Wednesday, November 25, 2009

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*


stayinghere said...

I scratch my head too. I have many friends who have been predicting that prices will tank for the past two years, and yet, they really haven't. Once rates rise and prices consequently fall, people may end up paying the same amount of monthly payment on a lesser amount borrowed at a higher interest rate. That is all. A few years ago I owned a house that I bought for $250,000. I sold it for $565,000 less than 5 years later. Are there really people on this board that think housing prices in Victoria will drop as significantly as the rose a few years ago? For all those people sitting on the sidelines waiting to jump in and buy a house once the "price" drop comes, who are paying rent to live in a "hamster cage" apartment or basement suite. How long does it take you to save $315,000?

HouseHuntVictoria said...

^ I think you are missing the point here entirely.

It's not about the monthly payment, AT ALL.

You use the last five years as your example of "savings." You're basically saying that the next five years will look the same. Here's a hint: they very likely won't.

I'm saving money in my "hamster cage", and there's no threat to my future financial security. Yet people who do as you advocate and buy today will find themselves in houses with mortgages they can't afford in 5 years time, if they were smart enough to use a locked in rate today.

I wonder what happens to them then?

stayinghere said...

I do understand your point and I do beleive that many would be crazy to buy a house now without a large downpayment. I am an advocate of conventional mortgages, always have been and always will be. My point is that what many of us experienced only a few years ago in ridiculous real estate appreciation will not mirror the price drop coming. I admit that I may be incorrect. However, I do not believe that my old house will once again have a market value of $250,000 anytime soon. If that kind of depreciation is what people are waiting for I think they are disillusioned. I think we may indeed see a price drops, but the rise in interest rates will erode part of the benefit. That is why I refer to monthly payment being a factor in affordability.

Just Janice said...

Oh Stayinghere - you indicate that you sold your home for $565k, I presume you bought another home and probably sunk most if not all of the money from your first home into that home....

That $315k isn't really $315k unless you sold and didn't re-enter an overvalued market. It might not go to $250k, but it could easily go to $300k in which case your $315k shrinks to $65k...but who cares after all how long does it take to save $265k?

Oh and that $800k upgrade you probably bought, could go to $500k - which would leave you with just $15k of the $315k you sunk into it....

The thing about leverage is it cuts both ways...

stayinghere said...

I agree with you Just Janice, that very well could happen to my wife, kids and I. However, we now live in a more family oriented area, with better schools, and a home that is much larger and more appropriate for our family. You are right, we did put all the money we "made" on our old house into our new house. However, our mortgage payment did not change since we had a lot of equity in the house we sold. In fact, our new house does not require as much maintenance as our old house did so we have been able to pay a few significant lump-sums on the mortgage and now owe even less on this house than we did on our old house when we sold it.

HouseHuntVictoria said...


I don't see many calls for a return to 2002 prices around here.

Personally, I look at rent vs owning costs and I'm currently paying less than 50cents on the dollar for an equivalent property. My savings/investments do great elsewhere.

Forgive me, as I don't have a lot of patience for people who bought their first place in 2002, then sold and moved up the later in 2007-2009 who tell me I'm missing the bus or whatever.

I wasn't in a position to buy in 2002. I was in a position to buy in mid 2007 and I thought things were ridiculous then. Since those days, I've saved money, prices on properties I would buy haven't changed more than + or - 5% to 8% and many people have told me I am a fool not to buy.

I don't live in a location I don't like, but if I bought a place, I likely would because the products I would choose to afford are in locations I don't like, or if they are in places I do like, they are crap offerings. See my dilemma? Owning doesn't make living in an unhappy place better than renting. All one need do is ask someone who has bought into those situations after the honeymoon is over.

Your property ladder story is going to be very different than those who are buying now hoping to live the dream in 5 years time. That's my point. And that's the reality of further depressed prices: there are no more policy options to make real estate more affordable. The next correction won't be stopped by drastically lowering interest rates because they can't get any lower. It only gets ugly from here on in if the buyers stop buying. What does ugly look like? Probably a slide from a $535K median to a $435K median--or about 20% or a 40% hit if you've bought with a 5% down 35 year mortgage (when u include opp. cost and debt servicing charges).

stayinghere said...

I would agree with you HHV. I too would have had a hard time buying in 2007 if not for the ridiculous windfall from 2002 prices. I do not think you are a fool not to buy. However, it is good to hear you say that people on this blog are not waiting for 2002 prices. As I am new on here all I have seen so far is people talking about price collapses and an essential nuking of the housing market in victoria. It is good to know that this is not the common sentiment around here. Realistic price corrections I can agree with, houses in Victoria for $150,000 I cannot.

Mark said...

There are plenty of people on this blog that believe that prices will correct 20 - 30% In my books that is s solid correction AND I personally believe more like 30-40% is coming.

