Saturday, December 1, 2012

CMHC stops handing out credit like candy

The heyday of free credit is most definitely over.  Over at CanadianMortgageTrends is an article proclaiming that CMHC mortgage volumes are down 37% this quarter.

The cause?  A quadruple punch from a slowing market, new regulations that stripped out some marginal borrowers, limits on refinancing, and the cessation of bulk portfolio insurance.

The bulk insurance story is particularly promising, since banks can no longer pass their risk on conventional mortgages to the taxpayer.  Now that CMHC is bumping against their $600B limit, they have essentially completely shut down the program.  CanadianMortgageTrends reports that the big banks are now operating under a strict $1B/year and small lenders are seeing an 80% reduction in the bulk insurance they have access to.  Now that the political climate has shifted from party to hangover, it is highly unlikely that CMHC's cap will be raised, and they are preparing to live under the new ceiling for the long term.

The bulk insurance racket looked good for CMHC's overall portfolio (average equity 45%), but allowed the lenders to pass off all the risk for minimal cost.  Mortgage with 25% equity but a stretched owner with shaky employment?  Pass it off to the taxpayer in a big bundle.  The "private" insurers only do limited bulk insurance, so this option is now essentially off the table in Canada.

We've seen the effects of these rules here in Victoria with sales down, MOI up, and many deals falling through.  The lower end seems to be hit hardest so far, with sale prices still exploring new lows relative to assessment.


46 comments:

Tim Ayres said...

Both private insurance providers do bulk insurance as well.

From the CMT article you reference:

"With CMHC pulling some bulk insurance cards off the table, Genworth and Canada Guaranty are now the go-to sources for lenders needing additional portfolio insurance.

“Canada Guaranty remains a portfolio insurance provider for its customers and lending partners,” says its CEO Andy Charles.

When allocating bulk insurance to lenders, he adds: “We take an overall relationship approach that is based on both low- and high-ratio business.”

Genworth has a similar approach. It “selectively participates in portfolio insurance under [a] clearly defined risk appetite and disciplined pricing approach.”

Jack and Cate said...

Glean what you want from any news article, reality is setting in for Realtors and leveraged buyers. It going to be a long, wet, cold winter waiting for more disappointment.

Great article as always.

Leo S said...

Whoops. Thanks Tim. I'll fix the article. Sounds like the private insurers aren't in the same league for bulk insurance as CMHC was (they have a limit that they're approaching too) but it does go on.

koozdra said...

Recession time.

Marko said...

A bit off topic...down to 1247 REALTORS® this morning, first time I've ever seen it below 1250...last year this time we were at 1300 REALTORS®.

Renter said...

Man I feel sorry for the guy who closed his downtown (mostly Asian) knickknacks store and went into real estate in 2009 or so. We were in the process of selling our condo because we just couldn't see prices going up any further (ok, so I was off by a year, sue me) and I just couldn't see breaking into real estate as a good career decision at the time. On the other hand, he was probably struggling with his small business too, and he and his wife had just had a baby, so it probably seemed that he had to move into something new. I wonder how he is doing now. Hope they're doing okay.

Leo S said...

They publish the list of active realtors every month?

a simple man said...

House on Mowat just sold for $500 k. Assessed at $605 k.

More examples of decreasing prices.

Watching and waiting said...

would a drop in 53 realtors in a year be considered the natural ebb and flow of the industry? Any numbers for the year prior to last to put this in perspective?

I would also be interested to know the increase in realtors who have moved to a discount brokerage and/or a reduced commission model or to put it bluntly:how many haved moved away from the outdated "full-commission" model?

Marko said...

They publish the list of active realtors every month?

I have active data, on any particular day I can see how many REALTORS® are with the VREB.

Introvert said...

Marko, do you have data on which realtors have the most sales? And are you able to share this information?

Marko said...

would a drop in 53 realtors in a year be considered the natural ebb and flow of the industry? Any numbers for the year prior to last to put this in perspective?

I would also be interested to know the increase in realtors who have moved to a discount brokerage and/or a reduced commission model or to put it bluntly:how many haved moved away from the outdated "full-commission" model?


Don't know about 1st question, I've only been tracking numbers for a year and slowly declining. An older REALTOR® was telling me there were 1500 REALTORS® in 1995 and by 2000 it was only 900 due to the market. I don't think that will happen now as REALTORS® can engage in other jobs/careers while licenced. This wasn't technically allowed back in the 1990s.

Regarding alternative business plans...it is a very slow process. Some discount models have actually lost market share in this market. It will take years for alternative business models to reach critical mass. Right now it is relatively flat from a net perspective...some alternative business models are struggling and some flourishing.

The average Joe or Jane doesn't really understand commissions. Sellers still pay 6%/3% even though there are a variety of models out there. $21,000+HST to sell a $600,000 home does not make any sense to me in this day and age.

