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.