Monday, November 16, 2009

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.

71 comments:

Vic said...

Garth on the obvious.

http://bit.ly/2O3LPb

Robert Reynolds - GBA said...

The problem with the unwinding are numerous, the main dilemmas I see are.

If/when the bullsh&t hits the fan and the govt. does need to respond will they

A) change lending rules, increase CMHC insurance premiums, require banks to take more of the risk?
B) Provide a tax payer funded bailout of the CMHC and keep things status quo.

The federal govt. is already on shaky ground with the minority and saber rattling of coalitions etc. with the highest home ownership rate ever in Canadian history I doubt the politicians have the balls to pull the plug on the bubble. Even if it is the best thing for the country, it will be wildly unpopular among the electorate. I can't see any party acting out option A. they would be voted out of office immediately.

Robert Reynolds - GBA said...

Vic said...

Garth on the obvious.

http://bit.ly/2O3LPb


God Garth looks smug the first time the camera hits him, I think I threw up in my mouth a little...

Skeptic said...

Todays News Headlines

Globe and Mail - Three views on a housing bubble

National Post - Is Canada in a housing bubble?

Just Jack said...

The phrase "pent up demand" drives me crazy.


Anyone want to try to define what this means. How about try to measure pent up demand.

By lowering interest rates you lower the income threshold needed to purchase a home. If the interest rate had remained the same would that person who did not qualify before be "pent up" or would that person with a lower rate have been created demand.


How about the phrase a "bubble" versus a "correction" in the market? What's the difference? Can you absolutely tell the difference in the two before the fall in prices? I think most bank economist are hiding behind the fact that a bubble can only be deduced after the fall in prices.

Yet, the bank economist and CEO's are now starting to state concern over the market. In this way, they can protect their jobs when the market blows up - as they have gotten their statement on record.

The bankers and economists know that the Government can not sustain this stimulus package. That the level of home ownership is too high in Canada. That too many homes are owned by too few people (hoarding) and that the Government's low interest policy has robbed future demand to the point that the rental pool is being drained.

We may be looking at a decade of falling rents as well as home prices.

Over a hundred rentals posted yesterday on Victoria's Craiglist.
-And this is mid month.

PainInThe said...

" think I threw up in my mouth a little..."

That all depends if he's cutting into your income, or saving your economic life.

omc said...

I almost think Garth blew it on that interview. I am not saying he is wrong with anything he said, just the way he said it. Sticking to the facts and letting the viewer reach the same conclussion works a bit better. maybe at the end you could slip a nuts or crazy in.

Lots and lots of basement suites for rent out there for rent....

Vic said...

"Over a hundred rentals posted yesterday on Victoria's Craiglist.
-And this is mid month."



Must be all those new "happy owners" fleeing their hovels for the joys of a lifetime jail sentence of debt... or maybe their just fleeing Victoria for somewhere saner.

Just Jack said...

How about a moment on Victoria's unemployment rate that has gone from 3.1 to 6.6 percent over the last year.

Why does this not seem to be affecting the real estate market?

In my opinion, I think the affect of the higher unemployment rate is lagging the lay offs. Our social safety net and ability to re-structure debt has deferred the affect of the higher unemployment rate. It may also be that the first to be layed off are the last hired. Consequently, the affect would be shown in an increase in the vacancy rate and latter in home prices.


It doesn't matter how cheap money is, if you can't rent out your non primary residences your heading towards defaulting on your mortgages.

It's just like the 1980's all over again but without the music of the bad "hair bands"

Skeptic said...

Financial Post jumps on the bubble talk bandwagon.

Rapid rebound fuels fears of housing bubble

Canadian existing home prices are now rising at a pace not seen in 20 years, fueling talk that a bubble may be forming in the market.

All this bubble talk recently is convincing me that most economists are in denial. Watch for changes to CMHC rules in the next few months.

Inglishmagor said...

Slag Garth all you want (as you should, but he's one of the few people with a media profile saying this stuff. We read about this stuff and follow the blogs and think we talk about common knowledge. We are the very small minority.

Go Garth. Be our media whore and we will laugh and mock you, but be our whore none the less. It needs to get to the point where people start to consider the outrageous idea that house pricing is broken. and even better when others are openly talking about it.

Marko said...

Listings continue to fall. As of yesterday ~ Total Listing Inventory: 3099.

