Thursday, October 22, 2009

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.

61 comments:

Vic said...

"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."



Thanks for posting that HHV. Clearly the bulls are going find out soon that this so called true Canadian "prudent" lending is completely out of control and this is as bad as the OTC derivatives which are also unregulated.

I watched the Frontline show the other night and it is a must watch,even the ousted head of the Commodities exchange sounded the alarm that this will happen many times over when banks are allowed to make off market bets on unimaginable levels. Tell me the Canadian banks aren't in there too but not betting quite as big but then we have default swaps that have reeked major havoc that we are all on the hook for.


Looks like the CMHC is on the same level. Look out below VREB, I think a tsunami is coming like you've never seen as Carney has sounded the bell.


And thank you Dianne Francis for some honest reporting.



PS Good to see HHV get a spot on the Shaw. Maybe the local MSM is slowly waking up at long last.

Don't said...

BC online news paper article has a similar story.

Why Canada's Housing Bubble Will Burst.

'The largest sub-prime lender in the world is now the Canadian government.'

jesse said...

I am no apologist for CMHC but it is not true they will insure just any loan the banks make. It's a pity they do not make public their requirements for qualifying for their insurance. My guess is that, while they are insuring high risk loans, there are limits stricter than what happened in the US such as more reasonable debt service ratios.

Muriel said...

It's interesting that both Diane Francis, a commentator who is considered far right by many on the left, and Murray Dobbin, a commentator who is considered far left by many on the right, seem to agree on this issue.

A sign of an emerging consensus?

Sean said...

Finally seeing some groundswell regarding the true cause of this. As with most bubbles, the market distortion of governments and regulators are at the root. Carney asking the banks to be responsible lenders is at best asinine, more likely disingenuous. The distortion is institutionalized... we cannot blame the banks for taking the free money, with no risk... we must blame an irresponsible government, but also an apathetic and uninformed population as complicit in this. Hard to see at this point how it will all fall apart, but more certain than ever that it will... With US average home price well below 200k, and Canada's well over 300k, and a dollar near parity, and mortgage interest deduction in the US... well, you do the math. It boggles the mind that anyone questions the existence or magnitude of the bubble ongoing in Canada.

Teddy said...

I agree that the current situation is insane but it also provides quite a backstop that the US didn't have. CMHC is probably the reason all of us bears have been wrong about the housing market for so long (multiple years). So the situation doesn't make sense but does it indicate a housing crash? I don't think so. With this level of obligation there's no way the govt. will let the market decide. Watch for longer amortizations, bail outs, etc. if anything hits housing hard. Too much to lose if it goes down significantly.

Remember at this point PRAIRIEBOY made the right decision and is probably up by about 50 - 100K. The trick is to gauge the market and make money not just have an opinion that is eventually correct (so far the bears have been wrong for YEARS!).

jesse said...

"With this level of obligation there's no way the govt. will let the market decide."

Do you really think the government has enough money to support an inflated housing market? Say the average price is $300K but market forces want it to be $250K. Times 10MM households that's $500Bn, or bigger than the government's current public debt, required to keep prices high. Ain't gonna happen.

omc said...

So you figure the housing market has gone up 10-20% in the last few months? How do you guage a market that has peak prices and frenzied bidding wars? Are the interest rates going down? Well then incomes must be raising at an unbelievable rate?

I have seen some of the same junk that was flipped in the bad days of 2007, when buyers were in such a frenzy they weren't getting inspections. It looks like they are hoping for the same sort of toxic envirenment to sell now.

I think I just guaged the market for you teddy. Let me ask you, are you buying a house? Why not?

Vic said...

Governments preventing a market crash ? sorry but they have no hope of that once it starts. They can fuel a bubble as we have seen but can never prevent a crash. What will they do ? penalize you for saving yourself from going bankrupt ? LOL.


I doubt Prarie Boy has made $50-
100K, even after his sales commision,land transfer tax etc he would be lucky to break even. Besides you haven't made diddly til you have sold.

ivy said...

This seems to be where the majority of the quotes/ideas are coming from - http://www.nbfinancial.com/web/davidlepoidevin_2009-09.pdf

"The value of mortgages guaranteed by the government of Canada in the past 18 months exceeds the total value of mortgages offered by the CMHC in it's 57 years of existence""

"Every single U.S. lender specializing in sub-prime has gone bankrupt. The largest sub-prime lender in the world is now the Canadian government."

