Thursday, December 10, 2009


News Release here. (H/T Skeptic)

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

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

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

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

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

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

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

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


Vic said...

I think I hear the sound of bubbles popping...and some fizzling of the alka seltzer.

jesse said...

It's disgusting that such inane logic is allowed to be released. There is no mention of the obvious: the CMHC is causing market distortions that are causing more problems than it solves by creating moral hazard in the banks. Considering the author was such a stark opponent of other government white elephants it's odd he would support this one.

Skeptic said...
This comment has been removed by the author.
Skeptic said...

For those that want to know the details of the Cdn. Bank Regulators Draft Advisory click her for pdf

Conversion to International Financial Reporting Standards (IFRSs) by Federally Regulated Entities (FREs)

Insured mortgages securitized through the Canada Mortgage and Housing Corporation’s (CMHC's) National Housing Act (NHA) Mortgage Backed Securities and Canada Mortgage Bond Programs (MBS/CMB Programs) are unlikely to achieve derecognition and will therefore be brought on balance sheet under IFRSs. To facilitate compliance with the Asset-to-Capital Multiple (ACM) under IFRSs and permit an orderly transition, OSFI will permit mortgages sold through the MBS/CMB Programs up to and including December 31, 2009 to be excluded from the ACM calculation when IFRSs are adopted, regardless of whether they are brought onto the balance sheet under IFRSs. If so, FREs will be required to exclude pre December 31, 2009 MBS/CMB programs from the assets in the ACM calculation. However, to create an ACM which is more consistent and which reflects the lessons from the recent financial turmoil, MBS/CMB exposures occurring after December 31, 2009 will be included in the calculation of the ACM under the current ACM definition and limits; that is, they will be included in the asset definition of the ACM upon implementation of IFRS if (but only if) they are accounted for as on balance sheet exposures under IFRSs5.

Irrespective of the IFRS determination of what is on balance sheet, the ACM should reflect the MBS/CMB originator’s risk profile. Where the risk profile of the MBS/CMB originator is not materially improved by participation in such a securitization, continued inclusion in the ACM may be appropriate.


Skeptic said...

Royal Bank gets it...

RBC may issue $8 billion senior or subordinated debt, with net proceeds used for general banking purposes and to "enlarge our capital base."

Robert Reynolds - GBA said...

Wait, so is this just a leak/speculation? Or is this going to is this going to become law? OSFI does have the authority to make these changes, it should be an interesting next few weeks...

Bubble 'n Fizz(le) said...

Hooray - you'll be able to buy that Oak Bay waterfront mansion for 20 cents on the dollar! Er, maybe not, basement dwellers!

Skeptic said...


Here is the OSFI statement on this draft advisory.

Most will not require action by regulated financial entities until 2011. What has the fur flying is the highlighted section which is proposed to start Jan. 1, 2010

Skeptic said...

BOC governor Carney has been busy lately trying to warn consumers about taking on too much debt. Now he has moved onto the stock market.

Slow recovery a threat to rally, Bank of Canada says

In an unusual departure, central bank says market prices might not be supported by economic growth

The Bank of Canada is warning that the stock rally may be overdone, taking the rare step of commenting on how equity markets may perform.

The central bank said Thursday that stocks may be overvalued given the projected pace of the economic recovery, and could pull back if corporate results don't match expectations. That prompted some observers to question whether monetary officials are trying to warn investors against growing too eager.

“For the recent improvement in equity markets to be sustainable, future earnings will have to be driven by revenue growth,” the review said. “Equity markets may thus experience some reversal if earnings growth proves to be disappointing. While indicators point in different directions, various measures, such as forward price-earnings ratios, suggest that equity prices may have increased by more than warranted in the context of an expected slow recovery.”

Mr.4AM said...

Awesome find(s) Skeptic.

In the previous blogroll, StargazerXL said..."I can't believe a "concerned citizen" would sit down and write a three [actually it's 5] page letter FOR the CMHC. Good grief."

That "concerned citizen" is either totally misguided/ignorant, or a blatant lier trying to add a massive spin to the fact that all the reasons that he raises are what put nearly every party at risk that he is so supposedly concerned about. Every reason he outlines that is supposedly good for Canadians/Canada is seriously flawed in the long term as they are all related to government policies or inaction that are pro-housing bubble - that can't go on forever, and that is in no way good for Canada as a whole, because when the housing-bubble reaches the walls of reality's limitations, it will pop with such a bank, Canada would be recovering for 5 to 10 years.