I am not surprised about the increasing rentals. A lot of people are probably leaving Victoria, moving back in with their parents etc. Prices are pretty ridiculous right now both to rent and to buy.

Don't said...

Marko said - "Listings continue to fall. As of yesterday ~ Total Listing Inventory: 3099."

I have seen you post current inventory numbers on several occasions. Where are you getting your stats? Are you a real estate agent?

Vic said...

"Slag Garth all you want (as you should, but he's one of the few people with a media profile saying this stuff. "


Exactly, if he wasn't out there speaking the facts against the MSM machine then who would have the guts to do it ? No one. Puking into your mouth is a little extreme, I saw nothing that was that bad,he just told it like he always has and not anywhere near what he posts on his blog.

Sounds like some political hangover effect causing the reflux. ;)

Vic said...

"Listings continue to fall. As of yesterday ~ Total Listing Inventory: 3099."


Declining inventory heading into winter will eventualy mean lower sales as the only thing left is the crap. When the masses wake up that the crap is overpriced by a couple hundred thousand then maybe the psychology will change.

msr said...

Marko,

Isn't it just seasonal for listing to drop as we head into winter? Which makes sense since people have other things to do than buy a house/move.

Robert Reynolds - GBA said...

Garth is just very pompus and has a Huge ego. I have tried talking to him on his blog and in person and he is full of venom and bile. He just isn't a very nice person and he thinks he is such hot stuff. Unless you are one of his lapdogs he just attacks you for no reason and raises strawmen everywhere. That smug little grin and cock of the head at the start just ooze smarmyness. I agree with his message, real estate is in a bubble, I just don't like him

Mr.4AM said...

There's a good little article over at Mish's stating that Bernanke (the fed) has still announced no Exit Plan (from trillions in market stimulation/bail-outs). When the music stops playing / fed stops buying garbage/mortgages & providing bailouts that have effectively propped up all the markets, who will step in to provide market liquidity for credit????

That's the 13 Trillion dollar question to which there is no easy answer.

Don't forget that most other G20 countries are playing the same music, including Canada though to a lesser extent. China's the biggest pumper - their stimulus is 3-5x the size of the USA relative to GDP.



There's a great CNBC video of Meredith Whitney (11mins) worth watching if you're an investor as it covers (US) Real Estate, consumer credit, stock markets, overall state of the US economy. As the US goes, so follows Canada... eventually.

Mr.4AM

PS. I'm still waiting for a significant stock market correction between now (well since Sept 09) and Feb 2010. Xmas retail earnings in the US are in for an all time record low, will that trigger the leg down, or perhaps more Eastern European countries defaulting on their debt, or perhaps the upcoming (bond insurer) AMBAC bankruptcy , or... (the list is long! Lots of high risk out there).

Mr.4AM said...

I forgot to mention in my "PS.", the still lurking potential of a 600 Trillion OTC derivatives blow-up. If that happens and Victoria Real Estate doesn't go down 30%+, I swear I'll become a real estate bull for life! *grin*

If you missed it this weekend, I strongly suggest you watch the full 55 minute PBS video titled "The [derivatives] Warning". It was very well done.

Mr.4AM

Mr.4AM said...

While I'm at it...
Is this the peak of insanity: ING offering 1% 5 year fixed mortgage in a contest, or shall I wait for the negative interest rate mortgage contest instead?

Vic said...

I can only imagine what Gordo has up his sleeve after the Olympics.


EDMONTON — Alberta Health Services plans to slash 1,200 administrative positions in a bid to cut in half a $1.3-billion projected deficit.

The move is part of a broad plan to save $660 million by the end of the fiscal year which ends March 31.

AHS also plans to contract out security services in hospitals. The move could leave about 100 people without jobs.

omc said...

Locally you don't hear much about it but most community medical clinics are having funding slashed. Many will end up closing.

Ok, How many articles have you read about the possibility of a bubble on the G&M and financial post in the last few weeks. I am guessing about 2 a day on average. The realtors are now trying to down play the whole market thng now and say that things will cool off. Boy we must be in really big bubble.

I hope Johny six pack ignore this and goes nuts with his cheap mortgage. Pop

Mr.4AM said...

Globe and Mail front page:

Are you ready for higher mortgage rates?

