (Bloomberg) the headline is a wee bit different: "Bank of Canada says Recovery Muted by Strong Dollar"

The definition of recession is two consecutive quarters (or 6 months) of negative growth. Apparently the definition of "recession over" is the prediction of one quarter of positive growth.

I'm advocating a level playing field. At HHV, you will not hear "recession is over" until we have 6 months of positive economic growth. I'll keep calling it like it is, not like you tell me to see it. Take that W, er, Carney.

Carney says: "HHV, if you don't accept my definition of 'recession is over,' I will squish your little head!"

Chek 6 bubble burst

I'm only writing this post because I want to be part of the Google search bonanza AND THAT SHOULD BE THE FIRST CLUE IN AND OF ITSELF!

If you believe that local news is the right of a tax-paying Canadian citizen, sign up here, and get ready to be disappointed, as you already have a dysfunctional news drain on your tax-paying pocket working overtime to save jobs with no tangible results for anyone involved except the taxpayer who pays more for less to support a corporation who made $80M last year on revenues of $1.6B. Now granted, the CBC isn't really meant to make money per se, but one shouldn't be faulted for thinking "rainy day fund" around here should one?

CanWest spent themselves into the graveyard by buying up a whole bunch of poorly performing media assets in a time of declining revenues using cheap debt to do it. You and I and every other taxpayer has already bailed them out to the tune of hundreds of millions of loonies. Do you really want to continue to chase bad money with good?

I liken this analogy as a perfect metaphor for exactly what has occurred in the housing market: cheap credit has fueled a buying frenzy of poorly performing assets. Should the taxpayer have to bail out these fools who spent more than they should have ever been given access to?

This wasn't the first failed media story in Victoria. Nor will it be the last. It's sad, depending on your viewpoint, but it's a harsh lesson in the new media world that old media better hurry up and learn.

Now, when will new home buyers be taught their own harsh lesson in foolish economic practices?

Spinning wheel of death

If you use a Mac, you'll understand this post's title. When that little spinning wheel of death appears and just spins and spins, you end up having to shut down your system to make it end. Who would have thought it such an apt metaphor for the MSM and real estate reporting?

CanWest stock closed today at a measly dime. That's down 99.4% since its 2005 peak of $15/share, and almost not worth calculating its drop from its 10 year high of $21.35. There's all kinds of theories out there that suggest advertising revenues are down because the Internet is eating into earnings, and so on. I call bullsh&t. Ad revenue is down because no one wants to pay for the crap passed off as news these days. If I can get the press release faster directly from the VREB online (and for the record I do, and I beat the TC to publishing it consistently because I don't have editors who need to "sign off" on my ability to regurgitate it) why the hell would I pay the TC to get it for me if all they are going to do is repeat its content word for word?

Here's my theory:

Media laid off a lot of quality writers in favour of a lean and mean content generating machine and dropped any semblance of quality investigative journalism because it cost too much. Many good writers opted to join PR firms or start their own and sell their insider knowledge of media and how to generate stories. And then the quality of writing and editorial ability degenerated into what we've witnessed over the past week: 3 separate regurgitation's of real estate "news," each of them barely newsworthy to provide 3 days worth of crappy "everyone is buying now, the recession is over, you're an idiot for not buying last year, boy you should feel stupid for not taking advantage of lower prices and interest rates sooner" spin. No balance, no news, no investigation into the credibility of the sources, no quotes from arms length economists, no nothing, just republished press releases.

The VREB has a director of communications, heck, they even have a communications task force who meet monthly (if not more frequently) to craft ways to influence the consumer to consume their products and services. The VREB is a member organization of the BCREA which in turn has more communications officers and likely a provincial communications task force who meet together solely for the purpose of crafting strategies to influence consumers to consume their products and services. The BCREA is a member organization of the CREA who has even more communications staff and likely a national communications task force who get together to craft, you named it, strategies to influence consumers to consume their products and services.

And the MSM publishes their press releases on a weekly basis, verbatim, as news without any fact checking, without any investigative journalism, without any arms length expert opinion and without any consistency of balance. Why no stories of how the real estate industry works to influence the consumer to consume services and products? Is that not news? Should the consumer not be made aware of the systems and coordinated efforts, not to mention the amount of money spent, to influence them with numbers and statistics which no one can quality control nor idependently verify? Why no stories about what an average sales price truly is, and what it truly reflects?

I'm no cheerleader of doom, but the sooner the market presses the off button on this spinning wheel of death that is the "reporting" of real estate market "news" and ends it, the better.

There are no winners in this situation, just a bunch of losers, and I fear the whole sh&tshow can be traced right back to the consumers who just buy anyway--well, at least they used to buy the news when it was news, now, not even the advertisers are willing to pay for the paper.

I've given credit where credit is due in the past, but not this week. CanWest, TorStar, G&M (even though you're private) and CBC (even though you cost me money), you deserve to get hammered by the market. Someone please, end the spinning wheel of death, and soon.