A good read, at any rate.

Reid said...

Vic, our government did prevent a housing crash this spring. Without their intervention and most importantly the low interest rates the real estate market across the country would have continued to drop.

Don't said...

Teddy,

Your comments about Prairieboy making 50-100K in a couple of months are laughable.

But what can we expect from a guy that lives in Richmond BC and just bought a house!!

Bears - just click on Teddy's name and go to his Richmond Renos Blog. You will see the house he bought a few weeks ago - click here.

Vic said...

Reid,

Point well taken but it was in attempt to save the whole financial system not just housing. If it wasn't for CMHC it wouldn't have made a difference. The new buyers with 5% down would not have qualified because they were at/near their lending limits.


As they just mentioned on BNN,the fools buying are only looking at the monthly paymemnt,not the elephant mortgage they have just singed up for, but by spring they will be.

omc said...

I was wondering why teddy was such a bull. I initially thought he might be a trolling realtor, but instead a peak buyer. Good luck with that teddy! I guess someone has to lose so another can win.

Don't said...

Looks like Teddy took down his Richmond Renos blog. I checked my browser cache and here is a snapshot for those that missed it.

Teddy's Richmond Renos.

I assumed Teddy was in Richmond BC. Is it possible that he bought a "character house" on Richmond Ave. in Victoria. If so that makes him a pumper troll.

Teddy said...

Who said I just bought? Anyway just doing some renos. I've been a bear for a number of years but realize I missed out on huge appreciation over the past number of years. In 2006 both my sister and I had about 500K budget to buy. She did and I didn't. Her place at the peak was valued at around 725K and would fetch around 650 - 675 now so she can still take a large decline. I however spent money on rent and saved. Who's better off? She is by far.

I notice bears are very sensitive when this type of thing is pointed out. There is no denying that bears were wrong over the past several years and missed out on huge appreciation. I just look at the reasoning back then and try to see if we are making the same mistake now. Just a debatable question and not something I have strong feelings about one way or the other. It makes sense that interest rates will rise and debt levels will become unmanageable but that's what I thought 3 years ago!

Teddy said...

Don't - what kind of scary stalker are you? I took it down because I am debating the relative value of real estate and the reno site was for my family. What relevance does that site have to anyone here?

Don't said...

Teddy,

You are the one that posted on a bear blog:

"PRAIRIEBOY made the right decision and is probably up by about 50 - 100K. The trick is to gauge the market and make money not just have an opinion that is eventually correct (so far the bears have been wrong for YEARS!).

No stalking here. You freely posted your profile that anyone could read by clicking your name. Your Richmond Renos stated "our new home built in 1912". One can only assume you bought the place recently from that statement.

If you are going to be a pumper troll you really have to do a better job.

Teddy said...

I made a debatable point and accidentally exposed my reno site. I understand you providing a link but providing a cached copy just strikes me as creepy. And why does questioning the bear view make me a "pumper"? We are happy with our house, doing a number of renos and will be staying here for a very long time. At this point in our lives the value of our real estate is irrelevant. I actually think it will probably go down in value in the short term but am not too concerned. What I'm curious about is if the bears will be wrong for a few more years or will the usual predications finally come true? You can't deny the theory has been wrong for a number of years. Obviously CMHC is propping up the market and with the huge increase they have can they sustain it?

jesse said...
This comment has been removed by the author.
Reid said...

Vic, I am with you on the CMHC issue as I have posted many times in the past on their role, but CMHC was in place before the economic crisis last year providing the same "insurance" to the financially illiterate.

IMO the reason prices started to rise again this spring/summer was because uniformed buyers realized the cost of buying was equal to or less than renting with these rediculously low interest rates. The existing CMHC program was there to support their desire to buy and buy they did.

If the CMHC program fails or goes away for any reason Canadian housing collapses. If long and short term interest rates hit 6%+, real estate prices will come off. So anyone buying today needs understand this and this is where the problem lies; the buyers are clueless.

That being said, I do not believe buyers are going to become informed any time soon, I do not see interest rates rising to 6% any time soon, nor do I see CMHC failing any time soon. Therefore in Victoria, you will need to be patient before you will see a material drop in the price of real estate.

Don't said...

Teddy,

Let's see if I get this right.