"The mortgage that might look affordable now very likely won't be when the inevitable rate climb kicks in"

"The cost of carrying a mortgage will absolutely shoot higher in the next few years. Nothing is more certain..."

"“The Bank of Canada has been very clear on this,” Mr. Gregory said. “‘Ladies and gentlemen, rates are abnormally low and in the future they're going to be higher. So be careful.'”


Step 1 to avoiding catastrophe

"1. If you're buying, don't borrow as much as lenders will allow you to have."


Hmm.. Gosh, now where have I heard these words of wisdom before?

Mr.4AM

Mr.4AM said...

Neat little 39 page report from CAAMP (Canadian Association of
Accredited Mortgage Professionals) dated Nov 2009. I've only done the 2 minute skim through it so far, but just thought I'd share it. No opinions yet.

Mr.4AM

Mr.4AM said...

And, the cheap mortgage interest rate party continues...

no wonder Roger went on blog vacation.

Combine that with US Fed hinting at 2012 to end low interest rates... and I think I need to go out and buy even more gold.

Mr.4AM

PS. Why is it so quiet around here ? :-D

Just Jack said...

Aaaaaaahhhhhhh argh, argh, argh. Okay, I feel better now.

It is so hard watching them being lead to the slaughter.

Aaaaahhhhhh, argh, argh, argh.

Unless of course the government is going to step in AGAIN to keep this thing artifically inflated.

S2

Just Jack said...

Sorry, led not lead.

When I'm agitated I can't spell.

omc said...


Garth makes it on to the globe again


He holds himself a little bit better, but he is not much off a public speaker.

Vic said...

Garth is Garth, you guys have to let go or just don't watch him anymore,lol.

Don't said...

No response from Marko about the source of his up-to-date real estate stats. Maybe I guessed right and he is a real estate agent.

PainInThe said...

"Garth is just very pompus and has a Huge ego." - Robbie Reynolds

SOME people deserve their huge ego.

OTHERS, DON'T.

Don't said...

From the Financial Post:

Canada's (Sub-Prime) Mortgage Market - Causing Concern for the Bank of Canada?

It seems that Canada is gaining a new reputation as perhaps the new kid on the block when it comes to the excesses of overheated real estate markets that are being fueled by a wave of mortgage financing that some consider to be sub- prime in quality. In part, this is starting to resemble what we have seen in the US.

Don't said...

Government wants to keep the party rolling. Only a few billion more!

CMHC Plans $2.33B Debt Issue

Skeptic said...

Breaking news:

B.C. plans to increase HST threshold on new housing rebate to $525,000

- If you signed a deal before Nov. 18 you are exempt from the new tax. Sign today and you better push for delivery before July 1, 2010

- Houses under 525K are not exempt from tax. You pay 12% HST and get a 5% provincial rebate. In effect you will be paying 2%. BC government says this 2% will be offset by a lower price from builder due to PST savings (nonsense)

- Houses over 525K will be subject to a 12% HST with a rebate of 26,250. On a 700K house this amounts to 22,750 more in tax after July 1.

- There is still a federal rebate using the same rules for GST that we have now.

- Buyers still pay the dreaded property transfer tax (PTT) on the before tax, sale price

Robert Reynolds - GBA said...

That's it, I'm officially calling it, the top is in.

I just had an appointment with a client about mortgage insurance. When I asked how big his mortgage was, he couldn't tell me. He didn't even know what he bought the house for. To figure it out we had to work backwards from his monthly payment. Young couple mid twenties.

Insanity.

Marko said...

"No response from Marko about the source of his up-to-date real estate stats. Maybe I guessed right and he is a real estate agent."

I am a builder.

Skeptic said...

Robert said:

He didn't even know what he bought the house for. To figure it out we had to work backwards from his monthly payment.

Yep it is all about the monthly payment nowadays. House, car, credit card, vacation etc. On the credit card this is usually the minimum payment. Budgeting for these folks is having enough money to make the monthly payments.

No concept of saving, debt reduction, retirent or financial planning. Live it up today, tomorrow is another day.

Marko said...

"- Houses under 525K are not exempt from tax. You pay 12% HST and get a 5% provincial rebate. In effect you will be paying 2%. BC government says this 2% will be offset by a lower price from builder due to PST savings (nonsense)"

I agree, complete nonsense. Builders don't pass on savings or extra costs incurred to buyers. You just sell for what the market value is. This 2% is significant, as is the 12% on over 525k, as are the new code requirements, etc. This will all significantly decrease inventory as I don't think the market will be able to support it. However, low inventory will dampen any correction we might have.

