Thursday, February 11, 2010

Birds of a feather

I find this utterly amazing. Derk Holt, economist with ScotiaBank and pretty much the most consistent (recently anyway) "bubble talking expert" in Canada is reaching in this article today.

His premise: if the government reins in mortgage rules to slow the rapidly inflating bubble and the Competition Bureau wins versus the CREA (his argument being real estate transaction commissions will drop sharply and quickly, which I disagree with) you essentially wipe out the effects of one move with the other.

Really Derek? Isn't that just a bit of a reach of logic? I get that ultimately the buyer pays all of the commissions because without the buyer you have no money changing hands, but do you really believe that the seller "paying" less commission will lead to the buyer bidding higher for the same property? Maybe in the long term as more liquidity is created in the marketplace, but this certainly won't occur in the next 18 to 24 months--which is all the time it will take to deflate the bubble with mortgage policy changes that are very unlikely to occur anyway. Remember, we don't care about the secondary and tertiary buyers in the market, it's always the new entrant that drives the bottom of the pyramid, and this move doesn't put more money in the pockets of first time buyers.

So why would Derek Holt be so quick to rush to the defense of the CREA? Head scratcher that one, eh? (sarcasm)


Just Jack said...

He shows a fundamental and critically flawed understanding of market value. Maybe he should talk with the appraisers that Scotiabank uses first. No, I guess he can't they got rid of them and now out source their work to the lowest bidder and use computer programs designed by CMHC in order to speed up the process of hooking someone into a mortgage.

Market Value is the same whether an agent is involved or the property is sold by the owner. The agent's function is to facilitate a trade between buyer and seller and for this they earn a commission which is typically a percentage of the Market Value.

omc said...

I don't understand the theory either. Wouldn't you, most likely, be selling a house if you were buying in to take advantage of this situation. That wouldn't have that much of an effect on the market because you would be increasing the inventory at the same time, and wouldn't end up changing the MOI.

Panza said...

`So why would Derek Holt be so quick to rush to the defense of the CREA?`

It is a head scratcher for me - what is the answer? How is he tied to the CREA?

I read the article and overall I would say his comments put forth a very bearish sentiment on RE. Moreover, I can see how a sudden 15K savings on the price of a house might prolong the bubble inflation for awhile. Why wouldn`t it?

It constitutes a very weak arguement for not putting an end to the obvious gouging though.

So, why the twisted argument and misplaced advocacy from him?

HouseHuntVictoria said...

"I can see how a sudden 15K savings on the price of a house might prolong the bubble inflation for awhile."

It may be a $15K savings on the cost of selling a house. Though I doubt it very much that overnight we will see a mass transformation of the real estate industry to sellers selling their houses on their own and buyer's buying homes without an agent.

Anyway, regardless, it's an output cost, not an input cost, so the market value of the home is not positively impacted by a buyer suddenly having $15K that they didn't have previously, unless of course it's a buyer that just sold a home. Which brings us back to the point about the entry level driving the market right now and those buyers won't save a dime through any changes to access to the MLS. Unless you think sellers will pass along their potential output cost savings to buyers in the middle of a heated, Canada-wide sellers' market.

think said...

I know, I know, its only stats for one day but Vancouver market looks bear-ish to me. Going to keep enjoying watching the cracks getting worse. Enjoy the numbers (even if its not a trend...YET!!).

Vancouver East & West*
Attached & Detached
as of: 02/11/2010
New Listings - 71
Sold Listings - 21
Back On Market Listings - 1
Price Changes - 18

Vancouver All Areas*
Attached & Detached
as of:02/11/2010
New Listings - 253
Sold Listings - 77
Back On Market Listings -6
Price Changes - 50

*Courtesy REBGV

Just Jack said...


This might help you to see a clearer picture of what is happening. It's called a sales to new listings ratio.

I don't know what level of information you can get about Vancouver, but I will show you an example for Victoria's core municipalities.

In the last 30 days there have been 146 sales of detached homes. And in the last 30 days there have been 274 new listings of homes for sale. That's a sales to new listings ratio of
146/274 or 0.53

Because of delays in reporting sales and new exclusive listings by agents- A ratio between 0.4 to 0.6 is considered a balanced market between buyer and seller.