Anyone that has travelled to the good old US of A and specifically places like Arizona, Nevada, California, Florida etc etc etc has seen first hand what a true correction looks like.

Sleepy Town hasn't seen anything yet.....stay tuned. By the way Janice is bang on with her assessment of people thinking they have locked in some kind of profit by moving up the property want to talk about delusional.

These people will be seeing real losses when their mortgage is bigger than the value of their shack and their payments are too much to afford. Difference is this loss compared to the paper profit you talk about is real!

Why the hell you people think Victoria is different is typical of the attitude in this town. Job losses across the board, unemployment is way up. Tourism is dead, disposable income is non existent thanks to the lunacy that is the buy now or never get in mantra that is keeping this bubble inflated. The economy is a lot worse than you think and we haven't even seen the Olympics hangover yet in BC.

This clown cracks me up. Hey stayinghere my guess is that when you bought your shack for 250k you probably thought it was overpriced, right? Now be honest because I know what kind of junk 250k bought 5 years you really think it's worth anywhere near 565k????

Now once you start thinking clearly and not like a sheep, do you not think that IF things get as bad as they could (higher interest rates, forced sales, increased taxes, continued lay offs etc)that the market could conceivably give it all back?

I do.....

stayinghere said...

Why would I have sold my house for $565,000 if I thought it was worth $565,000? I did not think my house was worth $565,000 so I sold it to someone who thought it was.

Mark said...

"Why would I have sold my house for $565,000 if I thought it was worth $565,000? I did not think my house was worth $565,000 so I sold it to someone who thought it was".

Ok first of all....HUH???? Second of all you sold your house (by your own admission)that wasn't worth anywhere near 565k and you bought another that wasn't/isn't worth anywhere near what you paid for it.

My question to you is - is not conceivable that your 315k paper profit that you keep bragging about could disappear over the next 5 years?

My point is and always has been that the price for an average house in Vic 5 years ago was too high, so now 5 years later it is ridiculously too high given what you are getting.

This is not Ft Mack or Silicon Valley. there are very very few high paying jobs here and the affordability has gone from expensive to completely out of whack when compared to monthly salaries.

You didn't answer my first question....did you really feel that 250k was a fair price for the first house?

right now it's all about monthly payments, nothing more. That will change with higher interest rates. 35 yr amortizations??? are you kidding me! You slam renters yet the majority of FTB's are doing nothing more than renting from a bank with 5% down and long amortization periods like this. It takes years before you pay even off any principal and the total paid out at the end of the 35 years is laughable.
Banks love this shit!

Add to the total property taxes (oh and those are going to climb big time over the next 5 yrs), insurance, maintenance....ya renters are the ones throwing their money away hahaha!

It is a FACT that you can rent a place (very nice place in fact) for nearly half of what it would cost you to buy the same place in Vic.

if that isn't argument enough to support lower prices then I don't know what is.....oh and rents will be coming down. They already are :)

The party for over mortgaged, indebted dummies that are now able to get 1200 month for a basement suite will be over soon.

HHV take a trip out of the bubble world we call Vic and you will quickly realize that prices could and most likely will come down a lot more than you think. Just have to give it a bit of time.

Leo S said...

"This clown cracks me up"

Why? You're being totally unreasonable and venomous. stayinghere is completely right, in that housing has been an excellent investment when he bought, and certainly better than renting in that period. He's also correct in that a return to 2002 prices in Victoria is extremely unlikely.
People love to point at extreme examples in the US, but the reality is that even there, if you look at places on the west coast with decent employment, prices for real estate are still high (Seattle area never had a big correction).

Not that this changes anything. Right now, real estate is a bad investment, and too risky if you're just looking to get into the market. But if I was at an age in 2002 where I could have gotten into the market and gained 315k then I would have no qualms about upgrading now. Sure most of those gains might be erased in the coming years, but who cares. It was never real wealth to start with, so losing some/most of it is no big deal. Trying to time the market with your primary residence is a total waste of time.

Bob leftcoaster said...

I don't believe in a return to 2002 prices. That would be close to 50%! But even if they remain static, I look forward to a saner buyer's market where $500k buys something nicer than a 2bdrm leak shack without the bidding war.

6% interest and a reduced pool of buyers will shift us into the market we are waiting for. We don't need a big drop in prices to significantly change the market. With 25% down payment, waiting for a mere 10% correction at 6 to 8% will result in a lower principle in 2015 compared to buying now with 5% down today.

omc said...

Leo S,

I hope you don't think this is an attack. You are just a bit unclear in your comments. "Trying to time the market with your primary residence is a total waste of time."
I hope you are talkng about buying and selling your primary residence as a source of wealth, not that you should buy in any market or circumstance.

omc said...

staying there,

Do you remember when the market was falling prior to the financial crisis? There were alot of projections from people in the know (not extremeists) on how far it would correct. Most of the people on this blog believe that the market is being manipulated by extremely low interest rates and will return to economic fundamentals as interest rates rise. The low interest rates have allowed a false affordability in the market. Most reputable economists were looking at more than a 20% correction last year.