It seems a few authoritative Government figures finally clued in to fact that being on the pro-bubble side of the fence puts our nation at serious financial risk and this (policy/leak/draft?) change highlights one of their first attempts at reversing it... and immediately, this peon threatens to sue via the anti-competitive beaurau! Seriously, WTF!?

This is so disgusting, I just feel like publicly providing a retort to this guy's so called "concerns", showing he is either obviously ignorant or an outright lier.

Wow, it's been a long time since something I've read has pissed me off this much! I need to sleep on this for a day.


Mr.4AM said...

Correction: In the above post I said: " will pop with such a bank...".

That should read "bang", not "bank" - freudian slip, no doubt.


hachiroku said...

Mr.4AM I encourage you to write just such a letter rebutting "mr. concerned citizen". It's beyond belief that stuff like that gets the airplay it does...who knows maybe yours might too?!?

Reid said...

Interest comments from Doug Porter at BMO from this morning.

"Now what exactly did the Bank of Canada think was going to happen when they slashed interest rates effectively to zero, and then all but promised to keep them there for more than a year? Can they really be shocked (shocked!) that Canadian households and investors are dutifully taking them up on this once-in-a-lifetime offer to borrow for almost nothing to buy marked-down, high-quality assets? Yet, that’s exactly the message the Bank’s latest semi-annual Financial System Review seems to be sending. The Bank has identified the rapid build-up in household debt as the biggest risk to the outlook, which they see as an important medium-term threat. But this seems to be a classic case of reaping what you sow. Policymakers can hardly be surprised that the most interest-sensitive sector of the economy—the housing market—is responding the most vigorously to ultra-aggressive interest rate cuts. And it’s quite possible that they ain’t seen nothing yet on that front: November’s home sales data will likely post some blow-out numbers, and the spring selling season could be a frenzy as buyers try to pile in before rates start rising and the HST kicks in on July 1, 2010 in B.C. and Ontario."

Vic said...

More bubble popping news.

David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business

Is the Canadian housing market in a bubble? It sure looks that way.

At a time when personal income is down about 1 per cent over the past year, we have seen nationwide average home prices soar 21 per cent to hit a record high, as did home sales. Even factoring in inflation, home price appreciation is now back to where it was in 1989. Back then, interest rates were far higher, but the economy was also in the late stages of a phenomenal expansion, not making a transition from deep recession to nascent recovery.

Robert Reynolds - GBA said...

I have been seeing a lot of commentary lately about the impending "jacking" of interest rates.

Carney has been warning about debt, but has not said anything about a rate hike.

I still don't see a rate increase in the cards, at least not a significant one. I consider significant greater that 1%.

Bond market, maybe. BOC no way.

HHV care to crunch some numbers? What percentage of British Columbia GDP is made up of RE related transactions? I am betting it is getting higher than ever before.

msr said...


I don't think there will be an advertised increase in rates, that is the BoC rate and the rates advertised by the banks won't change.

What I do see changing is either reduced lending limits or increased mortgage rates for higher LTV mortgages. In fact we might actually see larger loans cost more than smaller loans. This is opposite of what we've seen over the last few years when people were getting rate discounts on larger loans.

Anonymous said...


The real estate organizations like to trumpet their impact on the BC economy. Here are the facts for 2008.

The GDP of BC in 2008 was 198 Billion. BC stats link

In 2008 MLS sales and related activity contributed 2 Billion or about 1% of BC GDP. BCREA link -pdf

Skeptic said...

Check this out..

Who Says There Were No Canadian Bank Bailouts?

It is a matter of some national honor that Canada’s banks didn’t receive direct capital injections from the government. That much is true. But what isn’t true is that the banks survived the past twelve months without extraordinary financial support from the federal government and the Bank of Canada.

Between September 2008 and March 2009, Canadian banks reduced their holdings of domestic residential mortgages from $486.1 billion to $434.9 billion according to Bank of Canada stats, on a net basis.

Where did those mortgages go, you ask? Did 10% of Canadian homeowners sell their homes and move into rental accommodation en masse during a six month period?

Of course not. The federal government created a unique program through CMHC , specifically targeted at allowing Canadian chartered banks to move tens of billions of dollars of assets off of their balance sheets. The reason? Canadian banks couldn’t raise sufficient and/or cost-effective funding from their traditional sources - primarily other global financial institutions - and needed Crown intervention to keep the wolf from the door. By mid-November 2008, the federal government had agreed to take $75 billion of mortgages from Canadian banks.

