Sunday, July 4, 2010

Canada's residential housing market is anything but a safe place to be at the moment

WiseInvestor linked to this article in the comments of the last post.

Here's why it is a must read:
Warren Buffett has famously advised, "You only have to do a very few things right in your life so long as you don't do too many things wrong." For investors considering buying Canadian residential real estate at the moment, this could very well be one of those wrongs you absolutely need to avoid.
Despite claims that Canada's boring but prudent financial system has somehow prevented the negative effects of its housing bubble from coming to bear, the reality is that the day of reckoning has only been postponed, not prevented. Canadian banks may indeed be some of the safest in the world, but that is arguably largely because CMHC is holding all the toxic Canadian subprime mortgages for them. Canada's residential housing market is anything but a safe place to be at the moment ..., high-risk borrowers, propp[ed] up already historically high prices with unsustainable, artificial demand. From 2007 to early 2009, the total dollar value of CMHC's outstanding MBSs grew from $138 billion to $265 billion, an increase of 92%. During this same time, the total mortgage credit outstanding on the collective books of Canadian banks increased by only 1% to $447 billion.
In other words, all the market demand that has been propping up Canadian house prices can be attributed to Canada's version of subprime loans that the free market was not willing to bear the risk of.
...key causes of the U.S. housing bubble have been sufficiently replicated in Canada.
Thank you Chris Gallant for writing so clearly recently what we've been warning of here at HHV for years. 


Just Jack said...

Great article.

HHV. Are you glad you stuck around to watch this house of cards fall. I know I am. Thanks for being here through all of it.


NanHousing said...

Sure the MBS % has risen 92%, but wouldn't they have taken in 92% more in insurance premiums for the mortgages?

I'd like to find out some more info about how much they have from all the insurance payments. I am also wondering if CMHC gets paid right away from the bank or if they get paid each month when the buyer makes his payment.

Alexandrahere said...

Thanks for the article HHV. Makes me wonder how Prairie Boy is doing. Does he drop in from time to time?

Anonymous said...


I agree with most of your comments and believe that Victoria real estate is in for a big downturn with one exception.

It is a well known fact that all the duplexes sold in the Westhills development in Langford are immune to any downturn. People desperately want to buy these units and anyone that had to sell recently was rewarded with a huge capital gain. How do I know this to be true? I lurk on the KIV site and one of the happy Westhill owners keeps the readers over their informed about the development and her own astute and well-timed purchase. If you want to know more about this magical place click here for details. Units are still available for those prepared to make the leap of faith.

WiseInvestor70 said...

"It is a well known fact that all the duplexes sold in the Westhills development in Langford are immune to any downturn"

I just love when people believes that they are immune to an Asset Bubble burst. Reminds me Real Estate in New York, in 2008 I decided to look for some small apartment in New York as is one of the places around the world that I really love (culture, entertainment, shopping, etc). Problem was price, small apartments going for $ 800 K, or more.

I contacted a Realtor in August last year who felt offended when I told him that I was looking for a bargain (didn't want to pay more than $ 150 K for a 1 bed apartment), and something close to Astoria area as is close to Broadway ave.. and only 15 minutes to Midtown. His answer that time was, "New York is unique", and the meltdown crisis did nothing to RE prices down there, so my best chance was to buy something in a crappy area in extremely bad shape or go higher on my budget. I said, no thank you.

Well last week I've got a phone call from the same Realtor, telling me that they had a lot of buying opportunities and if I was still interested a lot of sellers were starting to consider extremely "Low ball offers", so any how he send me a whole bunch of listings of nice apartments that are selling right now for $ 235 - $ 260 K (valued at $ 700 K in 2008), telling me that I should not be afraid to make some kind of offer regardless of how low this one would be.

So I guess, that nothing and no-one in this world is immune to a financial crisis after all.

When you have to sell and no one wants to buy, you have to lower, and lower, and lower your price until someones comes along willing to pay for your asset(s), the asking price, other wise you will have to keep it or loose it (if you owe it)

patriotz said...

I'd like to find out some more info about how much they have from all the insurance payments.

The financial details of the banks or CMHC will not determine the future direction of RE prices.