I really don't care what prices are as long as I can make a living. If I spend $550,000 on consturction and sell for $600,000 that is almost the same as spending $350,000 and selling for $400,000.

Construction costs on the house I am currently building are only running about 7-8% below peak 2008; however, with the HST a lot of construction cost savings will be eaten up by HST especially anything over $700,000.

HouseHuntVictoria said...

Marko,

3000+ active listings is not low inventory compared to historical numbers. It only seems low because of inflated demand.

Reduced demand will make 3000+ active listings look like too many for the market.

Reduced demand will also lead to less hoarding as people realize they aren't making money till they sell.

Drop demand back to fall 2008 levels and we'll also see a listings spike back to similar levels (3800+ actives IMO).

The whole "there's no inventory on the market" line is a myth. What's truthful is we have too much demand in one core area of product: SFH priced under $600K.

Skeptic said...

But Marko the government says the sheep will not pay more. Here is the official story,

BC HST Website

The Province is proposing to increase the threshold for the B.C. HST new-housing rebate from $400,000 to $525,000 to ensure that, on average, purchasers of new homes up to $525,000 pay no more tax due to harmonization than is currently embedded as PST.

They even have more detail in the 19 page transitional rules document. Marko - better call your accountant and bookkeeper - it is going to be a papertrail nightmare during 2010.

HST Transitional rules for new housing

While sales of new homes in B.C. are not directly subject to the PST, building materials used in the construction of homes are subject to the seven per cent PST. The amount of PST, on average, embedded in the selling price of a new home is estimated to be equal to two per cent. As a result of the decision to enhance this proposed rebate, purchasers of homes priced up to $525,000 would pay no more tax, on average, than under the current PST.

Marko - How can you disagree so strongly with the Liberals? Even your own Victoria Home Builder Association was publishing full page Times Colonist ads in the spring about how great the Liberals were for the province of BC.

Marko said...

"The whole "there's no inventory on the market" line is a myth."

The point I was trying to make is with a significant correction (i.e. 15%) there won't be any development or construction going on. I've scaled back my operations 66% and homes are at almost peak prices. If prices drop 15% I am obviously going to do something else. If housing/condo starts die a correction won't dip as much as if there was a new inventory coming onboard.

There are a number of other factors why I don't think we'll see a 40% correction in Victoria. In Canada people have approx 50% equity in their home, in Victoria 49% don't have a mortgage at all.

If we correct 15% it will be a smart time to buy, if we correct 20-25% I am going to buy 2 houses myself.

Bubble 'n Fizz(le) said...

Now that prices are back up to where they were in April 2008, the bears are trying to sustain hopes for a cataclysmic crash by looking at government policy. Back in 2008, it was bubble mania. Mean while, real estate prices that were out of reach two, three or five years ago are even more so now. You snooze, you lose.

Even Roger has seen the light and taken his website down. Perhaps he moved up-island to a shack he can afford. So sad!

HouseHuntVictoria said...

Marko,

I'm not talking about a 15%-25% or greater correction. I'm just talking about current market conditions and wacky lending practices.

I know you subscribe to the theory that construction costs only go up (they don't) and therefore people won't build, and therefore inventory won't increase, if prices decline, but I disagree.

A house is only worth what someone will agree to pay for it. It doesn't matter whether that property is owned free and clear or by the bank. When it sells, it makes the market. The market is determined only by homes that sell.

If the majority of people's ability to pay a mortgage is eroded by rising interest rates, prices will fall. It really is that simple despite the real estate industry's attempts to confuse us with urban myths and quasi-economic statements about equity and ownership.

Marko said...

"They even have more detail in the 19 page transitional rules document. Marko - better call your accountant and bookkeeper - it is going to be a papertrail nightmare during 2010."

Doesn't really bother me, the only home I am currently building for sale will be sold before July 1st.

I am going to be doing construction management for customers building their own homes until I see how the HST/market plays out.

You have to adapt in life to have success. I've left construction before, a lot of people have this misconception that skilled tradespeople will work for $20/hour if construction slows down. Skilled people adapt, move, go into new ventures.