Assuming the risk-weighting of these assets was 20%, the feds essentially put $15 billion of capital into the Canadian banks that participated in the $75 billion CMHC program.

Next year OSFI wants this stuff to come back on the balance sheets.

Skeptic said...

Their has been a lot of Cdn. real estate bubble talk lately. Now Flaherty makes his comments in this article.

Stimulus spending must continue, Flaherty says

But the minister said one cause for concern over the pace of recovery is that Canadians might be carrying too much debt as they rush to take advantage of historically low interest rates.

The Bank of Canada stressed in a report Thursday that households are becoming "increasingly vulnerable" to any further economic shocks. The central bank noted Canada's debt-to-income ratio had climbed to a new high of 142 per cent as of the end of June.

Flaherty said the government expected to see some increases in household debt, but warned it is keeping a close eye on the issue and will act swiftly if necessary.

"We're not in a position now where we feel we need to act in that way," he said. "But we are watching."

Flaherty urged Canadians to be mindful of what mortgage payments they can afford assuming interest rates "will eventually increase."

This is a warning shot to the RE mortgage lenders. I suspect we will see a change to CMHC down payment and/or amortization limits early in 2010.

PainInThe said...

"Hooray - you'll be able to buy that Oak Bay waterfront mansion for 20 cents on the dollar! Er, maybe not, basement dwellers!" Prattle and Ratttle

What, you think Victoria won't be going the way of Dubai, Las Vegas, and Phoenix just because we're wet all the time?

Sooner than you think. And good luck to you then, too.

Marko said...

"In 2008 MLS sales and related activity contributed 2 Billion or about 1% of BC GDP. BCREA link -pdf"

What did this manufacture? Nothing. Simply flipping paper that is not EVEN legally required to sell/buy a property.

A time will come when the economy will no longer be able to support paper incomes. I am looking forward to that.

Vic said...

Heard today of a couple of young homeowner couples that should never have bought now heading to the food bank. Any of the pumpers that think this insanity can continue needs to get their head out of the sand. This is just the tip of the iceberg.

Anonymous said...

Marko commented - What did this manufacture? Nothing. Simply flipping paper that is not EVEN legally required to sell/buy a property.

Manufacturing is only one component of GDP. According to BC Gov't Stats

"The size of the economy is usually reported in terms of gross domestic product (GDP), which is a measure of the value added to the economy by the current productive activities of individuals, businesses, governments and non-residents (who either purchase or sell goods and services to British Columbians). The province's GDP includes all activities that take place within its borders, regardless of whether an individual or business is resident in the province. Because GDP is a measure of the value added to the economy by current production, transactions involving the sale of previously-used goods (such as houses or automobiles) are excluded from the total. Only economic activity related to the transfer of these assets (for example, the real estate commission) is included in GDP."

Manufacturing is only a small component of GDP in BC. Services account for 75% of GDP. link

Bubble 'n Fizz(le) said...

Heard today of a couple of young homeowner couples that should never have bought now heading to the food bank.

Baloney. You just make this stuff up.

PainInThe said...

If ANYONE makes stuff up around here, it's been you for years, no matter what your name of the month happens to be.

Vic said...

Bubbles lives in fantasy land where only the well off and anal live. Maybe you should venture out into the real world and visit some of these places where real people go to get help and are most embarrased to even be there. What a tool.

Vic said...

If Bubbles the clown actually picked up a newspaper once in awhile maybe he would see Victoria's use of food banks has skyrocketed. So little stats on his house pumping fantasy but nothing on the reality of living in Victoria.

From the TC on Nov. 19th :

Record numbers turn to food banks
Mustard Seed reports 44 per cent increase in demand in one year

"The numbers were even more dramatic in Victoria, where the Mustard Seed Food Bank reports a 44 per cent increase. The bank now serves 1,700 children and 5,500 adults every month."

"We think it's the average Joe -- the ones that used to donate to us -- that are the ones finding themselves in tough times," said administrator Beverley Elder."

Just Jack said...

Ah guys, it's Christmas. Do you have to pop Bubble 'n Fizz(le)'s bubble now. The cold, cruel world will come soon enough to everyone. Bubble 'n Fizz(le) not exempted.


Skeptic said...

Looking ahead to 2010...

Interest rates may rise despite BoC deadline

Bond yields and mortgage rates could head higher before the Bank of Canada's pledge to hold interest rates steady expires in July, the chief economist at Bank of Nova Scotia said this week.

