I'd like to take a moment to respond to a letter you would have received back in June of this year from Shayne Fedosenko, a Pemberton Holmes REALTOR® from their Sooke office. In case you missed it, I've linked to it here, as reprinted on the Pemberton Holmes Facebook page.
Apparently, Mr. Fedosenko, an individual who makes his income from helping others buy and sell real estate (in economic terms a rent seeker), is feeling great concern about the current state of the Victoria Real Estate Board's market territory, in which your constituency falls. He opines that it is not the HST - a tax shift that ultimately benefits his personal business model - that is to blame, but instead feels the new restrictions on how mortgage lenders calculate secondary suite income as it is used to qualify for mortgages has reduced the amount of money available to would-be buyers looking to purchase homes with suites.
He makes several deeply distressing claims: the first, that mortgage amount qualification used to be calculated along these parameters:
"This is the way that it used to be: you could take the suite income, say it was $1200/month and they would add it to your mortgage qualifications as a $200,000-$250,000 increase in your qualification amount, now what they do is take the amount of the rent: $1200 /month, multiply it by the 12 months in a year and add it to your income, making only an extra $ 40,000+ to your qualification amount."In the past, before the current government allowed the Canada Mortgage and Housing Commission to liberalize mortgage insurance products, lenders would not have lent to the extent that Mr. Fedosenko suggests is appropriate. Canadian banks would only lend so that total debt servicing did not exceed 35% of household income. Historically speaking, this translated to home values in the Victoria area growing steadily with inflation along the lines of household income so that an equilibrium of home price to income ratios did not exceed 3.5 to 4 times annual income. Whenever home prices did exceed this equilibrium, like the run-ups in prices that ended in 1981 and 1994, the market would naturally correct back to this equilibrium, usually over-correcting for a short period of time first.
Currently, the Victoria average home price to income ratio as calculated by the Royal Canadian Bank's annual affordability survey pegs the home price to income ratio exceeding 7 and nearing 8. This is unsustainable and not good for the community nor the country. Simply put, mortgage debt obligations are robbing local families of the ability to spend money in their communities on the things that many of their incomes depend on. The Government of Canada must take the correct actions, and they did, through restricting taxpayer exposure to the excesses of the real estate market.
Currently the CMHC is as over-extended in the real estate market as the home owners that Mr. Fedosenko purports to be concerned about. This quote is from a news story on the CBC website appropriately titled Michael Hlinka: Is a Canadian housing bubble about to burst:
"The household debt-to-income ratio has remained on an upward trend ... as debt accumulation continues to outpace the growth in disposable income.
But households aren't the only entity overextended. CMHC, which insures these mortgages, has about $9 billion in equity, while it guarantees - get this - $770 billion in mortgages.
That's more leverage that(sic) we saw from any U.S. bank or lending institution, by the way."Dr. Martin, I'm certain you will agree with me when I say that the Government of Canada is not in the business of bailing out the poor financial decisions of Canadians. This is a slippery slope that we should not tread towards. What's next? Car manufacturers lobbying to bail out the poor credit decisions of their financial arms when they lend to people that cannot afford to purchase new cars?
The second claim, which to me, highlights the questionable ethics of some members of the local real estate industry, mixes market data in an attempt to obfuscate and confuse readers (in this case you) to believe market conditions are favourable to their (industry's) desired outcome. Normally, this means trying to make buyers and sellers, both real and potential, believe now is always the best time to buy and/or sell a home, activities to which they collect "rent" on. In the case of Mr. Fedosenko's use of market data, with regards to his letter to you, he is trying to convince you that current market conditions are much worse than they actually are in an effort to have you take action on an issue in the wrong direction.
Mr. Fedosenko claims that "Last month [May 2010] there were 300 home sales on the Lower Vancouver Island with 4700+ listings." According to the data published by the VREB, there were 671 home sales in their reporting area, that is more than 140% higher than claimed. Now initially I thought Mr. Fedosenko may have been referring to single family homes with his 300 number. But it turns out that number doesn't match either as there were actually 364 single family homes sold in May 2010.
Mr. Fedosenko also claimed there were 4700+ active listings at that time. While his numbers still don't match May's VREB reported number (just over 4500, it wasn't until the end of June 2010 that listings peaked at 4700), at least they come within 5%, an understandable error.
Mr. Fedosenko's opinion also differs from the one given by his real estate association's current president, Randi Masters, who noted that current sales volumes "reflect a return to these historically average levels compared to the significantly higher levels seen between 2001 and 2007 when we had a very active market." Masters suggests the market is now balanced, Fedosenko claims "Hundreds of foreclosures [are] coming, about 75% of the home owners could not qualify to buy their own houses (especially with suite)."
Mr. Fedosenko also makes incorrect claims regarding suite vacancy rates. He writes: "Please note that there is a zero vacancy for suite rentals right now in this area." CMHC does not track secondary suite rental vacancy rates. However, their reported vacancy rates for the Victoria area show an over 100% increase in the amount of vacant units, which by the end of 2009 was 1.4%, after several previous years at approximately 0.5%. While we don't know actual numbers, it stands to reason that secondary suite rentals would have followed a similar trend.
I understand Mr. Fedosenkos' concern for home owners, the local real estate market and the impacts valuation changes will have on the economy. I've been writing on this very subject, much to the chagrin of many local real estate industry actors, for several years now. I am deeply troubled by the extent to which certain actors will go to maintain the unsustainable market status quo and do further damage to the financial well being of Victoria area families. The writing was on the wall years ago; all you had to do was look to see it. The current government chose the wrong policy options in 2006/2007 and extended mortgage insurance to people who would otherwise not be able to over-extend themselves because the banks would not lend to them.
This is Canada's version of a sub-prime mortgage crisis. Any attempts to prolong the real estate market at current price levels will only deepen the impact of an unavoidable market correction. We should have learned from the experience of our American cousins. The current government allowed similar activities to occur in our mortgage and real estate markets that will have profound financial consequences for Canadian households and the broader Canadian economy. We need only look south of the border again now to learn a new lesson: four years after their market began its much needed correction, no government intervention has been effective in preventing catastrophic financial losses for banks or homeowners; instead, government actions simply "doubled down" on the debt loads and will lead to higher taxes and restricted economic growth over the long term further hurting households and the broader economy.
I implore you not to encourage further exposure to the grave financial risks inherent in the Canadian real estate market for either the Canadian government or Victoria and area households through excessive and unsustainable debt. If you feel compelled to further investigate real estate related issues, I encourage you to read up on the Competition Bureau's upcoming tribunal challenge against some of the Canadian Real Estate Associations' business practices that they (Competition Bureau) have deemed anti-competitive.
House Hunt Victoria
To the readers: if you are as concerned as I am in regards to this issue, please feel free to cut and paste my letter above or write your own letters to your local Member of Parliament. Here's their contact info:
Esquimalt - Jdf Hon Keith Martin
666 Granderson Rd
Victoria, BC V9B 2R8
Victoria Denise Savoie
970 Blanshard St
Victoria BC V8V 2H3
Saanich – Gulf Islands Hon Gary Lunn
9843 Second St
Sidney, BC V8L 3C7