The issue is that prices are simply too high with respect to rents and incomes. That's the root cause of all RE busts, including the US bust and the coming bust here. How the prices got too high may vary, but that is not the cause of them going down.

NanHousing said...


That is not what I was asking.

I was asking about how much the insurance fund of CMHC is, with relation to how much in mortgages it is insuring.

I want to know what kind of losses it can incur before taxpayers would be on the hook.

Alexandrahere said...

Good Monday Morning to you all.

Here are some stats from my PCS

From: 28 June - 4 July

SFH: Criteria: Min. 2 beds, 2baths from $375K to $775K. Areas of: Victoria, Oak Bay, Esquimalt, Saanich East and Saanich West.

New: 31
Sold: 19
OM: 12
P/C's and Relists: 49

Some notable sale prices were:

667 Fernhill: $650K-$602K (-48K)
4378 Emily Carr:$839K-$705K (-134K)
4038 South Valley: $749k-$695k(-54k)
1141 Union: $520K-$460 (-80K)
3123 Rutledge: $469-$405 (-64K)
244 Richmond: $879K-$755K (-124K)

Condos: Min 2beds from $260K-$625K)

Victoria: Vic West, Fairfield, Rockland, James Bay, Sears, Mayfair, Burnside

Oak Bay, Esquimalt

S.E: Lakehill, Swan Lake, Maplewood, Mt. Tolmie, Mt. Doug

S.W.: Gorge & Tillicum

NEW; 19
OM: 11

All condos sold were at reduced prices and we are seeing many more 2 bed, 2baths going for under $300,000.

Just Jack said...

Of the last 100 sales of detached homes in the urban muncipalites, 20 percent of them sold under the assessed value.

Homes in the Westshore and Saanich Peninsula were a bit better with only about 15 percent selling below assessed value.

And about 25% of Condos in the urban areas were selling below assessed value. The assesments were within 5 percent of the selling price 30 percent of the time.

So, would you use the assessments to buy or sell a home?

omc said...

I think it is a given that the %s of sold under assesment is going to increase. Right now I notice that many houses in the Cordova bay area are asking under assesed value and very desirable, fixed up South Oak bay homes are dropping asking price close to assesment. The south oak bay prices are a bit surprising as I haven't seen prices like these since the last trough.

I was noticing that the norm for a gordon head box with suite was in the $625 range just a few months ago, and is now at $550.

It wasn't much of a weekend for sales as my PCS is overheating with corrections.

NanHousing said...

Sales don't happen over the weekend. It can take several weeks before sales avctually go through (removal of subjects etc), so if someone agreed to purchase a property, it wouldn't be recorded as a sale until all subjects are off.

omc said...

I realise that, but if you didn't have any showing over the weekend it isn't a good time for sales. That would be when you decide to make a price correction, as my pcs is showing.

Just Jack said...

I don't think it takes several weeks to remove subjects. Most agents ( I want to say all - but there could be one that doesn't) practice "hard sell" tactics in Victoria.

Keep the buyer hot.
Don't give the buyer time to think.
Keep the pressure on with short removal dates.

The agents in this town, own the brokers and customer reps at the banks.

NanHousing said...

I was wrong about 'several weeks', but it looks like it takes on average about 2 weeks for a sale to go through.

Just Jack said...

Is the Colwood Condo Cartel Collapsing?

The new condominium market in the Westshore has been held by only a few developers over the last decade. The cartel could manage prices by getting together and setting prices.

With a lot more resale condominiums on the market, it appears these developers are willing to take offers.

And how is the "Bare" Mountain market for condo's. How would like to spend half a million on a condo in 2007, only to sell it today for $350K. Or a pre-construction price of $300K back in 2007 and flip it today for $270K.

Well those pre-construction prices are coming back to bite those investors in their wallets. They did not do their homework going into the market - and now some of them are getting burned a hundred grand and more!

They believed that Bear Mountain was different - and how right they were.

HouseHuntVictoria said...


IIRC the CMHC is required to keep $8Billion in capitalization which they maintain through insurance premiums.

Just Jack said...

Does that mean CMHC has to sell $8,000,000,000 of insurance at say $15,000 per household or roughtly half a million mortgage insurance policies to the banks each year?