If I bought in 2002 I wouldn't even bother with these blogs as it doesn't matter to you.

stayinghere said...

It is conceiveable that the paper profit of $315,000 will erode over the next 5 years. I do not dispute that possibility, in fact, I agree with it. However, I do not think a $315,000 price drop correction is on the horizon. My guess would be more like maybe $100,000 reduction?

With respect to the $250,000 2002 purchase price. Obviously I felt it was a fair price. Otherwise I would not have bought it.

I do not intend to slam renters and call them stupid because they have not bought in. Quite the contrary. I respect the fact that many of them are making sound financial decisions in their particular situations by waiting to get in the market, or if they choose, never to get in the market.

What gets me is the ranting by some renters of doom and gloom coming and how stupid all of us homeowners are.

I mean why not sell my house now, pay off my mortgage, put my money in the bank, maximize our RRSP's, maximize our available TFSA room, rent a place, wait for a price drop, then buy a place that is better than the home I live in with cash. Seems pretty simple to me.

beagle said...

"People love to point at extreme examples in the US, but the reality is that even there, if you look at places on the west coast with decent employment, prices for real estate are still high (Seattle area never had a big correction"

Seattle is down 22.5% from it's peak in 2007. That's pretty extreme to 0 or 5% down 35 year buyers isn't it?

Mr.4AM said...

Leo S
"But if I was at an age in 2002 where I could have gotten into the market and gained 315k then I would have no qualms about upgrading now. Sure most of those gains might be erased in the coming years, but who cares. It was never real wealth to start with, so losing some/most of it is no big deal. Trying to time the market with your primary residence is a total waste of time."

You must be rich, because to most people $315K is a very large sum of money. To put this into perspective, if you make $50,000 a year, keep a rough $30K after taxes and spend $20K for your yearly living expenses, that leaves you with all of $10K to save. Without getting into intrested adjustment calculations, $315K = 31.5 years of your work life to save up. Or if you want to put in terms of retirement years (cost of living), then it shaves off upwards of ~10+ years off your retirement!

Thus "investing" $315K into a sure loss is not exactly the smartest thing to do. Also the real estate market is about the easiest market to time (compared to stock markets & forex markets). I timed the market with my primary real estate (granted not perfect - bought 2004/sold 2008) and am significantly up in REAL profits.


HouseHuntVictoria said...

"I mean why not sell my house now, pay off my mortgage, put my money in the bank, maximize our RRSP's, maximize our available TFSA room, rent a place, wait for a price drop, then buy a place that is better than the home I live in with cash. Seems pretty simple to me."

Even though this is likely sarcasm it may be the soundest financial planning advice uttered on this blog.

Stayinghere, I enjoy the discussion, glad you're here, if you're reading like I'm giving you a hard time, I'm not meaning to critique you, just some of the views... I bet we have more similar than opposing beliefs about the current market.

stayinghere said...

It was indeed sarcasm. However, it would be a nice scenario. I do not feel as though I'm being given a hard time. Housing is a serious issue for all of us. I enjoy discussing it with those that share my views as much as with those that do not.

Just Jack said...

Remember we have robbed the next decade of buyers with these low interest rates. Those people who are forced to sell over the next few years will make the new market. The lenders are not in the rental property game, so you can expect that the lenders will want the properties sold in 90 days or less and they and the court are more flexible in accepting offers than a home owner would.

So, you have the scenario of far fewer buyers and more motivated sellers. In otherwords, a market under duress.

As we had with the leaky condominiums, the future market will be investors looking to buy properties that have a positive cash flow. However, most will be reluctant, with increasing interest rates, to gamble on just breaking even or making a modest return on their equity. The investors of tomorrow will want a return on their equity to compensate them for risk.

So how low does Mr. X's $565,000 home have to fall in order for an investor to make an offer? Any reasonable analysis will show you that the fall will be substantial.

And while "stayhere" will refuse to sell his property for this amount. Mr. X has very little choice as he has been evicted from their home. Mr. X's property is the market, stayhere will just have to live with the thought that at one time he might have sold his home for $565,000.

Lucky C said...

I for one am pretty tired of the real estate geniuses that managed to pull off a 300K plus "profit" by following along with everyone else in the!! Rich!! This is such a Vic mentality. I am also pretty tired of the assumption that the only thing to rent around here is a dark dank basement in Esquimalt (no offence). Lets compare the rent vs buy on something like this . Maybe your nu vos reesh friends could buy in too and be yer neighbours. People have completely lost the plot on the current situation. Hellooo... Victoria? The dirty thirtys called... they're comin' for a visit after the winter olympics... ya, good luck with that. The time line that people are looking at is waaaay too short. There is some serious deleveraging that must take place and none of us are going to be immune from the effects. Well, except maybe Mr.4am...