1. You come on to a bear blog and tell us how Prairieboy has probably made 50-100K since he bought his house. You tell bears that they have been wrong for years.

2. I post a link to your blog that shows that you are a new homeowner.

3. You quickly remove the link to your blog and deny buying recently.

4. When I post a copy of your blog you call me a stalker/creepy. Now that the facts are on the table you change your story and say that you bought for the long term etc.

You are just a troll - plain and simple. Anyone who bought a house recently, lies about it and tries to make others feel bad because they are on the sidelines fits the description to a T.

Just Jack said...

CMHC does have lending guidelines to protect them from claims by the lenders. However, what CMHC has done is develop a computer program that values homes by their postal code. This program, CMHC gave to the banks and brokers to make mortgage approval quicker and more stream lined. It now takes minutes and not days to get mortgage approval for the largest purchase you may make in your lifetime. The problem is that the brokers and lenders quite quickly figured out that if they altered or tweaked some of the data inputs, then the mortgages were made and the brokers got their commission.

Now when the broker is selling the mortgage to the lender. The lender is suppose to check the information. But in practice this does not happen. Hence, buyers that would never have received approval for a mortgage, get one and consequently home prices are bid up because of increased competition for the house.

Now, this works very well and is lucrative for the brokers, CMHC, and the lenders. Unfortunately, the over stressed buyer starts to slip on the monthly payments. No worries, as long as the prices are going up and the interest rate is similar or less than the initial rate. The the stressed home owner can re-finance themselves out of debt (more commissions).

But what happens when market prices remain flat or only increase marginally. Well the stressed home owner has no equity to borrow against.

So what does he/she do. They can't sell because after costs their mortgage is more than the amount left over. The can rent the home, but they have to find a rental for themselves or move home with mom and dad or move to a cheaper community. And chances are that they will have to subsidize the rental of their home by a couple hundred a month.

So who is to blame. Well, if you talk to CMHC they say that are not responsible for brokers not following their guidelines or the the lender not checking the broker.

The broker says he just took the information from the clients credit report and assumed it was correct. Increased some of the physical attributes of the home and what the property would rent for because he was trusting his client to be honest.

The lender says he was trusting that the broker checked the data.

And so on, and so on.

You see in the old days, we had real estate bubbles before, but these bubbles never got this far out of hand. Why? Well back then, CMHC had appraisers on staff that checked the data. But when CMHC's mandate changed from helping Canadians buy homes to one of underwriting funds to make money for the government then the appraisers just got in the way of making profits.

As long as there are enough buyers at the bottom of this pyramid, then things go on nicely.
But eventually the market runs out of enough people who can qualify for a mortgage to keep feeding the CMHC monster with new application fees. Then, the market collapses, as it did in the USA.

As per the article, CMHC is the largest insurer of sub prime mortgages in the WORLD. So, tell me how ugly is this going to be in Canada.

Skeptic said...

Reid, the real estate market can be cooled quickly without raising interest rates or an economic downturn.

This is easily done if the government instructs CMHC to increase the down payment requirement to 10%. They went from 0% to 5% and 40year amortization to 35 with a stroke of the pen. They can do it again.

The effect on current owners would be minimal. Mortgage rates and payments would stay at the same level. People would still buy but the FTB pool would diminish and cool off the market.

Teddy said...

Ok, here’s the trolls story… I’ve been a bear since, from what I remember, about 2003 and reading real estate blogs about as long (bear and bull blogs). I was living in Calgary from 1999 to 2006. Bought a place in 2005 and 16 months later it was worth 180K more. Took the money and ran. Sat out of the market and rented on the coast from 2006 until early May of this year. Economic situation looked dire in early 2009 but the crashing of interest rates and the buying up of MBS from the banks indicated a possibility they could reflate the real estate market. That’s what made me throw in the towel.

Anyway I like the debate on these blogs and have previously found the bears to be open debaters with a lot of great references to articles, documents etc. As of late it seems the bears have taken up some of the bulls lopsided views with no tolerance for differing opinions.

Robert Reynolds - GBA said...

I talked to a mortgage broker acquaintance of mine. He works for TD Bank as an independent mortgage specialist, he has been in the industry a long time, I trust his opinion. I asked him the following questions and here are his answers.