Don't said...

I think what Marko is really saying is that he will charge what the market will bear. After July 1st 2010 he will be paying less for materials because he will no longer be paying PST. This is a cost savings to him. However, he stated his costs are irrelevant when setting the asking price.

The goal for these builders is to get the maximum profit. He and his real estate agent will list as high as possible and hope some fool will pay the price. Given todays insanity and easy credit it is a plan that will probably work until interest rates rise or we enter recession again.

What I hope is that all these builders and developers get caught with their pants down. One can only hope for rates to rise next summer or CMHC to come to their senses and raise the down payment requirements. The faster the flippers, developers and others stop pushing prices higher the better.

BTW - Still wondering how a builder gets the latest MLS inventory numbers from the VREB database.

Don't said...

Bubble 'n Fizz(le) wrote this drivel...

Now that prices are back up to where they were in April 2008, the bears are trying to sustain hopes for a cataclysmic crash by looking at government policy.

You truly are an idiot. It is the sales that are running high, not the prices. Visit the VREB site and get the stats before you write your nonsense.

Greater Victoria April 2008 stats:
- SFH average: 630K
- SFH median: 558K

Greater Victoria October 2009 stats:
- SFH average: 591K
- SFH median: 536K

Skeptic said...

Here is a Globe and Mail article about the effect of rising interest rates.

THE RESET RISK - Easy money, eager buyers. What happens if rates go up?

While home buyers have been pulling the housing industry out of a slump with their enthusiasm, there is growing concern that today's price gains, fuelled by cheap money, may be setting the stage for a different sort of crisis two to five years from now when their mortgages reset at higher rates.

These homeowners could be forced to put their houses on the market and sell them for less than they paid, dragging down prices everywhere.

"It's a safe thing to say that interest rates tend to move higher a lot faster than they move lower," said BMO Nesbitt Burns chief economist Doug Porter. "And there is always an outside risk that we could end up with more of a global inflation problem than many are predicting and rates could rise dramatically."



Take a look at the example at the end of the article.

Vic said...

marko misses the point that the other 51 % of those who do have a mortgage will be controlling the price as it crashes as they are the ones in hock.

The different stages of what time those people bought in and how long their denial lasts will define how fast and severe it will happen. I expect one nasty move down when rates start up. Bernake is not too far away from pulling a surprise 25 or maybe half a point hike to try and save the US dollar.

Once that happens the cards are off the table and the media alarm bells will be ringing so loud the CMHC/VREB will have to have a day off in mourning along with some group counselling sessions.

omc said...

I really have noticed a change in attitude from the realtors in the releases lately. Idiots like bubbles beat the drum and built up a huge asset bubble. Now we are seeing multiple articles at the G&M and financial post to do with risky real estate and how it will hurt our economy. So now Muir is saying that there will be a glut of listings in the spring and "pent up demand" is ending, so everything will be ok.

Kepp moving folks, no bubble here, nothing to see see.....

Idiots

omc said...

I don't think Marko is missing or misleading anything. He stated that if things crashed he would move on. He also stated that he he sees risk and has no exposure to the market. Sounds like me when the last downturn hit. I found greener pastures and never came back.

In the downturn you will find some trades working for $20/hr (or some where close), but for cash while they get their next step lined up.

Marko said...

I really don't encourage anyone to buy right now. In my opinion, you have nothing to lose by waiting out the next year to see what happens.

Where I think people will get burned is waiting too long if the market does correct. I think a lot of bears will get caught waiting for a 30-40% correction and pass up on a possible smaller correction; however, I don't think it will exceed 15%.

HouseHuntVictoria said...

Marko,

Won't we be able to see trends form? It's not like it will turn on a dime overnight? Personally, until I see 3 months or more of consistent movement up or down I'd hesitate to call anything top or bottom.

Until rent vs own costs in Victoria are more in line, I will continue to realize the value in renting. Right now, there is very little value in owning, just a whole lot of risk with very little upside in view.

omc said...

So the market over here was correcting prior to the economic crisis. Moderate analysts were calling for around 30%.

I see no reason that the economic fundaments have changed. The market will go back to where it was supposed to be before it was manipulated by the government, except now they have borrowed the future buyers out with the silly low rates. It could be worse because of this.