PainInThe said...

There is 50% correction coming... anyone who buys now is the greatest fool of all... i.e., a complete idiot.

Especially if they've been suckered in by "cheap" loans from the banks. Like crack, and will prove every bit as fatal in the long run.

Leo S said...

"I hope you are talkng about buying and selling your primary residence as a source of wealth, not that you should buy in any market or circumstance."

Yeah exactly. I'm just saying that if I had made 315k from real estate like stayinghere I also wouldn't be worried about upgrading now. Yes those gains might be erased, but I almost certainly wouldn't be losing money either.

"You must be rich, because to most people $315K is a very large sum of money."

I'm not rich, and yes, $315k is a lot of money if that money had come from my job. But if that money just magically appreciated into my house, I wouldn't be hugely concerned about it also magically disappearing again when the market corrects. It never really existed in the first place, and I never worked for it, so who really cares. Life is about more than money.

"that leaves you with all of $10K to save"

Well I save a hell of a lot more than that, but that's beside the point for the reasons stated above.

"Thus "investing" $315K into a sure loss is not exactly the smartest thing to do."

Sure, in terms of where you will likely be financially, I agree. But to play with your primary residence like an investment is also a big hassle and the last thing I would want to waste time on. I'd rather have the house than the money if I didn't work for that money, but I see how some people would rather take the cash.

By the way, I was at Garth Turner's talk last week (which was great). The guy I sat beside sold his house in late 07 near the peak, then put all his money into the stock market instead and promptly lost 50% of it. Yes you can argue that he's stupid but unless you are omniscient about your investments, there is risk everywhere (unless you want a 2% return).

Anyway, it's not like I either own or plan to enter this crazy market. I just don't get the hate for the homeowners that struck gold during the past decade.

Animal Spirit said...

stayinghere - I like your posts, they add balance. The vitriol of a few does not (it is anger rather than reasoned argument).

All - a couple of recent posts on calculated risk provide some insight on what CMHC is likely to do policy wise:
1 - FHA Changes,
2 - Fannie Mae Standards

What's the over/under on when CMHC follows?

Vic said...

stayinghere timed the market,got lucky,end of story. Happened to me too back in 81, I wasnt' a genius, I just lucked out. Bought in 79 and the price almost doubled in a year and half,sold as the market began its decent and lost out on the first 15% but thankfully missed the next 30% had I stayed. That was a 45% total swing down from the peak in less than two years and was in a nice neigborhood.

To say it won't happen you are being naive and not grasping the impact of rising rates. Yes rates in 81 were 19% at the peak,but houses were affordable at 13-14% releative to prices and incomes at the time.

This an entirely new dillema where prices have exceeded incomes even at lowest rates ever. Just watch the interest rates already being jacked a full point on your LOC.

The bond market controls your future house price and with gold blowing the doors off you can bet there will be some harsh movements in the full point or more increase in one swoop before spring time. The US dollar is tanking and it will effect everything in Canadian economics.

Olives said...

I was going to say that too - in the 1980's prices dropped an average of 45 percent inflation-adjusted ,and that was just during a recession. We are in the initial stages of a credit contraction now, so why is it such a stretch to think that house prices could drop substantially - ie. below 2002 prices?

We don't know what is going to happen, but I don't see why some think that a drop of this magnitude is out of the question. One thing we do know is that historically credit contractions have always led to deflationary depressions. The contraction is apparently beginning to accelerate.

Just trying to be realistic....

Reid said...

It is impossible to predict how much house prices will fall as there are simply too many variables which cannot be accurately predicted that will drive future prices. But if you look at the range of possible scenarios it is highly likely real estate prices will drop over the next 2-5 years.

The problem with us bears if that if prices drop 20%, most of us will not buy as many will feel prices have another 10% to 20%+ to drop. Consequently most bears will continue to sit on the sidelines waiting for it to get uglier.

I think at the end of the day, you buy when you are comfortable with the cost of a house you know you can live in for a long time. It is simply not worth buying a house for 2-5 years as transaction costs are too high. My program has always been that I only buy a house if I can support my family under a 25 year amortization and I can comfortably maximize my RRSP/pension contribution limits each year.

If you follow this program you are prepared for rising interest rates as there are lots of buffers. If things get ugly you are not forced to sell and most importantly you are providing for your retirement. Your house is not your retirement fund and sacrificing your retirement savings in order to own a home is moronic at any time in the real estate cycle.

I continue to own a home because it provides a stable environment for my kids who had to deal with too much in their lives and I will not move them around to save a few bucks. I recognize this may cost me much of my paper profit, but we have paid off the mortgage, so I have no reason to be concerned. If real estate tanks hard as some predict, then I am positioned to buy as an investor at a time when others are in crisis and deals can be had. So regardless of what happens with real estate I figure we are OK and we can prosper. But we only got ourselves in this position because we worked hard living well below our means for many years to pay off that mortgage. I do not see that mindset in the FTB’s of today.