No wonder, CMHC opened the lending doors wide open - it needs money like a whore with a cold sore.

Alexandrahere said...

OMG....Incredible amount of reductions in my areas of interest.

Today as of 4pm I have received 16 Price changes i.e. reductions. Four of those are reduced re-lists.

You can feel and smell the doom in the you are afraid to exhale.

In my experience, especially in the last couple of years, most realtors (in collaboration with the "other" realtor), try to get the buyer to only have a "subject to inspection by a certain date" on the purchase agreement. They like to do this so that the seller only has to wait for one "subject to" to be removed. After all you don't have to give a reason why you have declined on the offer. It could be you can't get the mortgage or that your father-in-law says there is too much wrong with the house etc.

The buyer's realtor pretty well always "just happens to know a great inspection guy that you can really trust" and he'll offer to phone him for you right that minute to get the shortest time-frame possible. He'll tell you that this is very important to the seller psychologically and will give you the edge on him accepting the lower bid. I have found the inspection is usually done within the week.

kabloona said...

Yeah, it's ridiculous but in a "red-hot" market (ha!)the realtots have actually been advising their "clients" to put in unconditional offers whereas traditionally every offer should include at least 2 conditions: a) financing and b) home inspection.

Conditions are usually waived witin a week for the deal to "firm up". I once bought a Power-of-sale back in '96 in Ontario and in that case the house was sold "as is".

But I did my homework and the price was dirt cheap. Still, it just amazes me that "real estate professionals" have been advising their naive clients to submit binding offers to purchase without conditions - and also telling them to bid over asking!

Don't wanna lose a bidding war, especially if your commission depends on it....gotta make those payments on the Beemer somehow!


jesse said...

"Incredible amount of reductions in my areas of interest."

Do people have a sense for why Victoria is so weak right now compared to other parts of the province? Is the slowdown in government employment starting to take a toll?

Animal Spirit said...

Here's a good rent to list price for Patriotz to chew on:

Beautiful Cobble Hill House

Listed to rent at 1,500
Previously listed for sale at 485,000 (a bit unsure that this was the right price, sale price included the cottage across the lake)

Price to rent: 485/1.5, or 323. Which would be around 27 years (or 20, including rent for the cottage.

And to think that I got momentarily excited seeing this house listed for sale.

jesse said...

"Does that mean CMHC has to sell $8,000,000,000 of insurance"

No the reserve is standard for insurance companies to cover potential losses. It's done for other insurance companies but the problem with CMHC is their losses will be correlated unlike, say, an auto or house insurer.

$8BB for $500BB+ total insured assets. Some additional amount of loan repayments will have been established in almost all of these properties. You could go through various stress tests and I'm sure under certain market conditions CMHC will be technically insolvent.

As a quick estimate, let's say the national market drops 30% from peak in 10 years. Assuming the provision remains untouched, let's assume the average mortgage is 15% below peak prices. That works out to about 15% average loss on $500BB, or $75BB notional shortfall assuming no principal payback (which there is). This would be the amount CMHC is on the hook for if all loans defaulted.

Now assume 20% foreclosure rate on insured loans over the 10 years, so that equals $15BB CMHC must pay out over 10 years.

They will make some up by increasing premiums, tightening approval criteria, and cutting staff, as well as likely turfing some of their actual housing affordability initiatives (which MI is not). If we also include the principal reductions I think they will probably stay solvent but will be under massive pressure to reconstitute their balance sheet if these losses materialize.

I just don't see how CMHC is a "massive" liability to the government. It may well cost some billions but it's not in the order of tens of billions from what I can ascertain.

patriotz said...

Does that mean CMHC has to sell $8,000,000,000 of insurance at say $15,000 per household or roughtly half a million mortgage insurance policies to the banks each year?

No, the reserve is a stock not a flow, i.e. it's an accumulated balance. Once they have the $8 bil they only have to top it up by the amount lost to claims.

My rough calculation: suppose the average foreclosure costs CMHC $200K in shortfall (it will be greater here, but less elsewhere), that means they can cover 40,000 foreclosures, give or take. Then TSHTF.