A ratio greater than 0.6 indicates a sellers or bull market. A ratio less than 0.4 is a buyers or bear market.

Now, if a bear or bull market has been sustained for the previous 2 or 3 consecutive months then one should see declining or rising prices respectively. Unless, there is an external influence such as a change in CMHC policy, interest rate, war, etc.

For example, the median price for the last 30 days is $630,000. In the 30 to 60 day period of December/January it was $615,000 and the sales to new listings ratio was then 0.7 which lead to last months 2.4 percent increase in prices.

Now, if you polish off your crystal ball you might project that, based on a 0.53 ratio, prices for the next 30 days should remain similar to this month. But there's no guarantee with those Ottawa clowns running things. Myself, I'm waiting for the budget speech.

Just Jack said...

One more thing houses are boring to watch right now. But condos are more fun

The sales to new listings ratio for condominiums is 0.37

And some other ones are:

The ratio for homes in the Westshore is 0.43

And for the homes in the Peninsula
the ratio is 0.35

So you can see that home prices in the urban municipalities are stable - but the outlying districts and condominiums are the Canaries to watch.

think said...

The sales/list ratio for Victoria for January was .345 (34.5%) - so thats bear. And a huge change from the sell/list ratio in December of 94% and the preceding 6 months of 70%. I don't understand why nobody else can see this shift. And during the downturn of 2008 the sell/list ratios were around 40%! I understand that I'm premature in saying what it means but the numbers ARE showing a potential shift! I may not have a crystal ball but I think we have hit a wall - there is nowhere to go. Now as more bad news is added it has to fall apart. Budget news will just continue to add reasons for the crash. Maybe low interest rates can prop things up in the short term but if the fundamentals aren't there (as in employment, income growth, etc) it will have to deflate. I personally know 2 sets of people that have recently told me they have made a big mistake buying homes in the past few years - they are mortgage poor and are planning to sell this spring as they will run out of money (aka room on the credit card). Too much debt load and speculation ALWAYS leads to a crash. This is going to be big and ugly and I think it is already here. This spring is going to be a disaster.

think said...

Those condos numbers are very interesting! Thats the bottom of the pyramid. The crash is here - just wait as it ripples its way up to houses. No new buyers getting into condos is a critical point!!!!!!!!!

think said...

I remember back in March/April of 2009 - the market started getting "busy" again and it started at the condo level then moved up to houses (makes sense) - now the condo market is going bear, then it will start to affect houses.

Just Jack said...

You could be right-on Think.

However, most of us on this blog have been burned in our past predictions because of government intervention in what should be a "free market"

The housing market has been manipulated by the government to keep Canada from going into a deep recession.

This is not economics this is political move to keep a government in power. The recession is the cure for the past market excesses, not propping up the housing market.

It would have been better for the economy to drop prices by half and sell twice as many properties.

Rhino said...

Still not seeing it think. This 1930s needs-work house I looked at next to hillside mall sold today...they were asking 499, went for 545. Unbelievable. I remember when I was a kid, I had a friend who lived in that neighbourhood and my parents didn't let me to go over to his house (thats where the poor people lived I guess).

Vic said...

"This 1930s needs-work house I looked at next to hillside mall sold today...they were asking 499, went for 545. Unbelievable."

More proof our fellow Canadians have crap for brains. I've lost faith that any hint of intelligence is left in the majority of the population. 10% over asking for that garbage ? Disgusting is more like it. When the media can't shut up about it evey day for the last week now, you know the hammer is about to fall.

Mr.4AM said...

What I find mind-boggling fascinating is how the home channel amongst others that stream content from the US of A, just carry on with non-stop shows about flipping houses and increasing market value... Are these just re-runs from 2005/2006 or which planet are they broadcasting from? You'd think 3 years into non-stop house value declines, they'd shut up already. Good Grief!


Vic said...

Mr. 4 AM,

Incase you missed Sinclair's letter tonite, he states "THIS IS THE END". I would not be surprised to see one last large move up in the markets first. "Sovereign debt" will be the future buzz words we will hear for a long time.