"There's a very good chance long-term rates will head up before then," Warren Jestin said in Toronto at a briefing sponsored by the Investment Funds Institute of Canada.

He warned new homeowners with variable-rate mortgages not to be influenced by the central bank's neutral statements on rates on Tuesday. The bank has pledged to hold rates at a historic low of 0.25% until the end of the second quarter of next year, inflation conditions permitting.

Read the "fine print" and he believes it's likely three-year and five-year mortgage rates will be higher before July 2010.

Bubble 'n Fizz(le) said...

The cold, cruel world will come soon enough to everyone. Bubble 'n Fizz(le) not exempted.

B&F doesn't have a mortgage, because unlike you petrified losers, I invested in RE when the time was right!

PainInThe said...

I don't have a mortgage either, Bubble Sitting Pretty Fizzle, and I made far more in gold than you'll ever come close to making in real estate.

Furthermore, it was a lot easier for me to cash out at peak at the beginning of the month than it will be for you to sell your "million-dollar" ancient hovel at ANY price.

Leo S said...

"B&F doesn't have a mortgage, because unlike you petrified losers, I invested in RE when the time was right!"

Being at the right place at the right time is not exactly investing genius. At the right time in the Victoria market, I was 16, so it's certainly not a problem of trepidation. 9-10 years ago was the right time to buy, as you know, but today is certainly not the right time.

The only way to make money on real estate is if you were either buying and selling multiple properties or bought something huge and then downsized when it appreciated. Otherwise all your profits are just on paper. Most people only own one home, so there goes the first scenario, and people tend not to go backwards in house sizes. Whether you fall into one of those groups to get mortgage free or not has little relevance to the normal buyer.

omc said...

I think you are now seeing why many of us think that the character of B&F is fictional. Probably made up by one of the bears to add a little comic relief to the blog. If anyone actually thought that they were superior to others because they "bought at the right time", aka are older, they would have forgotten to breathe by now.

B&F is like a caricature of the misconceptions held by many concerning real estate. Think Cletis from the simpsons. I used to hear a bit of this type of stuff, but not for quite a while now. Public perception seems to have turned, or at least in my social group.

omc said...

Oh say it isn't true!

Skeptic said...

Move along folks. Nothing to see here...

We're richer, but deeper in debt

Canadians' net worth swelled in the third quarter, riding the crest of rising equity markets. But debt levels rose too, sending the household debt-to-income ratio to a record high.

Debt, too, is rising. Household debt, as measured by mortgages and consumer credit, swelled 1.6 per cent as low borrowing costs caused Canadians to buy more homes and renovate them. They also bought more cars, sparking a further increase in consumer credit, the agency said. Personal debt has been steadily rising in Canada since 1982.

Thus the household debt-to-income ratio rose 2 points to 145 per cent, the highest level since quarterly record-keeping began in 1990. That means for every $100 of personal disposable income, Canadians are now carrying $145 in debt.

Back in 1990, by comparison, Canadians were carrying $88.60 in debt for every $100 of income.

Anonymous said...

VREB Month-to-Date Statistics released this morning to Realtors®.

For period Dec. 1-13

Net Unconditional MLS Sales: 238
New Listings: 287
Total Active Listing: 2,794

Just Janice said...

A higher downpayment or reduced term (to 25 or 30 years from current 35 years) would likely have the same impact as an interest rate increase. Using a basic calculater decreasing the term of a mortgage from 35 years to 30 years results in a reduction of the maximum allowable mortgage of 6.8% (assumed 75k/year in income 5% down, $1200/year heating, $1200/prop taxes, 4.19% interest). When it goes to 25 years (same assumptions) maximum mortgage drops 15.39%.

See no interest rate increase needed for there to be a 'choking' of the market...

I note that many recent purchasers would be 'underwater' in this kind of scenario.

Animal Spirit said...

I read this as an industry group talking point submitted by an interested individual. Basically an attempt at manufacturing 'outrage' that the poor FTB won't be able to afford a home if the policy goes through, but really is an industry group trying to protect its markets/interest.

Politicians see this all the time, and usually get quite peeved by false outrage arguments.

As usual, agree with Just Janice on her last post...

Just Jack said...

"B&F doesn't have a mortgage, because unlike you petrified losers, I invested in RE when the time was right!"

If you think this is only going to affect mortgages B&F than you are more clueless than I thought.


Vic said...