By comparison the US (with about 10 times the dwellings) saw 2.3 million default filings or foreclosures in 2009.

patriotz said...

Still, it just amazes me that "real estate professionals" have been advising their naive clients to submit binding offers to purchase without conditions - and also telling them to bid over asking!

The clients of the "real estate professionals" are the people paying them - the sellers.

Are you the "client" of a car salesman?

HouseHuntVictoria said...

"Does that mean CMHC has to sell $8,000,000,000 of insurance at say $15,000 per household or roughtly half a million mortgage insurance policies to the banks each year?"

No. Banks and insurance companies are expected to have minimum capitalization in their accounts to cover their liabilities (potential). CMHC is too. The difference though, as far as I know, is that banks and insurance companies in Canada are well regulated (which is why Canada is being held up in such a positive light internationally).

I think banks are 18:1 cap ratios. I'm not sure about insurance companies (perhaps Rob can inform us). CMHC appears not to have this kind of regulation ratio. If they were required to have an 18:1 cap rate, then you'd be looking at maximum mortgage insurance liabilities of $144B based on an $8B capitalization minimum. But they're well over $250B right now.

CMHC is far from the prudent financial institution that the gov't and industry want us to believe it is.

omc said...

Wake up bears, while you were asleep santa came. SupposedlyVancouver is in the same shape as us, and Toronto.

kabloona said...

Patriotz, I used the word "client" because it sounded better than "pigeon"....

Skeptic said...

The Victoria Real Estate Board (VREB) set up the PCS system for agents to use as a marketing tool for their clients. It provides much more info for their clients and in the boom times made clients anxious to buy as they saw prices go up, multiple offers and fast sales come in every today.

This same service will now result in lower prices and fewer sales Why? Because clients will now see waves of price reductions, very few sales and listings going months without a sale. Buyers will now sit like vultures on a fence waiting for a better deal down the road. PCS lets them watch the market get worse every day and they get more reluctant to buy with every price reduction and lowball sale they see in their daily updates. Agents will soon wish the public only had the real estate books and MLS.CA and they could control the real estate sales and price history.

Alexandrahere said...

Ok....what did I say or rub you wrong HHV?...all my posts have been removed.

Alexandrahere said...

Received a "free" magazine this morning. It's called "YAM" .....You and Me: Living Smart. seen it before.

Anyway interesting article: Buying,Selling,Holding

by Brennan Clark

Some excerpts are:

"Victoria's real estate market is a hot topic these days. And with experts saying we are headed for a slow down, many homeowners are taking action."

"Most observers believe Victoria's desirability as a place to live and its finite supply of land for building new homes will continue to drive demand for single-family dwellings in the $400,000 to $600,000 range. However, the prognosis is not quite so rosy for condo owners, who are still feeling the effects of an oversupply, and owners of higher-end homes can also expect demand to tail off in the coming months says Gord English, owner of Genco Construction.

"Now instead of chatting about rising property values at cocktail parties, many Victoria homeowners are wondering if the gains they've made over the last five to 10 years are about to slip away."

While Neal (Ron) says a sharp drop in prices in Victoria is unlikely, homeowners should be prepared for prices to flatten out or even dip slightly in the coming months." (keep in mind this is the July/Aug issue)

"I don't see a significant drop in prices, but we may see a little decrease in the 2nd half of this year."

From Randi Master's......

"Many people who bought five years ato have enough equity built up in their homes right now to be able to look at conventional financing."

"While it's hard to predict exactly how much the market is poised to slow down, Master says Victoria's market tends to suffer less than others during real estate market upheavals due to it abundance of recession-resistant public sector jobs and desirability as a place to live."

"We're not totally insulated", she says. "But we tend to move through those harder times a lot easier and we come out of the a lot faster."

So anyway folks....nobody should worry too much......Victoria's real estate always comes up smelling like roses!!. Just turn a blind eye to it all.....after all....we are different from the rest of the world here in Victoria.

Robert Reynolds - GBA said...

think banks are 18:1 cap ratios. I'm not sure about insurance companies (perhaps Rob can inform us).

Ask and ye shall receive.