Just Jack said...

When you read in the listing that all offers to be presented at xx:00 PM on xx date, the agent is creating an auction. That's what happened on the property that was listed at $499,900 and sold for over list price.

The agent intentionally under listed the home to get as much attention as possible then starts an auction.
Who even knows if the other bids are real, they can be shadow bids by the agent to excite the other bidders.

Just Janice said...

Financial and economic illiteracy in all its glory is alive and well in Victoria and Canada. There's a tremendous disconnect between understanding the 'value' of something and the 'price' of that same something. People also seem to be confused between the concepts of 'owning' and 'renting' and are failing to understand that when there is little equity and a long amortization and your focus is on the monthly payments and not the price that you are in effect 'renting' whatever it is that you just 'bought' because if you were to sell it there would be little if anything left over to keep.

As long as I can keep my husband from wanting to jump into this insanity all is good. But I fear that it was much easier when there was no end of debt to be eliminated (student loans, etc.) and now that we're making headway into downpayment territory that my ability to postpone home purchase will be time-limited. AS we are expecting our first child in July the urge to nest may be particularly strong... A second leg of this recession would help in buying a bit more time. I would prefer to buy when the upside risk exceeds the downside risk and when the purchase is sound from a 'fundamental value' perspective.

HouseHuntVictoria said...

Just Janice,

Congrats on the little one coming soon!

Nest in a new rental. In my memory, there has never been more choice or negotiating potential than right now. When the students move out at the end of April, the choice/negotiating only gets better for you.

kabloona said...

From today's

Jarislowsky sees housing bubble

Stephen Jarislowsky, one of Canada's best known investors, says he believes government measures aimed at juicing the housing market has put the sector in a bubble.

"I am convinced there is a housing bubble in Canada," Mr. Jarislowsky told Bloomberg News. "… I conclude that the prices of housing today in the U.S. are cheaper than they should be, and that the prices in Canada are far more expensive than they should be."

Mr. Jarislowsky is not alone. Other economists have also fretted about a bubble given the stunning rebound in real estate after the slump, and projections for record sales and prices this year. Ottawa is now considering tightening some rules. Said Mr. Jarislowsky: "They have basically encouraged people to buy houses based on cheap mortgages. That has created the opposite effect of what was desirable."

omc said...

just janice,

My congrats also. I know what you will be going through; as we already have 1, and are soon expecting a second. The market has been irational since 2006, and guess when we were ready to buy with a kid on the way. You will have very strong urges, but I know many who bought and regret. Having a kid is extremely stressful, make sure you don't add economis stress from a bad decision to it.

HouseHuntVictoria said...

Check this out: When Dale Ripplinger, CREA president took questions on the G&M the other day, he was asked these 2 questions:

"(1) Why is CREA even fighting this fight? Why shouldn't consumers be able pay a realtor to post and administer a listing on MLS and nothing else?"

Here was his 1st answer:

"1. Consumers already can hire a REALTOR as per your example. That already exists. In fact the media has reported on those models just today."

Here's the 2nd question:

"(2) What is CREA's position on listings syndication, that is, making MLS available to websites outside of boards or brokers?"

And here's his second answer:

"2. We already have boards in parts of the country who do syndicate."

Now take this article with content accessed by Access to Information request law:

"The rules to be voted on make only changes to the second pillar, removing the requirement that a realtor act as agent for the seller "throughout the entire time" of a listing contract. In CREA's proposed amendments, its interpretations of the three pillars have eliminated the clause that required a realtor to handles all offers and counter offers."

Remember this is a proposal to be voted on in March by member boards of CREA like VREB. Which means, right now, agents can't do what Dale claimed they already could above. I have yet to find any examples of syndicated MLS listings on websites not run by realtors.

Is anyone really surprised by Dale's misleading remarks in the media?

Mr.4AM said...

Just Janice, I admire the stance you've been taking in regards to resisting the temptation to buy, and continuing this line of thought even though you're about to have a kid.

I can tell you that in the case of nearly all my friends, even though most of them are not bearish on housing, it was their wives who eventually persuaded them to buy a house, and in several cases more than they could comfortably afford.