"B&F doesn't have a mortgage, because unlike you petrified losers, I invested in RE when the time was right!"

Yes the Langford trailer park trash has really been a financial windfall these past years for those oh so smart investors. "Jed,we gotta get us a trailer now 'for we aint done shut out forever !"

Robert Reynolds - GBA said...

Can someone in the know, better explain the newly reported debt to disposible income ratio of 145%

How does this work? Say I earn $3000 a month after tax, and my living expenses are $2500, I have $500 left of disposable income. Does this mean that I have $725 in debt? or is my debt carrying cost $725? or is the debt cost added to the living expenses? my my living expenses are 2500 debt carrying cost is say $290, and left over disposable income is $210?

Skeptic said...


The debt/household income ratio is not computed on an individual basis. It is based on aggregate numbers.

Total household debt in Canada (in the form of mortgages and consumer credit) has surged to 1.41 Trillion dollars. Total household, after-tax, income is around .97 Trillion (78K x12.4 Million households).

The debt/household income ratio is 1.41/.97 = 1.45 or 145%

You can check this out at Stats Canada.

Skeptic said...

More bubble talk and denial by the real estate industry shills.

From Great Depression to 'bubble of a bubble'

The fear now is that the housing market is too hot, stoked by record-low interest rates.

Among economists, all the talk is of a bubble forming. David Rosenberg, chief economist with Gluskin Sheff & Associates Inc., kicked off the discussion with his note that suggested housing values were 15% to 35% above where they should be based on fundamentals such as personal income and residential rents.

Bank of Montreal's Doug Porter, a reluctant addition to the bubble economist ranks, was still hedging his bet. "We're on the bubble of a bubble," said Mr. Porter, who is worried there will be a stampede to buy homes ahead of a central bank rate hike that could come as early as July, 2010 and the implementation of the harmonized sales tax in British Columbia and Ontario that takes effect one month later. "We could see a bit of a buying frenzy this coming spring...followed by a "pop" in 2011?" said the economist, a note.

One senior real estate industry veteran, who asked not to be identified, wonders whether economists are now calling for a crash to grab themselves headlines. "They are all piling on the bubble story now," he said.

Skeptic said...

David Rosenberg, chief economist with Gluskin Sheff & Associates Inc wrote an extensive report on Canada's housing bubble. You can read it here as a pdf click here

HouseHuntVictoria said...

I like "bubble of a bubble" it's actually really accurate, just not in the way it was intended.

We were in a bubble in 2007. And then it almost burst in 2008, but record low interest rates re-inflated the bubble even bigger (rest of Canada, not Victoria). So really it's a bubble on top of a bubble, or bubble of a bubble.


Vic said...


I prefer Double Bubble. More bang for your bubble. ;)

omc said...

I am sure many of you have seen this
. We have been seeing the public perception now turning to accepting that we are in a bubble. So, I love how the realtors are now claiming that there was a huge rush of new listings in the last few days that has brought balance to the market. I don't know about anyone else but I have not seen any surge in listings, and in fact the sales to new listings ratio shows we are still in an extreme sellers market.

Just another example of the realtors lying and talking out of both sides of thier faces.

Skeptic said...

BOC governor Carney must be getting real nervous. Today he was repeating his concern about rising debt levels.

Be ‘vigilant,' Carney warns on debt

Bank of Canada Governor Mark Carney again warned Canadians Wednesday not to borrow more than they will be able to handle when ultralow interest rates start to rise, urging households and lenders to be responsibility while the risks that debt poses to the economy are “still manageable.”
In his report last week, Carney said household debt remains “a key vulnerability over time,” and in the stress test model the central bank assumed that the ratio of debt to income would rise from 1.42, or 142 per cent, in the second quarter of this year, to 1.60, or 160 per cent, by mid-2012.

To illustrate the point that Canadians' debt could become a bigger risk once policy makers lift the main interest rate, the bank showed the proportion of households with debt-service ratios higher than 40 per cent of income would rise to 8.5 per cent by the second quarter of 2012, assuming the central bank's rate is 3.2 per cent. That share would climb to 9.6 per cent assuming the central bank's rate is 4.5 per cent. The proportion of households with more than 40 per cent debt-service costs was 6.1 per cent over the past decade and peaked at 7.4 per cent in 2000.

Skeptic said...

HHV and others have suggested for some time that vacancy rates were rising in Victoria due to homebuyers vacating their rental.