Q:What percent of your clients use 5% down payments?
A: 90%

Q: What percent of your clients use 35 year amortization?
A: 95%

Q: What percent of your clients choose fixed rate vs. variable rate mortgages?
A: 90% of first time buyers choose Fixed 5 Year.

Anecdotal, but probably representative of reality.

Just Jack said...

Why would the government want to cool the real estate market?

The real estate market makes jobs and causes consumers to spend.

The market will cool because of economics, which the government has been monkeying around with since the 0 down and 40 year mortgages, and by tripling CMHC's ability to push more high ratio mortgages.

It's happening now, look around. The amount of "for rent" signs that are popping up around town. If you have a couple of rental properties and they start to go vacant, there is no low interest rate that is going to save you.

CMHC is going to start taking a lot of hits and a lot of payouts. Only then will CMHC increase the amount down and the insurance fee. Not because the government says so - but because the Canadian taxpayer says so. Because WHY should we protect bank profits!

Robert Reynolds - GBA said...

Just Jack said
because the Canadian taxpayer says so. Because WHY should we protect bank profits!


Oh how quaint, you think we as taxpayers aren't going to get left with the bag? Of course we will. Those of us who were prudent and didn't buy will be bailing out the condo flippers.

Just Jack said...

Oh,Robert

We are going to pay, the Canadian taxpayer has always been the governments cash cow.

And right now they are fitting us for another set of teats to milk. HST, increased income taxes, elimination or reduction of the Capital Gains exemption, inheritance tax.

We are so screwed.

omc said...

The lunacy is getting worse. I am now seeing the same old junk that couldn't sell in the summer, but they have added another $100k to the asking.

Reid said...

"This is easily done if the government instructs CMHC to increase the down payment requirement to 10%."

You are correct the government can increase down payment requirements again and it will have a material impact on housing. But people in Ottawa are not as stupid as many think. After all the effort to stimulate the market over the past months, they are not going to increase the down payments until the sh** really hits the fan.

I would love to see higher down payment requirments. As a matter of fact I think it should be 20% minimum down payment as this will force Canadians to finally learn how to save and live below their means for once. But unfortunately Canada is in too deep now to move in this direction unless real estate get hammered and CMHC loses billions. Thereafter more realistic policies may be put in place.

Today in the US you would never get a 95% mortgage, nor would you get 6x your income in mortgage debt.

People wounder why US real estate prices are lower than Canadian prices, well it all has to do with financing.

Just Jack said...

Well now you see it. The emperor has no clothes.

Why for the last few years, the housing market seemed to defy economics, and why there has been an endless stream of new buyers.

For the last decade the real estate market has been pumped, vamped, re-vamped, extended and pushed to bubble heights never experienced before.

Accountability and responsible lending is sacrificed for bank profits and fat commissions. Why our own government, through CMHC is destroying the one thing most Canadians are relying on for their retirement.

This time however it is different. Its not just those that bought in the last few years, but those that have become addicted to home equity loans.

You can bet, that both Stephen and Iggy have fat bank roles outside of Canada.

Marko said...

Haven't the 5% secured morgage through CMHC been around for a while? Even when the market was slow and prices were low? I.E. 10 years ago in Victoria.

HouseHuntVictoria said...

Marko,

In short, no. 5% down mortgages haven't been around for 10 years. I'm not positive, but I'm pretty sure they've not quite been around for 5 years. I think 10% was the minimum down payment up until around late 2004 or early 2005.

David said...

HHV, I googled the following:

In 1999, the National Housing Act and the Canada Mortgage and Housing Corporation Act were modified, allowing for the introduction of a 5% down payment - a change launched as a five-year pilot in 1990, extended and finalized in 1999 - removing a significant barrier for first-time home buyers. CMHC also expanded its activities internationally and launched the Canadian Housing Export Centre (later renamed CMHC International) to share Canada's housing expertise with the world.

Vic said...

It used to be if you went the CMHC route it was a sign of desperation and was frowned on. You were advised by your agent and banker to avoid CMHC at all cost. It was like having a stamp on your forehead that said "I shouldn't be owning this shack cause I really can't afford it".


The extra scrutinization of your income and job wasn't worth the hassle AND the extra interest rate you had to tack on. It was better to get a second mortgage for the last 20% of the mortgage as the bank rate for that was still cheaper than going the CMHC route.