There is one thing I, unfortunately, agree with that half wit bubbles; prices. I too think that house prices are at least as high as the previous peak. Look at the stats and you will see many more houses have been selling in cheaper neighbourhoods. That is why the averages and medians are down still. Overpriced garbage that has been on the market for years is now selling.

Mr.4AM said...

Here's our real estate market in one picture. Warning: You may end up having nightmares that include Stephen Harper for a few days.

Mr.4AM said...

People, you don't have to wait for the real estate market to correct. It's been correcting steadily for 2 years in Canada already. Don't believe me? Check out this chart ;-)

Mr.4AM

Skeptic said...

In the US the FHA is akin to the CMHC. They must have been reading the CMHC press releases extolling their achievements. The FHA recently decided to expand their lending policies.

New York Times - Easy Loans in Expensive Areas

SAN FRANCISCO — In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.

A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

Chickinvic said...

"2 unit apartment building"

Was that a typo? Is 2 units actually considered an apartment building down there?

Vic said...

Personal bankruptcies continue to soar


The number of bankruptcies rose 44.8 per cent for the 12-months ended Sept., 2009, according to the Office of the Superintendent of Bankruptcy Canada, an agency of Industry Canada.

During the latest month for which data are available the number of bankruptcies increased 29.1 per cent from the prior month.

The volume of consumer bankruptcies rose 47.4 per cent during the 12 months ended September, while increasing 29 per cent from September over August.

Businesses have faired well with the volume of bankruptcies falling 0.4 per cent during the past 12 months, although on a month-over-month basis they rose 31.6 per cent.

The number of bankruptcies increased during September over August in the agricultural, forestry and hunting sector, construction, manufacturing, retail, waste management and the professional, scientific and technical group.

Leo S said...

@Don't
"The goal for these builders is to get the maximum profit."

Duh. The goal for everyone trying to eek out a living is the same. You make it sound like that's a bad thing. Only a complete idiot would sell below market value just because they happen to be saving costs somewhere.

However I don't agree with Marko's view that construction costs won't fall. Of course they will. How is it that in tons of other markets a house that costs 500k to build in Victoria will get built for 250k? If houses really cost 500k to build in, say Halifax, then no one would own a house.

The market has been high for a long time, so everyone adjusts their rates to take full advantage. When that is no longer possible, they will be forced to adjust their rates down again to keep their jobs. The thought that everyone in construction would rather leave than work for cheaper is totally bogus. Not like there are a billion easy jobs out there that you can just hop into.

Vic said...

"The thought that everyone in construction would rather leave than work for cheaper is totally bogus. Not like there are a billion easy jobs out there that you can just hop into."


Agreed, there are few carpenters,roofers,electricians etc that will toss away 4 years of training and years of experience to go start some new venture as a techy type or some big business dude. Most trades guys are in the trades because thats what they like doing,they are blue collar guys, not office boys. Maybe anecdotally a few do something different but overall I bet the percentage is very small.


The only reason there may be a temporary shortage is because of the large projects that have been happening the past few years which histrorically was a rarity in this town.

HouseHuntVictoria said...

The average age of Victoria tradespeople is also a lot older than most people think. Many will simply retire (if they can) or sell their businesses to younger more ambitious people.

I know of many tradespeople who are currently either working less than they did a year ago (in hours/week) or are working for less money.

It's not really about hourly wage. It's about total bill they can get from clients. It's more competitive out there than a year ago and their are firms outbidding one another for jobs driving prices down. My anecdotes are reno side of business.

Marko said...

"How is it that in tons of other markets a house that costs 500k to build in Victoria will get built for 250k? If houses really cost 500k to build in, say Halifax, then no one would own a house."

Find me a decent ready to build lot in Victoria for under $350,000 and than find me one in Langford for under $240,000. I just paid $6,000 for sewer connection along with $11,000 in "fees" to Langford. Once you spend this kind of money on land you have to build a bigger and better house. Jacuzzi tub, glass shower, hardwood floors, high-end appliances, granite in kitchen and bathrooms etc.

I've been to Halifax and you are comparing apples to oranges. For example, this brand new home 1542 sq/ft is $289,900. I could EASILY build this for $100 sq/ft (no Jacuzzi, no granite, cheapest stainless steel appliances money can buy, no garage etc.)