Canadian Life Insurance companies are subject to the Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio. This is a fancy way of predicting how many claims an insurer might have to pay out in a given year. The requirement is 150% of expected claims, though most carriers are closer to 200+% (I've got a table somewhere with the data but I can't find it ATM)

The actual dollar amounts required to be held in reserve depends on the asset. Cash counts for more than a bond, which counts for more than a stock. So say the company expects $100 million in claims this year. To be at a MCCSR ratio of 150% this can either be $150 million in Cash, or maybe $300 million in bonds etc.

Here is the math behind it.

So in simple terms, we have to have 50% more cash on hand then we can reasonably expect to pay out in claims.

It is not a perfect comparison but as an industry we are VERY conservative.

They also changed the rules in 2008 to make things like Mortgage Backed Securities, ineligible for these calculations.

NanHousing said...

The 2~3% or however much CMHC costs buyers is actually quite hefty.

Buyers must pay that percentage of the ENTIRE MORTGAGE. However, there is 0 chance that CMHC would have to payout the entire amount to the bank as the home would never be worthless. (CMHC only covers foreclosures and not fires or natural disasters.)

If viewed in this way, then buyers are actually paying much higher than the 2-3% to insure mortgages since some of the mortgage amount will never have to be paid out to the bank from CMHC.

HouseHuntVictoria said...

AlexandraHere... comment functions are acting up, I haven't removed anything.

jesse said...

@NanHousing: good point. The stress tests I've calculated seem to indicate CMHC has enough reserves and if they do get into trouble it won't be tens of billions like some are predicting.

Skeptic said...

Americans know when the housing boom is over... Mish tells it like it is.

Vancouver Home Sales Drop 30 Percent , Calgary 42 Percent - First Comes Volume, Then Comes Price; Canada Housing Peak is Finally In

This pattern is quite similar to how things cascaded in the US once the top was in.

Housing Collapse Cascade Pattern

* Volume drops precipitously
* Prices soften a bit
* Inventory levels rise slowly
* High-end home prices remain relatively steady for a brief while longer
* The real estate industry tries to convince everyone it's "business as usual" and homes are affordable because rates are low
* Bubble denial kicks in with media articles everywhere touting the "fundamentals"
* Stubborn sellers hold out for last year's prices as volume continues to shrink
* Inventory levels reach new highs
* Builders start offering huge incentives to clear inventory
* Some sellers finally realize (too late) what is happening
* Price declines hit the high-end
* Increasingly desperate sellers get creative with incentives, offering new cars, below market interest rates, trips, etc
* Gimmicks do not work
* Price declines escalate sharply at all price levels
* The Central Bank issues statements that housing is fundamentally sound
* Prices collapse, inventory skyrockets, and builders holding inventory go bankrupt

Some of those may happen simultaneously or in a different order, but the whole mess starts with a huge plunge in volume.

I am now confident the peak in Canadian housing insanity is finally in.

omc said...

O.K. Houses in my price range are now down $100k; I call bear beers.

Just Janice said... - depending on timing I might be able to join! The baby is to arrive on Friday - so if bear beers is in a couple weeks I might be able to indulge...

think said...

I am sooooo doing the bear dance!!! (and the beer dance) The price changes are hard to keep up with on my PCS - its all falling apart. I agree with OMC the prices are way down from what I am watching too! Did you see that one on Linden finally sold - for just over 700,000 - I think they started close to 900,000. This market is falling off a cliff as we speak and the bulls are going with it! FINALLY!!!!!!!!!!!!!!!!!!!!! And it is only going to get worse from here - way worse - prices are going to be way way down by Christmas!

omc said...

This thing is nation wide. Did anyone see the Calgary stats, sales down by 42%.

Anonymous said...

Here's an underwatercondo owner. Thank goodness this could never happen in fairfield.

Rhino said...

Funny watching these guys on bare mountain. First they were trying to sell the unit, then make it a rental with a years they are trying to convert them to vacation properties:

Just Jack said...

Would you buy a home with an assumable mortgage?

Interesting question, theoretically you could buy a home with no money down. I suppose you would have to look at the interest rate too. Because the assumable rate may be less or more than what you could get today.