And...if you ever screwed up on the CMHC payment you would wind up getting whacked a hefty late fee and alot of un-needed hassle.


But now it's like the way they treat bankruptcy, no big deal,only a few lean years... or 7, with a black mark on your credit. My how times have changed.

HouseHuntVictoria said...

thanks David, i stand corrected

Just Jack said...

5% down payment brought in in 1999, 40 year mortgages, lowest interest rate ever. Well, that explains the last 10 years.

Just saw a 1950s bungalow listed for $649,000 on Grant Street. Purchased in 2005 for $345,000. I love the beer bottle decorating. Of course, it has 2 investment suites.

Is the methadone clinic still in Fernwood village?

S2

Just Jack said...

Anyone else read the TC article Hudson Contractor bounces payroll?

Things that make you go hmmmm?

S2

Marko said...

My neighbor's son (26) just bought a house. He is a pharmacist and seems to be a bright kid. He said he bought with a 5% CMHC mortgage despite having a 20% downpayment saved up form living at home the last 3 years. His rational is that with his current 2.25% variable rate, even when factoring in CHMC fees, he can invested the 15% he didn't make for the downpayment at a annual return of about 8% based on current investments(apparently he bought dividend paying stocks during the crash ~ BMO, Telus, TransCanada). He also thinks once mortgage rates get close to his returns, he'll put his investments towards his mortgage principle.

Does this rational make any sense?

HouseHuntVictoria said...

Marko,

Seems to me he's doubled down his risks.

He's banking on his stocks being at or above what he paid for them, and he's banking that his home purchase price doesn't drop more than 5%.

How do YOU think this will turn out for him?

Reid said...

I am not sure the pharmacist’s decision to take out CHMC insurance was that bright. It cost you 3.15% insurance on the “entire” mortgage when you take a mortgage with 5% down, so lets say he has a $500k mortgage his CMHC insurance costs will be $15,750. If he put down 20% or an additional $79,000, he would save the $15,750 insurance costs. This is an instant and guaranteed 20% savings on an after tax basis on the $79,000 investment. Even if he bought dividend stocks back in crisis that yielded 8%, the dividend yield relative to today’s value will far less than 8% as stocks have risen in value since the crisis, so he would better to sell in today’s market.

Over five years (when we all know interest rates will be higher) lets assume he averages only 3% in mortgage interest (conservative estimate), but he saves 4% per year in up front insurance costs (20%/5 years), he gets a guaranteed 7% after tax return on the extra investment necessary to avoid CHMC costs. I would take that return over risking my money in this equity market for which I will have to pay tax on any returns I do generate.

Bob leftcoaster said...

What if the CMHC were to change their rules and charge a deductible before releasing money to the bank? Suppose on a failed mortgage, the lender isn't paid immediately the full amount but instead is only issued 90% after a 10% deductible is withheld. Would that force lenders to retract and be more responsible?

delooper said...

If the article is true, and we're in a proper bubble, then what event will pop the bubble?

Our minority government is too unstable to make any major changes -- political expediency requires feeding the bubble. The recession, for all its hype, isn't hitting western Canada nearly as badly as, say, California.

Just Janice said...

Bubbles pop when the tipping point is reached. When buyers begin to question the value of what they are buying and doubt the proposition of never ending price appreciation. Bubbles pop when selling is no longer something one wants to do, but is something that one must do. I think we're close, but I've thought we were close for a couple years now.

When you can buy based on what you think, as opposed to what you feel, maybe then we will no longer be in a bubble, because right now it takes a lot of feeling and no thought to be in a position to buy.

delooper said...

Right, but if the bubble is going to last more than another 20 years, I'd probably be better off buying into it. I think real estate is significantly over valued here. I think there will be some pretty compelling forces to lower real estate values in, say, 10 years. Maybe only 5 years. Mostly due to the aging population in Canada. But I don't see a great big reason for the bubble to burst soon. I *want* it to. But I don't see a mechanism for it to happen.

Just Jack said...

As Just Janice said previously, bubbles burst when people start questioning the sanity of the prices. A "trigger" or special type of event is not necessary.

It's starts with someone just saying no and then spreads to the population. Kinda like H1N1.

I think most of us would question the sanity of buying a single Tulip bulb for a quarter million dollars. As did the auction market in Holland one day some two centuries back. And that's all it took.