Robert Reynolds - GBA said...

Today Rogers laid off 700
Bombardier 715

Recession is over people, green shoots....

hachiroku said...

Dubai debt woes jolt world financial markets

Yup we're just turning the corner into the land of luxury. ROTFLMAO

Move along people...nothing to see here.

Mr.4AM said...

Olives said "One thing we do know is that historically credit contractions have always led to deflationary depressions. The contraction is apparently beginning to accelerate."

Correct me if I am wrong but the last deflationary recession was prior to Brettonwoods 2, that being the 1930's depression. Since then, while it is theoretically possible to end up with a deflationary spiral in a Keynesian economy, I just don't see it happening.

This is because today the Central Banks have the power to print their way out of a deflationary spiral, as we've already witnessed, and continue to witness.

The more likely scenario is that they keep printing and printing and deflating the currency, which explains a large part of gold's rise against it.

Eventually you reach a point where deflation stops (in the USA it only lasted for 4 consecutive months between 2008/2009 as measured by negative CPI). Once it ends, interest rates eventually rise to pay off the deficits, which causes massive inflationary pressures on the economy. In fact, the very printing of money against thin air automatically causes many assets (mostly commodities) to rise due to excess fiat supply.

At any rate, from a real estate perspective, yes I very much expect a significant / severe deflation directly proportionate to whatever height interest & mortgage rates rise to. Conversely though, I expect most other assets to go higher in purchasing price.

Bernanke, who studied the great depression in depth outlined in his his early 2000 thesis how to halt a deflationary spiral - PRINT $$! And, that is precisely what he is doing, which has been working so far... however the secondary affects of these actions are not pretty either, and we are yet to feel the real repercussions.

The other aspect of this mess we're witnessing that sides with an inflationary wave is the impact of a 'supply side shock'. This means that as small/med/large businesses feel their credit tightening, eventually some of them start to fail, which means they cut prices at all costs (no pun intended) to stay afloat, causing their competitors to have to do the same, and margins are squeezed all around. One might conclude that indeed this is a deflationary spiral, but that's not the end of the story. Eventually several of the businesses fail and either disappear from the market or get taken over by the slightly stronger surviving ones. Once the industry shakeout has taken place, what we are left with from a consumer perspective is much less choice, which also translates to the survivors being able to charge more, and this ends up being inflationary in the long run. So first some deflation, then lots of inflation.

We haven't seen the inflation yet, but boy, you can bet it's coming. And when that day (or series of years) comes, savers will be punished - unless we're talking about downpayment savings that are going to be applied against a depressed real estate market. Still, I'm choosing to place the bulk of my downpayment in rising asset values during the inflationary period... but its too early for that at the moment, there's still too much (stock) market risk out there, and we could see another severe leg down - it all will depend on how fast the governments can react to provide even more stimulus during the next panic.

Don't be fooled by this stock market recovery, it's nearly all based on government stimulous + speculation. When unemployment keeps rising, businesses cut costs, there's less joe-6-packs feeding their portfolios, and even less after the last scare. In short, the fundamentals of Main St are totally disconnected from Wall St, and it's only a question of time before they are brought back to balance.


Mr.4AM said...

An US member on an economy site I follow just posted the following which highlights the American perspective of things:

"Dubai default risk, Ukraine default risk, Lativia default risk..... S&P 500 P/E at 140 (reported earnings), stimulus effect temporary, continued unemployment, more war, worse to come in housing, bank closures have only just begun, no more EZ consumer credit to propel the borrow-to-spend economy, municipal governments financial collapse, huge numbers of retirements wiped out, energy costs ever higher, incredibly massive new Federal debt spending, Americans polarized, inevitable much higher taxes, China bubble, U.S. Constitution dead and buried..... etc.. BUT...Bull stock market!"

As I said, Main St & Wall St. are disconnected, It's only a question of time before some external force causes a panic. I'm not sure if the Dubai fiasco is big enough, but there's plenty of high risk out there walking the ever thinning edges of the precipice.


Olives said...

Mr. 4 A.M.: Re printing of money - a good video that explains how money is created is "Money as Debt". You can probably find it on YouTube.

Also an important part of the "monetary inflation" calculation is velocity.

Vic said...

I'm not sure if the Dubai fiasco is big enough, but there's plenty of high risk out there walking the ever thinning edges of the precipice."

From all I am listening and reading today it may well be a blip but will give the markets a reason to sell off. The charts were all overbought territory for awhile now. Should be interesting to see how the metals and US dollar react.

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Mr.4AM said...

Ugh... so now Dodge starts suggesting we keep low interest rates until... wait for it... 2015! Talk about copying a page from the US Fed and then 1-UP-ing it.