So for you to go against what appears to be a (female?) instinct to 'nest' and to further dissuade your husband from treading into obvious folly, I commend you! :-)

“The sign of an intelligent people is their ability to control their emotions by the application of reason” - Marya Mannes


Robert Reynolds - GBA said...

A realtor friend of mine gave me this today. It is a graph of mortgages in arrears for Canada and BC.

Sorry for the poor quality.

Basically there has been a huge increase in the number of people in arrears, but we are only back to 2004 levels. So, bad for the past few years, but pretty "meh", in the long run.

I will see if I can find a better version to post later.

Robert Reynolds - GBA said...

Also, Diana told me that there was a house on Foul Bay Rd. which was intentionally priced low to start a bidding war and just sold for $130,000 OVER LIST! redonkulous

I don't see it on my PCS, anyone got any info?

Disclosure: Diana is in my BNI chapter.

Robert Reynolds - GBA said...

Found the mortgages arrears stats here and made this graph.

Robert Reynolds - GBA said...

Sorry I lied about that house that sold for $130K over asking it was this one, not on Foul Bay Rd.

1429 Grant St.
List $599,000
Sold $734,000

Mr.4AM said...

Robert, too bad that chart doesn't go back to the early 1980's so that we can see what we might expect in the next few years.

On the US front, this Aug 2009 article shows them at 9.23%! (nearly 20 times higher than we are at now). Granted that's 3 years into the decline, which over here has not quite yet begun.


Mr.4AM said...

Vic said: "Incase you missed Sinclair's letter tonite, he states "THIS IS THE END". I would not be surprised to see one last large move up in the markets first. "Sovereign debt" will be the future buzz words we will hear for a long time."

VIC, although I agree in general about defaults on Sovereign debts being the looming and eventual black swan(s) that slam the markets into lows not seen since 2008 (that or a China bubble pop, or a major terror attack in a Western nation); Sinclair, has a track record for saying things like that. The reality is that they take longer to manifest than most people expect, although we are closer than ever.

A parallel could almost be drawn to the Victoria housing market. Back in 2006/2007, I too thought the collapse for real estate locally was imminent and fully expected it to take a major dive in 2008 from which it would not recover for years, but government intervention prevented this.

Be sure to check out this top 20 Sovereign Debt Default candidates. Greece looks like it will be getting rescued although it's not 100% official yet, and I'm not sure what will happen to Spain. Ukraine debt while on the verge of defaulting, looks too small to trigger a global domino effect. I'm not overly worried about Portugal, they've already been in a 7 year Real Estate decline, and their Reserves are 98.5% in gold (probably one of the top countries in the world holding that high a percentage of gold as national reserves, instead of fiat currencies).

Hungary has already been to the IMF once, so that's a possible candidate. Ireland is probably the next biggest one though. But I'm still thinking China will eventually pop, and I don't see anyone capable or willing of rescuing China. Their stimulus vs GDP was 3 times higher than the USA, and they are not a reserve currency to be able to print their way out without consequences.

India is also on the list of that article, but I really don't see an Indian collapse that would take the world with it. Their speculative SENSEX stock market might see another 30-50% correction again, but that's about it. From a domino perspective, they're a farming and service stronghold, so food prices may rise slightly around the world, and their call centers may cost more to operate for foreign corps, but even a 50% increase there, is not that significant for the rest of the world. It's kind of like when rice doubled in price in the last couple of years... So instead of me paying some $12 for a large (20 lbs?) bag of rice at Fairways, I'm now paying some $20+... but that doesn't even come close to worrying me as a Canadian.

So at present, while yes there are a long line-up of debt default candidates, I'm still wondering how much longer this will all take to play out. One thing is for sure though, if several of them fail, even if small, that could also trigger a global market meltdown.

In short, there's just too many variables to be 100% sure about anything, especially when governments & reserve banks change the rules to prop up the systems.


Mr.4AM said...