And that is the classic ending of a bubble. A free fall of prices over a short period of time.

It's one of the reasons why, at the end of the cycle, you find so many high profile politicians telling us that the worst is over and happy days are here again. Because without this re-assurance someone will lead us to see that the Emperor has no clothes.

delooper said...

An aspect of that argument (if I'm to take it as an argument to hold off on buying a house) is that there's an underlying belief in a correction. ie: we live in a market that is currently irrational, but that invariably the invisible hand of the market will force peoples' hands, a correction is inevitable.

But maybe the market is even more irrational than that? Maybe the apparently bubble is stable -- due to the irrationality of Canadian investors.

The recent real-estate market collapse in the States was triggered by an array of bubbles piled on top of each other. A single bubble can be sustained for a long time if there isn't other bubbles propping it up -- if the environment is stable enough a bubble can be maintained for an extremely long time.

Mr.4AM said...

The problem these days is that few people do any critical thinking, and even less so in areas they have little foundation in (the economics of real estate), as such I am compelled to think that until some event drives them to think differently, the real estate party will continue, either as a flat-line or slow-creep upwards. This because debt levels have erroded joe-average's affordability ratio, so no more exploding growth.

The forces more likely to cause a downturn are:
- Steadily increasing interest rates due to macro-economic factors (i.e. bond markets, BoC & bank margins)
- End or claw-back of government aid to the real estate sector by various means (reduction of allowed amortization periods (35 years to 30 years, or min 10% to buy), removal of fix-your-house grants, etc)
- Continued growth in unemployment (I don't see this trend continuing for too much longer)
- Higher taxes (think HST)... more to come as somebody's gonna pay for the growing deficits
- Unresolved/Unsocialized resolution to the upcoming CMHC crisis
- Credit Crunch 2.0 shrinking mortgage credit to potential buyers (due to macro-economic factors... i.e. another major stock market downturn)
- Problems in finding MBS buyers (Mortgage back securities) due to macro-economic factors
- Pension plan crisis forces boomers to sell their houses so as to afford retirement
- Running out of greater fools (though sadly the supply seems near limitless!)

I'm hedging my bets on another stock market POP anytime in the next 4 months causing another panic, leading into the realization that all is not OK, and government and bond markets to smarten up resulting in increased interest rates combined with real estate buyer fears (high # of listings, small # of buyers).

Mr.4AM

PS. Don't expect RAPID price decreases in real estate... there is little historic precendence for this. It could take 2 to 7+ years to reach a bottom.

Mark said...

Mr.4AM

PS. Don't expect RAPID price decreases in real estate... there is little historic precendence for this. It could take 2 to 7+ years to reach a bottom.

Let me ask you this then.....is there any historic precedence for the insane run up in prices that we have seen over the last 5 years? (relative to wages)

delooper said...

There's precedent, sure. Victoria's prices aren't as high (compared to wages) as a lot of European cities. In Europe most people never expect to be able to buy a house. Maybe Victoria will have that kind of model for the forseeable future.

I doubt it, but who knows?

delooper said...

I wonder how many people out there scan MLS after a big drug raid where property is seized. Even with holes in the walls and garbage everywhere, the courts still want more than $350k...

I wish Victoria had a proper "bad" neighbourhood where the property was sub $200k. I'd buy into that neighbourhood regardless of the troubles.

Mr.4AM said...

Hi Mark,
you asked: "Let me ask you this then.....is there any historic precedence for the insane run up in prices that we have seen over the last 5 years? (relative to wages)"

In Victoria or even Canada, I think the answer is I don't believe so; still the reality is that real estate is a slow turning beast, in part because it takes time (months) to sell houses to drive down just a small bit of the overall asset values of real estate in a particular area. It is not until mutliple houses have sold one after the other, each at a lower value than the previous that eventually a bottom is reached. It can take years before this happens, unless of course there is a massive 'sudden stop' panic event, that is not unprecidented, but it is also not tied directly to real estate (i.e. Amercan "New Deal" a few decades ago).

Just look at the past year, we went (globally) through some of the worst turmoil in most markets since the Great Depression, yet Victoria real estate only went down a small percentage, and then getting back on the path of (fake) recovery.

If you haven't already done so, I'd strongly recommend this 15 minute video on the phenomenon of bubbles, and specifically pay attention to the following segments:
7:57 - "This housing bubble has no precedence" (as per your comments)
8:47 - Regardless, see bottom of bubble = 2015 (my comments on upwards of 7 years to hitting bottom).