CMHC validated this in today's news release: National Rental Vacancy Rate Increases in October 2009

In order to get the details on Victoria you have to download the Victoria report pdf - click here

Renters are having an easier time finding accommodations in Victoria this year. A sluggish local economy and labour market, and a recent surge in homeownership has moved vacancy
rates up.

As the level of employment has edged lower, relatively fewer people have moved to the region. Historically low mortgage rates and lower home prices reduced monthly mortgage carrying costs, and encouraged some renters to exit the rental market in favour of homeownership. Near record levels of apartment condominium resales recorded across Greater Victoria during the second and third quarters of 2009 reflected this movement from rental to homeownership.

Vacancy rates for both apartments and town homes moved up in the Victoria CMA over the past year. The average apartment vacancy rate edged up to 1.4 per cent, following four years at 0.5 per cent. Similarly, the average vacancy rate for rental townhouses shifted up from 0.1 per cent last October, to 1.8 per cent in October 2009. The trend of increasing vacancies was widespread in the region. Higher vacancy rates were observed across all Greater Victoria municipalities. Both the one and two bedroom segments of the local apartment rental markets recorded increased vacancies.

Over the past five years, purpose-built rental apartments have accounted for only one per cent of all apartments built within the Victoria CMA.3 The secondary rental market continues to add to the overall rental stock. One notable trend is the renting out of owned condominium apartments. CMHC estimates that roughly 18 per cent of all Greater Victoria condominium apartments are currently part of the region’s rental supply.

So what happens to all these condo landlords when interest rates rise, condo prices drop and vacancy rates increase?

PainInThe said...

"So what happens to all these condo landlords when interest rates rise, condo prices drop and vacancy rates increase?" - Skeptic

Uh, what else? The owners, bleeding, dump them on the market at half price, driving down the prices of all other real estate, AND THEY STILL WON'T SELL.

And that's when the crash FULLY hits and the bottom looms.

Just Jack said...

As at June 2005, there were 23,681 condominiums in the Greater Victoria area. If we conservatively round that number up to 25,000 that would mean some 4,500 condominiums are in the rental market and approximately 65 are vacant.

It does not seem like an over supply, unless you own a condominium that has gone vacant.

From memory, I believe the vacancy rate for purpose built apartment buildings went up to 4 percent after the commonwealth games in 1994.

An increasing vacancy rate, is something that worries investors. If you add in falling rental rates, buying an investment property becomes economic suicide.

Skeptic said...

I see that the link is broken for the CMHC Victoria rental report.

You can download it or view it by clicking here

Anonymous said...

Another organization jumps on the bandwagon.

B.C. homeowners warned of interest-rates squeeze

Homeowners are being warned the inevitable rise in interest rates later next year risks putting a financial squeeze on the large number of debt-laden Canadians who took out variable mortgages at rock-bottom rates.

“Canadians are potentially leaving themselves wide open for significant financial obligations once interest rates begin to rise,” the Mortgage Brokers Association of B.C. said in a statement Wednesday.

However, the Mortgage Association of B.C. estimates that some 40 per cent of homebuyers are taking variable mortgages with interest rates that flow with bank prime lending rates, and Carney said consumers need to be ready to lock rates in.

Fixed rates will start rising in the 1st quarter when US and Cdn. governments stop buying mortgage backed securities and normal market forces push up the rates.

Joe 6 pack will ride his variable at 2.25% until rates start rising in June. He will then be shocked to see that switching to a 5 year fixed will be over 4.5%. A 400K mortgage at 35 year amortization will jump from $1375 to $1883 per month

Robert Reynolds - GBA said...

So much Bubble news lately, LOVE IT

Vancouver Sun

Globe and Mail


So much counterspin as well, and they wonder why old media is dying...

The contrarian View: Globe and Mail


For the first time in about a year, I am starting to feel excited about housing again, I personally sense a shift, like a tsunami far out to sea, barely noticeable but incredibly powerful and there is no stopping it.

Robert Reynolds - GBA said...

Double Agent

What makes you think 5 year money is going to be at 4.5%?

As the spread between variable and the bond market continues to widen in the first half of 2010, the banks will assume there are going to be more defaults when people are forced to switch, if things look really bad the banks might up the spread from 2.0% to 3.0% to account for the added risk of low credit borrowers. Thus pushing them the home grown subprime even further towards default. If the conditions are right, this could cause a lovely little chain reaction which I imagine might sound like: *POP*

wildcard CMHC

Anonymous said...