1542 sq/ft x $100 = $154,200 and I'll take a flat $25,000 construction management fee so $179,200. All you have to do is find a building lot in Victoria for $100,000 and you are set!

If you take identical houses, take away the value of the land, building costs differences are not large as people would suggest.

"It's not really about hourly wage."

I agree, most tradespeople work on a contract based off an estimate. The reason I use hourly wage is because it is easy to quantify. Essentially skilled tradespeople aren't going to drop their prices to the point were they are making $20/hour. I am talking about real tradespeople here not guys on usedvictoria.com calling themselves carpenters. There people are ovepaid at $12/hour.

Skeptic said...

Garth Turner was in town last night and posted his comments on the Victoria real estate market today.

BC - Bubble Columbia

Actually the large crowd was friendly for a city epitomizing real estate delirium, and which I miss few opportunities to ridicule.

Meanwhile affordability levels are flashing red. It now takes 7.4 times the average income in Victoria to buy the average home – seriously unaffordable by international standards, and far worse than the height reached by US real estate just before the crash. Just imagine what even a 2% rise in mortgage rates over a year or two would do to a market like that. Victoria is also a relatively small place of about 80,000, and an urban area of about 330,000.

But I do worry for those people who fall victim to the mass psychology of insular markets, reinforced by uncritical and myopic local media. What has happened in Britain or the US is always just a few lousy weeks away.


The Times Colonist did not cover the event. They have been too busy writing glowing RE pumper articles to prop up falling real estate advertising revenues.

Leo S said...

Lot prices will come down if people can't afford them, same as houses.

If no one is buying, then that $350k lot is going to be forced to drop in price. And like you said, you might have to build cheaper houses and leave out the luxuries, but houses will still be built when prices come down.

Skeptic said...

Those following the economic news know that the "economic recovery" is not going as forecast. The Bank of Canada and US gov't predictions were too rosy and even Obama is talking about a dip back into recession.

What about BC? The Liberals are far too busy selling the Olympics to focus on the economy. But in a little over 3 months that party will be over and it will be time to tally up the expenses and face the bill. Once the PR switch promoting BC and the Olympics has been turned off economic reality will be pushed to centre stage.The Liberals passed special legislation to delay the budget until the Olympics are over. The budget will be presented on March 2 and you can bet it will be a doozy.

Weak economic recovery, final Olympic bill, BC government cutbacks, HST and perhaps increased interest rates will have an effect on house prices.

2010 - Year of the Bear

Marko said...

"If no one is buying, then that $350k lot is going to be forced to drop in price. And like you said, you might have to build cheaper houses and leave out the luxuries, but houses will still be built when prices come down."

I don't know how many times I will repeat this but there is very little lot inventory in Victoria. I paid $200,000 for a lot in Cordova Bay more then 10 years ago when at the same I bought an older 2500 sq/ft home for myself in Fernwood for a bit less! I could have bought a very nice home in Gordon Head for $260,000 - $280,000. Even the subdivision in View Royal past the General Hospital small lots were going for $110,000-$140,000 and that was like 12 years ago. A rancher on Scott Street (close to Hillside Mall) sold for $142,000 on a 5500 sq/ft lot back in late 1990s. My point is that land has always been very expensive in Victoria relative to price of homes.

The cost of developing a building lot in Victoria is astronomical. Municipalities use to help out. I had to pull a sewer off an adjacent street for two homes I was building in 2004 at a cost of $56,000; however, Langford picked up $36,000 of the cost. Good luck getting $1,000 out of them now.

There are currently 5 lots for sale in Victoria on MLS with the lowest price being $472,900. There are a few more in Sannich but some require you use their builder (they give you the lot for a reasonable price but they gouge you on the building side).

The only way lot prices will drop significantly in Victoria is if home prices fall to the point where it is cheaper to buy an old home, tear it down, and build.

Vic said...

"Essentially skilled tradespeople aren't going to drop their prices to the point were they are making $20/hour."


That depends on how hungry they are after the crash and if their EI has run out. What job is a guy going to go into on short notice that makes over $20 an hour with no experience or training ?


This usedvictoria story is getting lame. If thats where you're looking no wonder you find nothing but shleps. Maybe try the union hall,thats where the "real" trades guys work thru,but then will have to pay the going rate.

Art Vandelay said...

The "union hall."
Phhht.
Credentialist.

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