Granted Dodge isn't in power and by keep interest rates low (2% from 0.25%) he proposes tax hikes that the Conservatives have currently said they won't do. If we start seeing hints like this from those in a current position of authority, look out, because the housing market could drag on at high prices for a while yet.

If that happens, I'm buying even more commodities because the Canadian dollar would take a hit against such assets.

But I wouldn't worry too much, 5 years (2010-2015) is a LONG time, and it only increases the probability of a black swan taking out the markets, including real estate.

Insanity never prevails in the end.


Mr.4AM said...

Some of you might be interested in checking out BMO's Canadian economic report. Starting on page 7, they cover top 6 concerning trends of the Canadian economy which include Real Estate amongst other interesting topics with some nice charts.



omc said...

Yikes that BMO article is much more of a furry bear than most of us here. Many home owners would see an increase of 50% with only a modest 4% increase in the mortgage rates. If you read the other article that 4am linked to regarding Dodge, it says that rates could be "accomadative" until 2015. But, it also gives Dodge's idea of accomadative as a raise to 2% in 2010 and flat there after. This is still a massive increase in interest rates for the over mortgaged (20-25% in payments).

Vic said...

So if they kept short term rates low til 2015 while the bond market keeps hiking the long term rates,the spread alone will scare the bejeezuz out of most buyers in my opinion.

When the short rates did rise to catch up they would most likely sky rocket, thus lenders would most likely make short term borrowers have major tight lending restrictions like 25% down and long term employment histories over certain income levels, etc. I still find it highly unlikely Canada will have a choice but nothing surprises me anymore.

think said...

I don't think it is going to take an increase in interest rates to cause the crash - it is already poised to happen this spring...people didn't list this past spring because they were afraid or wanted to wait and see what was going to happen, now there is a "pent up" number of sellers, also unemployment has been steadily rising in Victoria, all those people that are trying to rent out their places (have you seen craigslist rentals!) will be having to sell this spring...we are already in the process of a price correction - this crazy increase we have seen lately is just a silly blip up on a long fall down...

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Vic said...

"pent up seller demand"... the new RE buzz words ? I like it !

Skeptic said...

What is on the mind of mortgage lenders in today's real estate market?

A Lender’s View of the World

For today’s home buyers, “dollar amount doesn’t matter anymore,” says Bozic. Instead they’re concerned about, “What is my carrying cost?”

With the potential for rising rates, mortgage brokers should counsel borrowers to leave “a little wiggle room” with their debt ratios. – Wahl

Refinance risk is certainly nothing I am concerned with,” said Smith. He believes, in 5 years, people will be earning more money. Moreover, debt ratio standards and personal covenants are being vigorously enforced, Smith said.

“Canadian lenders retain risk after they underwrite a mortgage,” said Smith. Therefore, unlike in the U.S. before the crisis, Canadian lenders have incentive to lend wisely.

Do you believe these guys?

The lemmings are heading for the cliff...

Anonymous said...

VREB will be releasing the November stats tomorrow. Here are the month-to-date internal stats as of this morning.

Unconditional Sales: 562
New Listings: 770
Total Active Listings: 2984

Expect the usual spin when comparing year-over-year. But a year ago we were in the midst of the credit crunch. Here is the real story.

Estimate for November 2009 (add in today's sales) - 590 MLS sales

Checking the database I get:

Total MLS Sales in November
2008 - 268
2007 - 623
2006 - 571
2005 - 573

MLS Sales during Jan-Nov.
2009 - 7629 (est.)
2008 - 6280
2007 - 8523
2006 - 7573
2005 - 8141

Total Active Listings - End Nov.
2009 - 2984
2008 - 4459
2007 - 3196
2006 - 3150
2005 - 2400


November sales were much better than 2008 which is not surprising give the financial crisis last year. However they are typical sales levels when compared to other years. Sales are slowing down and December will be lower still. Total sales for 2009 will be better than 2008 but worse than 2005 and 2007.

Inventory has dropped considerably but expect lots of listings after Xmas as sellers try to move up.

In my opinion prices are still lower than we saw during the peak of April 2007. Surprising given the low interest rates. The first time buyer pool is shallow. If the move-up buyers don't show up in the spring prices could drop.

Mr.4AM said...


"“Canadian lenders retain risk after they underwrite a mortgage,”

Sadly, this is mostly BS. Nearly all financial institutions securitize mortgages off their books (some 90%) and anything they do keep on their books you can bet will be insured by either CMHC and/or client having 20%+ down payment.

If the top statement were true, we wouldn't be in such a bubble.


Mr.4AM said...

BTW, The British Pound is about to take a 20%+ dive in 2010. Stay out of that currency or investments in that currency.


omc said...

I wish it were true skeptic, but as someone who was looking at houses, I have to say my experience says otherwise. My experience is that we are in an extremely tight, overheated sellers market. The Jan to Nov sales supports this as nothing sold in the early spring and we are still at near record #s. 2005 and 2007 were record years; all year long.