Just a conservative guess. Things could go higher by June - who knows. My link does show what happens at 5%.

Five year Cdn. discounted rates are now back under 4%. The US Fed will stop buying MBS at the end of Feb. 2010 and analysts expect an upwards bump In US mortgage rates of .35%. There will probably be a similar increase in Canada as CMHC cuts back on purchasing mortgages from the banks. The Cdn. gov't will also be trying to sell a lot of bonds to cover the stimulus payments and that will push rates up as well.

Robert Reynolds - GBA said...

Double Agent, my thoughts exactly, 4.5% will be a killer rate in 6 months, unless we double dip and Carney backs down.

I am off to southern California for a week to visit the folks, they bought a town house in a gated community with 27 holes of golf, 16 tennis courts, and 32 pools for under half of what the last guy paid. I plan to check out some "investment properties" while I am down there, I will post back with my findings.

Merry, um December...? all.

Skeptic said...

The Times Colonist is covering the CMHC rental vacancy report.

Capital's tight rental market eases

The city’s rental vacancy rate as of October 2009 increased to 1.4 per cent, compared to 0.5 per cent a year earlier, according to figures released yesterday by the Canadian Mortgage and Housing Corporation.

“I’m a little surprised that the vacancy rate isn’t a bit higher and I think it actually is,” said Al Kemp, CEO of the Rental Owners and Property Managers Association.

“I would think it would be about a point higher — somewhere in the 21⁄2 range and that’s just from hearing from my members.”

A more telling indicator is availability, said Kemp. While vacancy rates measure how many suites are vacant at a given point in time, the availability rate records vacant suites as well as those units for which a landlord has been given notice. CMHC lists Victoria’s availability rate at 2.6 per cent, up from 1.5 per cent a year ago.

The average rent on a two-bedroom condominium in Victoria is $1,223 — up from $1,096 a year ago and considerably higher than the $1,001 a two-bedroom apartment goes for.

It costs less to rent one of these Victoria condos than the property taxes, condo fees, maintenance and mortgage interest the landlord is paying. Would the real estate bulls please explain why anyone should consider buying one.

Marko said...

Why would anyone ever by a BMW M3 when you can buy a Toyota Corolla that has more room, is more fuel efficient, cheaper on insurance, and gets you from point A to point B just like the BMW M3?

HouseHuntVictoria said...

^Marko, the girls at Cactus Club love the guys with M3s. They don't love the guys with Corollas, no matter how much cash they can afford to leave as a tip.

Just Jack said...

Because you want everyone to think you have a


Skeptic said...

No need to save for your retirement if you buy a house in Victoria. That is your nest egg - right?

More Canadians put off saving for retirement

According to the survey, one in three Canadians, or 32 per cent, have not started saving for retirement yet, compared to one in four, or 24 per cent, in 2008. The study also found only 36 per cent of the 1,457 respondents said they were planning or have planned for retirement, down from 42 per cent in 2008. The decline was most noticeable among those aged 55 and over, with only 53 per cent doing any retirement planning compared to 67 per cent in 2008.

The poll, conducted online by Ipsos-Reid between Oct. 21 and Nov. 2, found only 35 per cent have contributed to or plan to contribute to an RRSP for the 2009 tax year -- the lowest percentage since 1996 when the figure was 34 per cent.

Skeptic said...

BOC governor Carney tells banks to tighten lending requirements..

Carney warns banks, consumers on debt

Bank of Canada governor Mark Carney Wednesday asked the country's financial institutions to uphold their global reputation as sterling risk managers and exercise caution in their lending to households.

"Lenders have responsibilities," Mr. Carney said. "Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit."

As of October, growth in mortgage credit had climbed 7.1% over a 12-month period, and 7.5% month-over-month. Meanwhile, credit contracted in the last two recessions.

Canadian laws compel residential loans valued at more than 80% of a house's value to be insured - in essence, meaning Ottawa backstops the mortgage in the event of default.

Still, households that default on an insured mortgage would likely be unable to meet other debt obligations - resulting in a deterioration in banks' loan portfolios and an overall tightening of credit, the bank pointed out last week.

bigboss said...

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Vic said...

Why this sudden concern from Carney ? A month ago he could give two craps wether someone was buying too much house or borrowing past their ability to repay.

I sense the government is getting some insight into some default/late mortgage payment info we are not yet privy to. Since when over the last decade has any government agency ever been such nice guys to warn us to not bite off more than you can chew ? Never. Something smells bigtime.

Skeptic said...