How about buying a home with a $265,000 assumable mortgage, but is only worth $250,000. It might make sense, since you don't have to come up with a down payment or pay the CMHC insurance fee.

But you would have to be pretty desperate for a home. I'm thinking that it is too early in the game to look at assumable mortgages, I would pass on this now, but maybe change my position later on.

Alexandrahere said...

I am shaking my head and want to cry. Someone just paid over a half million dollars ($500,600) for a 1942, 963s.f. war time house on COLVILLE ROAD. It has been fixed up nicely and does have a lovely back yard overlooking the Gorge Vale Golf Club....but man,,,,,,What were they thinking? I want to shake them.

Their parents, if they know anything must be ready to dust off the shot-gun and go headhunting.

The traffic along that road is incredible morning,noon and night (after work). There is absolutely nothing pretty about Colville Rd. For a few thousand more they could have bought a house in the Rockheights area.

Animal Spirit said...

Up island stats showing the same trends as in Victoria:

Median SFH price down 6% in a month, however I have a gut feeling that this is somewhat due to a compositional change (higher end houses sold in May, back to normal distribution in June). From April, the median price is down 3.5%, or 1.75% per month.

patriotz said...

How about buying a home with a $265,000 assumable mortgage, but is only worth $250,000.

I am about 99.99% certain that all "assumable" mortgages are conditional on the LTV at time of sale meeting standard requirements. In other words, you can't assume a mortgage greater than you could get on a new financing. The lender would have to be completely crazy to allow otherwise.

Note also that if the mortgage is insured (which is very very likely) that CMHC insurance does not transfer to the new owner, so the new owner will have buy new insurance and meet CMHC's requirements.

NanHousing said...


Some of the mid-island stats are mind boggling.

How about 1192 condos on the market north of the Malahat and only 80 sales?

Since February, every month has seen a 12+ MOI in this category.

I thought everyone was supposed to come to the Island to retire?

If people who bought in the last 2-3 years aren't underwater, they will be soon.

Just Jack said...

Excellent points Patriotz, that certainly make buying a home with an assumable mortgage a stinker.

But I am wondering if what you mostly say is only true if you use a different lender. The vendor's lender has to approve you for a mortgage and the CMHC insurance is in the lenders name? If your covenants are strong, could the lender waive some of these conditions.

It certainly would be prudent to check these things out before you make an offer that involves assuming a mortgage.

BUT, having said all of the above, assuming a mortgage at this point would be more in the sellers favor, as the seller would not incur penalties for getting out of the mortgage before the term is up.

Perhaps someone on the blog in the mortgage lending world could help explain assumable mortgages. As, we are going to see a lot more of these over the next few years.

Anonymous said...

Well this seller wants you to pay them $5000 to take over their nightmare which is absolute lunacy. There was another guy on craigslist trying the same thing on a condo in Latoria and it's now in foreclosure which is where this place will be in a few months I'd say.

Rhino said...

Check out this low ball that worked:

1124 Temple - 2010 Assessment 601,000

Current Price $499,900
Price Original $599,000
May 17/10 $549,000
Jun 17/10 $499,900
Sale Price $435,000

Marko said...
This comment has been removed by the author.
Rhino said...

Agreed Marko, horrible marketing and pictures. They didn't even mention it is a few hundred yards from the ocean!

Marko said...
This comment has been removed by the author.
Just Jack said...

There are some suspicious things about that listing. The lot size is written in the comments but not in the section that allows you to search by lot size.

It appears to be an estate sale.
Both list and sale agents work for the same company.

Originally listed in May for a high price of 600, then dropped by a hundred grand for one day with an offer accepted.

I'm not saying that there is anything underhanded in the deal, it just gets the spidy senses working.

Just Jack said...

There are some suspicious things about that listing. The lot size is written in the comments but not in the section that allows you to search by lot size.

It appears to be an estate sale.
Both list and sale agents work for the same company.

Originally listed in May for a high price of 600, then dropped by a hundred grand for one day with an offer accepted.

I'm not saying that there is anything underhanded in the deal, it just gets the spidy senses working.

Phil said...

The crazy thing how 435K will be a lot of money in a few years.

Todays "bargain-getter" is tomorrows underwater owner.

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