I should also point out that a couple of weekends ago, the World Economic Forum held its annual meeting at Davos with the theme of "Improve the State of the World." Which naturally meant coming to terms with the risks out there. Their economists came up with a comprehensive list and assigned probabilities to each--and also mapped the linkages between each one. Then they summarized all those findings in a handy dandy interactive map of top global risks that's sure to delight paranoid conspiracy theorists everywhere *grin*:

From the map, note that:

Domino Potential = Closeness to center of map
Severity in Money = Bigger circles
Severity in Human impact = Closer to the top of the map

Further, note how nearly all the dots in the center of the map (domino potential) are blue/Economy related.
- Note how China is one of the biggest circles.
- Note that "Fiscal Crisis" is Smack in the middle of the map, likely with the most connections.

- Note how Asset Collapse (aka. Real Estate/Stock Markets) is one of the biggest circles.

You can also click on each circle to see a few more details about its interconnectedness.


Vic said...

Mr. 4 AM,

I am not a proponent of Sinclair by any means, just something worth noting. His high level involvement in past economic disasters tells me he knows his stuff but overestimates his timing. I agree it will take a longer time to happen than most think, as in a few years, then we will see the whole inflation effect kick in.

Bernake basically waving the interest rate flag the other day says it all. Higher rates are coming and the Canadian bankers are crapping themselves after seeing charts like Robert posted of defaults. It's probably much more than they will admit or they would not be so desperate. Flaherty will crumble and the iceberg will hit the good ship ReMax/CMHC where it counts and deserves.

patriotz said...

Higher rates are coming and the Canadian bankers are crapping themselves after seeing charts like Robert posted of defaults.

It's not so much mortgage defaults that the banks are concerned about (as they are insured) but collateral damage to their other loan portfolios. When someone ends up in BK due to mortgage troubles the other loans get hit too.

Robert Reynolds - GBA said...

From Garth on Victoria

...And so the number of listings grows as sales wither...


listings are through the roof.... /s

mln said...

The jump in listings looks pretty typical to me...

I'll get excited when we start seeing actual price declines (again).


think said...

It will take 3 months of increasing listings before it starts to put downward pressure on prices...these things take time. Anybody have mid-Feb stats for Victoria????

Just Janice said...

As my husband has 2 kids from before me and we have a dog, we were already renting a 4 bed/2 bath house (whole house)...and we just extended the lease to October that should be a fair defferal on the buying urges for now...

It helps that our rent is less than what the mortgage interest would be.

I also think it helps that my training in economics has been rather effective in limiting the emotional impulses associated with home buying. I seem to be able to think about it rationally and to separate 'housing' (a need) from 'home ownership' vs 'renting' and to determine which is the best method at a point in time in terms of achieving the need. Right now its renting, hands down.

Vic said...

Saw Garth speak today. Love'em or hate'em he is a great speaker with some good investment and retirement income ideas. As most of us believe, this Victoria bubble will pop at some point soon and is totally unsustainable.

I was surprised he likes gold now and thinks $2000 is possible in the next year or so along with record oil prices. Can't argue with that theory.

Robert Reynolds - GBA said...

I saw Garth a year ago, didn't bother to go back this time round.

I still see gold as any other commodity, it is only as valuable as it's uses. jewelry, circuits, etc.

I have been aggressive since the big crash in Oct 08, but I am starting to get more conservative. I have been switching from growth equity to dividend funds. I am also probably going to finish up my high yield corp bonds play this week.

Other than the cop-out dividend play I have no idea what to get into next. I see as much uncertainty in the next few months as I did in fall 08.

Vic said...

Very large crowd, must have been a few hundred there. It was interesting as he compared his visit a year ago and where the markets are at now, but more importantly where we are going. His emphasis on avoiding tax in the coming high interest rate and higher taxes enviroment was the best advice besides dumping your overpriced Victoria real estate.

Gold is a currency as well as uses or it wouldn't go up and down with the US dollar. If it doubles to $2000 it won't be because anyone's buying more circuit boards. I have never been a total gold bull and prefer the stocks and don't own any but may in the future as insurance is always a good idea when you realize the debt the US is pumping out. $11 trillion ( and growing) is not going away anytime soon and Canada will not look too much better after the next budget.

I agree with Garth on his view we have another leg up to go in the stock market over the next year then we flat line or correct once again if the sovereign debt problems aren't coralled.