Houses in my price range (up to $850k) are at an all time high compared even to the peak, and we have bidding wars. We didn't have bidding wars at the last peak. We have the lunacy of no inspections now too just like 2005 and 2007. The realtors are actually trying to take the spot light off the market now as it is just too crazy.

We can have hope that lots of sellers join the market this spring, but there is definitely no slow down yet. Don't be fooled with average prices, the realtors aren't pointing out that more houses are selling in cheaper neighbourhoods than before.

Skeptic said...


Were you referring to my post or double-agent's?

Skeptic said...

Mr. 4AM,

I thought most of the comments by the mortgage lenders were BS. Like wages going up enough in 5 years to offset increased mortgage rates. Household income was flat even during the boom years 2002-2007.

But the statement about buyers not caring about the price - only the monthly payments was right on. The lemmings will learn the hard way.

omc said...

Sorry, that was double agent

think said...


The market is not as hot as you is a mixed market - kinda bipolar really - I agree some stuff sells for crazy prices that I can't believe either but other stuff sits and sells for fair prices- for example 904 Deal Street in south oak bay, mls #270318 just sold for $755,000, assessed value 909,000 and the selling price is under the land value alone. I do believe that is a selling price less than that place on Moss Street sold for that you commented on before. And this is a 14,000 sq ft property on a cul de sac backing onto the golf course. Crazy market. I am looking in the same price range as you and I also am frustrated by the overpriced crap out there but patience will pay off - this spring the true colours will show..let all the lemmings buy up all the crap!!

think said...

also, in reference to your comment about all the bidding wars etc. on stuff - the craziest behaviour always occurs just before a correction. All market corrections - whether it be housing, stock markets, etc. - have a common theme - excessive speculation and debt loading leads to an inevitable crash. People just always want to think "this time is different"...but it is always the same.

Skeptic said...

Lemmings continue to gorge on credit.

Check out the stats

Government is supplying the cash through NHA - Mortgage Backed Securities - Graph

Full story here:

Bank of Canada Stats

omc said...


I totally agree that the market will correct, but I don't think it will be yet. Deal street is an anommaly, everything on that end of the street has sold for far under assesment for the last year. It has something to do with a giant highrise for a next door neighbour and lack of privacy.

I have noticed though that houses in the 750k and up in need of extensive work and updating are not selling as well.

I think we are in the 2007 stage of the market yet and will see prices go higher this spring. I was watching the same frenzied activities then. It is easy to believe that things are better than they are until you actually go and look at the houses and find that there is an accepted offer on damned near everything the first day or so. That and the houses are much worse than they appear on mls. I wouldn't have my family live in probably 40% of the $800k range houses as they are so unhealthy (mold and other hazzards). I have watched as much of the absolute garbage that has been on the market for years has been snapped up this last 2 months.

After interest rates rise and affordability erodes further we will see a fall. The market will act like 2008 at that point.

Mr.4AM said...

Good quick and simple read:5 Factors That might burst the housing bubble.

I'd like to add a few more:

6. Double dip recession when the stimulus ends.
7. Worse than expected Xmas retail numbers.
8. Olympic event, turns out to be a non-event in terms of earnings outwaying costs.
9. More government lay-offs & public services cut backs to offset continuously revised and increasing budget deficits.
10. Canadian Government policy intervention to stop (too late) a housing bubble. (We can dream, can't we?? :)
11. Whenever the foreclosure bandwagon starts taking off, after 8 Billion worth of foreclosures, CMHC blows up as they run out of money to cover their hundreds of billions in insurance, this will require a government bail-out a la Fannie/Freddie style, but government will act too slow to stem the full blown crisis and/or increase the deficit by even much greater amounts as QE is used to bail out the insurer multiple times.
12. Increasing Canadian unemployment rate eats away at Government tax revenues, thus putting even more pressure on government who will be forced to cut spending & scale down (hopefuly!), or go into even deeper debt USA style - Spend your way (through inefficient programs) out of debt, only to go into even greater debt.

13. Another 34K troops in Afghanistan + continued war spending in Iraq & Iran/NK nuclear threats to eat away at US Gov $ & increasing debts/deficits further, resulting in more QE, resulting in a weaker US dollar, resulting in Canadian Exporters to suffer due to higher loonie, resulting in more lay offs.

14. Another world wide stock market crash any time now or in the next few months reducing 'investor' liquidity & confidence. This could be triggered by:
a) Dubai contagion takes out a few European banks.
b) Eastern European countries default on their sovereign debt, spreading risk to Western Europe & then world wide.
c) US experiences problems selling long & short term treasuries. (i.e. China reduces or stops buying Tbills)
d) IMF additional gold sales to India, China and other countries as well as hedge funds recently buying gold results in continued gold & silver prices rising causing a massive short squeeze against ever increasing investment bank shorts resulting in another Lehman sized blow-up. Potential Comex default (will we ever see this?)
e) British Pound collapses 25%+ in mid 2010 due to Debt defaults & excessive QE.
f) US Fed audit yields very negative PR for Obama's administration, thus putting pressure on any more bail-outs (this would be wonderful, but may not happen as the audit may get over simplified).
g) Any other black swan event.