This is why Carney is now concerned.

Mark Carney - Current Issues in Household Finances

As noted in the Financial System Review (FSR), the vulnerability of Canadian households to adverse wealth and income shocks has grown in recent years. Aggregate debt levels have risen sharply relative to income. Those debt levels have continued to grow fairly rapidly this year, unusually so for a recession. For some households, this additional indebtedness has translated into increased financial stress. Personal bankruptcies in Canada rose 41 per cent in the third quarter from the same period a year ago, leaving the number of bankruptcies as a proportion of the population at its highest level since 1991. Delinquency rates on loans have risen as well, with the proportion of mortgages with payments in arrears three months or more having increased by half over the past year.

Just Jack said...

Well, you can't say we have not been warned about the future of real estate.

For the last two years the Feds have been propping up the market in central Canada. The low interest rate and ease of credit have slowed the rate of descent in housing in hard hit areas of Canada, like Windsor. The average Windsor house price has dropped only 10 percent over the last year to $150,000.

The cost to the Canadian taxpayer has been to guarantee 400 billion dollars of additional mortgage backed securities flogged by CMHC.

Unfortunately, while this has been a stabilizing act in most parts of Canada, allowing those hardest hit by our economy to sell or downsize to more affordable housing. The affect in the bubble cities has been like putting gasoline onto a fire.

Next year, brings us new accounting rules that are to allow more transparency to those people who invest in companies. It also means the Feds have to come clean in the books too.

I expect CMHC is really going to get a "bitch slapping" with the new rules.

In the past CMHC has increased the cost of the mortgage insurance, I would expect CMHC to continue this practice, until the cost of insurance is beyond the average Canuck.

Just Janice said...

Heard the funniest thing on the radio today (CFAX) in Victoria...Murray Langdon was saying that Victoria and Vancouver are immune from the 'housing bubble' because they are not resource towns. He concluded that short of something catastrophic happening there would not be a collapse in housing prices.

Apparently, Mr. Langdon, can't fathom what a more than doubling of the local unemployment rate and soon to be higher mortgage rates will do. Not being 'resource based' didn't really help Arizona, California, or Florida. And if only the rest of Canada is 'susceptible' to a collapse, then where are all of our retirees going to come from?

mln said...

I see Carney's new-found concern for homeowners as a mainly political move. There have been dozens of articles about the "possibility" of a bubble inflating--he needs to be on record cautioning homebuyers or risks taking all the blame later on.

It must be tough trying to stop this bubble from popping. You can't just let prices stagnate or fall the littlest bit. Prices will need to keep increasing at 5% or more per year to keep this party going, IMO.

Just Janice said...

Did Allan Greenspan's comments about the american housing market looking a little 'frothy' save him from later being held somewhat responsible for the situation?

No. Same will go for Mr. Carney. The Fed isn't about asset price control, its about inflation the fed can warn all it likes, its mandate does not include 'doing' anything about a housing bubble.

Vic said...

Thanks Skeptic. I assumed it was based from that report/article but we have all here been documenting this rise in bankruptcies etc for many months. This leads one to agree on what MLN mentioned as a political move to save his ass as the inevitable unwinds next year. Can't say we didn't warn ya !

Murray Langdon doesn't want his paper profits to sink, more MSM pump. No wonder he isn't with CHEK anymore,both sides of the story need to be told at least once inawhile. The CFAX morning boys are a complete copycat making bragging comments over the years about how much coin their assesments have moved up. Pretty sad statement when the local media has to rub it your face. The trip back down will be memorable.

Skeptic said...

This is the kind of talk bears like to hear...

Flaherty ready to deflate any housing bubble

The federal government is ready to clamp down further on mortgage rules if the boom in the Canadian housing market turns into a bubble, says Finance Minister Jim Mr. Flaherty.

"The reality is we have low mortgage rates . . . so we can expect some upward pressure on housing," he said. "That's OK, as long as it doesn't become a bubble. We're watching that."

If necessary, the government is prepared to further tighten the conditions under which the Canada Mortgage Housing Corporation insures mortgages, the finance minister said.

"If we have to, we'll do what we did last year and limit the rate of amortization further than we already did, and require higher down payments," said Mr. Flaherty.

Flaherty & Carney now beating the same drum. I expect changes early in 2010. Do you??

Just Jack said...

I'm a bit surprised that no one here is talking about the front page of today's Victoria News about the rental market or the Times Colonist article about the woman charged with mortgage fraud.