One thing for sure is real estate is for fools unless you got some to sell.

think said...

I'm still doing the happy dance :)

Month-to date stats for Victoria - as of Feb 15th.

Sales 302
New Listings 747
Total Active Listings 3001

Thats a sales/new listings ratio of 40%

Oh yeah :) The winds ARE a-shifting :) Can't argue with the numbers - its been a month and a half of low sales with climbing inventory :) If it continues like the for another month or two prices are going to start tanking!

Just Jack said...

There in't a bubble because of a lack of speculation in the real estate market, said Scotiabank senior economist Adrienne Warren.

This brings up a good point. What is speculation?

Depending on how one defines speculation you get different answers. These are the ways I have heard speculation described:

From an agent
The same home re-selling in less than 6 months.

From an admitted serial monogamist home owner.

I buy a home every 1 to 2 years, in that way Revenue Canada does not consider this a business.

Revenue Canada:
it's about intent.

None of the above have any base in fact or figures as to what constitutes speculation.

The six month example is so restrictive, that it would mean there is no flipping going on in Victoria.

The serial monogamist home owner is basing this on something that someone who knew someone said. Heresay

The Revenue Canada definition is so vague, it could mean anything they want it to in order to increase taxes.

Now the way I would look at speculation, is that years ago, I heard that the typical Canadian owns their home for seven years? If that has changed significantly would that not suggest - speculation? There are no studies of this analysis that I have read.

How about the number of persons per household. If that number is dropping would one plausible answer be that on average a household is now owning more than one property? But that information is dated to the 2006 census.

So back to Ms Warren's original statement. Its hooey.

patriotz said...

In economic terms none of these definitions is correct.

Speculation is when someone buys an asset in anticipation of positive returns based not on earnings (which in the case of RE is rental value), but on capital gains.

By this definition everyone buying today in Victoria is a speculator. Unless they expect that prices will never go up further and just don't care, and I don't think that includes many people.

Note if you buy a house and your total monthly costs are less than renting, you're not a speculator regardless of what you think about future prices, because you're getting a positive return even if you never sell.

Leo S said...

@Just Jack and @patriotz

I think the revenue canada definition is the best one. If you're buying a house with the primary intention of selling it at a higher and making money, you are a speculator. If you are buying a house with the primary intention of having a place to live then you are not a speculator.

Of course figuring out what one's primary intention is pretty tricky, as of course everyone will want both, but there is definitely a big difference between someone buying just to make money and someone buying to have a home, and incidentally also hopefully be better off financially.

Unless you hand out a survey it's going to be impossible to determine what people have in mind with their real estate purchases.

patriotz said...

I think the revenue canada definition is the best one.

It's not a matter of "best". When dealing with taxes, you have to use the taxman's definition. When looking at the merits of an investment, you look at the economic definition.

For example, suppose I buy at bond for $105, coupon yield 6%, matures in 5 years at face value of $100, YTM 5%. The taxman says I'm getting $6 a year interest income and a capital loss of $5 (which I can't deduct against the interest) when it matures. But economically I'm getting $5 a year.

patriotz said...

Should add that the $5 a year is what I get in a tax shelter such as an RRSP. Obviously in a taxable account I have to pay attention to the taxman. :-)

Just Jack said...

So, do we all agree that a statement such as Ms Warren made or any other person making a similar claim is just trying to pull the wool over your eyes.

patriotz said...

There isn't a bubble because of a lack of speculation in the real estate market, said Scotiabank senior economist Adrienne Warren.

She is ignoring the fundamentals which indicate that prices are being driven by speculation, as I described above.

It would appear that she is choosing her own definition of "speculation" which supports a predetermined conclusion that there is no bubble. The economic definition of a bubble uses the economic definition of speculation which I gave above. Note that nowhere in the article does anyone say what definition they are using for "speculation".

She is also ignoring her colleagues at another branch of the bank, Scotia Capital, who came right out last week and said there is a bubble in Canada (which must include Victoria since it's the second most expensive city in the country), based on - surprise - fundamentals. But these guys don't do the mortgage lending. :-) Their business is evaluating investments.