I'm just rattling these off the top of my head, I've probably missed a dozen+ other ones I can't think of right now, but you get the idea.

The spiral of ever increasing world wide risks is ongoing, until the next sudden stop event.


Mr.4AM said...

Oh two other obvious high risks:

h) Mid 2010-2012 Option-ARM Real Estate blow up in USA causing Florida & California Real Estate to drop off the map another 20-30%, thus resulting in more government stimulus and/or QE, further devaluing the US dollar, Canadian Exports affected, resulting in Candian Lay offs, resulting in more Candian forclosures. BTW, Option-ARM blow up = 3/4 the size of subprime, so this will be a huge event.

i) US Commercial Real Estate blow up at least 1/2 the size of the Sub-prime. This to start in Q2 2010 or so and ongoing for 2+ years.

j) US & other countries pressure China to unpeg the Rambeni from US dollar, causing a China bubble pop taking out the world stock markets along with it. Also, unpeg would have the immediate affect of much higher costs of importing cheap-chinese-crap & anything electronic. This would be good long term though for most countries, except China.

k) More severe Oil spikes & crashes to be seen between 2010 & 2015+, as peak oil has arrived & futures derivative markets remain unregulated and subject to heavy manipulation. Higher oil prices take a huge toll on the economy as cost of transported goods increases against frozen wages or the unemployed.

l As baby boomers start to retire, they eat away at our under-subsidized federal pension that will yet suffer more stock market turmoil. Further, starting in 2011 as inflation rears its ugly head, retired boomers will see their flat-line pension income buy less and less of inflated consumer goods. This may result in some of them selling off real estate, as most boomers have no other source of revenue (i.e. no RRSPs).

m Some heavy exporter nation triggers protectionism unofficial policy resulting in other nations to do the same. This becomes highly inflationary for consumers who's daily goods are not locally sourced (thank god we have food in BC). This erodes consumer discretionary spending & impacts housing afford ability.

n) Japanese bond risk could trigger a national debt default & currency crisis destabilizing not only world stock markets but currencies world wide.

o) As more and more nations slowly get off the US dollar for goods trading (i.e. Iran stopped accepting USD$ and only Euros for Oil sales), this results in an influx of US dollars returning to the USA further deflating the currency.

p)Eventually, after all the bail-outs end, massive inflation will hit the USA. This will trigger the current US carry trade to reverse, impacting Forex markets with wild volatility with contagion to stock markets & then main st.

Ok enough for now, and these are only the obvious ones. The really scary stuff is what takes us by surprise.


Skeptic said...


I guess you were right!

VREB December Stats Release

The number of properties sold throughout the Victoria area last month eased compared to October but remained well over double the number of sales in November of last year. A total of 604 homes and other properties sold in November through the Victoria Real Estate Board’s Multiple Listing Service® (MLS®), down from the 742 sales in October but up more than 125 percent from the 268 sales in November of last year. Prices, meantime, increased somewhat for single family homes and townhomes.

Victoria Real Estate Board President, Chris Markham, says this has been a remarkable year of recovery for the real estate market, "Sales during the first eleven months of the year are running over 21 per cent higher than in the same period in 2008."

The VREB president made no mention of the fact that November 2008 was when the recession and financial crisis erupted or that 2008 was a poor year for sales. What a shabby organization.

You have access to VREB data. Are you an agent? If so why bother to post here?

Mr.4AM said...

Ooops, and there goes another fiat currency. Today the North Korean Won devalued against the US dollar at a ratio of 100:1 (!!!). Meanwhile the US dollar devalued against gold ~14% in one month, and the Canadian dollar about the same.

Tyson said...

Long time stalker, first time poster.

I realize it's off topic but I was hoping to get some advice about ETF and stock investments. I'm not looking for specific stock advice, but just for some websites and blogs that people on here have found useful and informative.

I've learned a ton about RE here and would like to find a similar type of Canadian site/blog for stock investing.

Thanks for your help.

Skeptic said...

TD Bank issues cautionary report on the state of Canada's housing market.

TD Housing Report - Dec 09

Here is a good summary by Larry on the Yatter Matters blog

Robert Reynolds - GBA said...


Nice to see some fresh blood on the olde internets.

Mish's site is very good for general market and economic discussion, there are lots of people in the comments who talk about various stocks and ETF's

One of the better places I have found to lurk and pick up hints is the google finance comments section.

Skeptic said...


Lots of good stuff on Canadian Finance at these sites.

Financial Webring


MoneySense Discussion Forums

CARP Investing Forum

Olives said...

Tyson - there is a link on this site to Futronomics blog also.