This theory is further backed up by far more sophisticated analysts I follow, though to present that data would require me to go back and dig through their mutiple articles and a few days of compiling data to report here (sorry I don't have that kind of time)

Another factor is that since Canadians have such large percentage of their networth in real estate:
1. They are not going to give it up easily (i.e. only will sell when forced to)
2. Governmetn will recognize this pro-actively or re-actively and find ways to slow down the collapse (controlled collapse ... ala Bernanke and the US dollar).

Mr.4AM

Mr.4AM said...

Sorry, forgot to post link to the video (Crash Course - lesson 15)

Mr.4AM

Just Jack said...

The population of Victoria City is 80,000. Which European city should we compare ourselves to, Rome, Paris, London?

Its silly to try to compare ourselves to another country.

We have more in common with Whitehorse than Rome, more in common with Saskatoon than Paris and more in common with Chilliwack than London. But these comparisons are not made -because they are not favourable to our ego.

The simple reason why properties went up from 2002 to 2008 at double digit rates is that they went up the year before at a double rate.

When prices remain flat or the increase is minor, then real estate ceases to be an attractive investment and people stop buying. Which leads to price falls. Which leads to...

Prices will go down this year, because prices went down last year.

Because when you take away greed then all that is left is fear.

Vic said...

"Because when you take away greed then all that is left is fear."



Exactly JJ, when the masses who are out there hunting for moldy shacks see no more price increases then the buying stops. The RE business has had a pair prime marketing tools the past six months and that is rising prices and bidding wars. Both pump the buyer that it's safe to jump back and you're getting a deal but you have to do it "NOW"....and we both know what happens when the sale is over.

Reid said...

I would strongly recommend readers to invest the time to read the retirement/pension articles currently being published in the globe and mail. These articles highlight the brewing problem of people simply not having sufficient funds for retirement and the problem pensions are facing. IMO this issue is far more serious than the Victoria housing market being overvalued.

We may not have any influence on what the future holds for housing prices, but we can all influence our own retirement program. We can also ensure that when we do buy homes that we do not lose sight of these critical retirement objectives.

Many on here complain about the stupidity of first time buyers, but the real damage will be realized many years from now as I am sure these buyers approach retirement in the same manner that they approach buying a home.

Below is a link to the articles:

G&M Retirement Articles

Just Jack said...

Can someone post a link to the TC Business section and the article 'Homemade Savings' the new RRSP. Interesting and not surprising. Thanks

S2

Vic said...

Yesterday it was BCAA cutting it's travel centers, today it is Carmmanah cutting 20 jobs.


"Solar lighting company Carmanah Technologies Corp. has cut 20 employees from its payroll -- including 14 at its Vic West head office -- after failing to make aggressive sales targets.

Jobs were cut in sales and marketing, administration and accounting."

delooper said...

The population of Victoria City is 80,000. Which European city should we compare ourselves to, Rome, Paris, London?

Its silly to try to compare ourselves to another country.


Silly why? Some comparisons are relevant, some are not. The greater Victoria area has about 330,000 people. That makes it about the 15th largest metropolitan region in Canada. So Victoria is to Canada as Columbus Ohio is to the States. Or Grenoble is to France (perhaps a fairly apt comparison).

Victoria has growth and infrastructure problems due to it being on an penninsula (ie: Grenoble isn't bad for that comp). It has a relatively desirable climate for Canada, meaning there's an abnormal amount of competition for the property here that there isn't in a place like Columbus Ohio. So the will always be some kind of mark-up for property here, compared to say comparable property in Kenora Ontario, or Smithers, BC.

What I was getting at is sometimes apparent bubbles turn out to be stable. Take a look at property values in a city like Oslo, Norway. They've been high and increasing in value for a long time. Is that a bubble? If there's nothing to cause a bubble to pop, is it really a bubble?

Just Jack said...

So, can you name the 14 larger cities in Canada?

So, if you want to include all 330,000 people in Greater Victoria, what city in Europe compares to Port Renfrew?

If Greater Victoria is where Canadians aspire to live - why are we ONLY the 15th largest city?

If we are twice the size of Abbotsford does that make us twice as desirable?

mmmmm things that make you question?