For 2012, I am going to pour my marketing efforts into my buyer's cash back business model as it is the easiest concept to explain to the consumer. "Buy a home worth xxx,xxx and I'll cut you a cheque for x,xxx on completion." Even with this concept the large portion of my growth this year was referrals. When people tell their friends, "we bought a house, this guy gave us $7,000 on completion," seems to be a lot more effective than any of my marketing attempts.

Marko said...

Marko, do you have data on which realtors have the most sales? And are you able to share this information?

I do have an idea; however, the board does not publish an official ranking list. VREB publishes top 10%, 20%, and 30%. If a REALTOR® is GOLD MLS® award they are top 10% for that year.

totoro victoria said...

Patriotz, I did not miss your comment on the last set of postings. I notice you ignored all of the other measures I'd take and focussed only on the point dealing with lowering the price while failing to note any of the other points or the word "slight". Confirmation bias?

The truth is, imo, that we can solve most problems with a little creative thinking. Affordability is one measure of desirability but there are a host of others for rental properties just like there are with buying: area, condition, amenities, extras, marketing...

I think that the drop in number of realtors is significant. The market is not experiencing high turnover and it is tougher to be a realtor than in a hot/rising market.

I also think the Mowat sale could be signficant. The assessed value seems high for a 2 bedroom home. I didn't view it so I'm not really informed but $500 000 seems low for the location.

patriotz said...

I notice you ignored all of the other measures I'd take and focussed only on the point dealing with lowering the price while failing to note any of the other points or the word "slight"

I said that all of your points summarized to lower return on investment, which is what you get when you spend more money, put in more unpaid time, or get less rent.

Equating my summary of lower return on investment simply to dropping the price is indicative of your underestimation of costs which you've been displaying here all along.

mrmike said...

Average real estate commission = ?
Please tell me it's not still 6&3 ?
I know Marko does deals...whats the average realtor charging in this climate?

Thanks.

mrmike said...

^ I know from experience Marko is a killer (very good) Realtor!

Just want to know if they're adapting or not?

Marko said...

I don't know what the average gross commission is but for the month of November the cooperating commission of 3.0%100k+1.5%balance or more, 1.75%balance (military transfer), and 3.5%100k+1.25%balance (some court ordered sales) made up more than 98% of cooperating commissions for sold properties. The 2% offering less cooperating commission may have received and accepted a fee agreement further lowering the 2%.

Complete guess on my part but I estimate 90% of sales occur at 6%/3% gross or more. There is probably around 8 to 10% that offer full cooperating commission and take a cut on the listing end. I think this type of business model makes the most sense in this particular market.

It will take an extremely hot market to get the cooperating fee down on average. As for the gross, it will take time, lots of time. Alternative models and Mere Postings will slowly chip away at the gross average. My prediction is that in 10 years 15% of the market will be Mere Postings.

Marko said...

In the US commissions are actually up on average to 5.4% (2011) from 5.0% (2005).

MC said...

Here is a keeper, especially close to Calgary's average house price!

http://listings.myrealpage.com/wps/recip/25999/details-25866054

patriotz said...

In the US commissions are actually up on average to 5.4% (2011) from 5.0% (2005).

Which is what happens if prices fall under any commission regime with a larger % on the base amount and a smaller % on the marginal amount. The average % goes up.

totoro victoria said...

Correct that I don't account for my time and many would. I have nothing on my spreadsheet for this and don't plan to. This could be viewed as underestimating costs.

I have a job and a suite is something on the side. From my perspective, I spend very little time and effort relative to a "real job" on this and what I do spend I enjoy. It is not taking away from free time, but rather an interesting hobby that has huge benefits including early retirement which we will reach in our early forties because of it.

I view it in a similar way I would to the time I spend researching, say, a car, prior to buying it. Or maybe the time I would put into selling something we own. I never account for this time either. I look at it as a way to save on costs overall. I voluntarily and happily do these things - just like I would with cooking.

Cooking at home saves us money over eating out. However; if we started to assign a wage for this it would be cheaper to eat out. I view what we can do outside of our regular jobs to save money or make our living conditions more pleasant not as work, but rather as daily living and sometimes a bonus in dollars saved. Growing a garden could be viewed the same way.

You don't have to agree with me on this. I don't view it as underaccounting for costs in this area and I'm not going to change.

As for upgrading, I do that anyway. I don't spend a lot on it and I track costs. I stop when I'm satisfied things are in good repair and look nice. If a property was not renting I would focus on what was on the list to improve, not just spend more money.

I think it is far more likely that folks without suites might have difficulties in a downturn than folks with one.

Marko I think you are correct that mere postings will rise. This is still so new that most people don't know about it but behaviours will shift based once it becomes more mainstream.

I looked at your website and I like that you offer this option along with the photos and advice. I would use your services and am happy to have the option now to get onto realtor.ca.

As for the market, it seems like prices are starting to fall a bit more.

HachiRoku said...

MC said...

Here is a keeper, especially close to Calgary's average house price!

http://listings.myrealpage.com/wps/recip/25999/details-25866054


She's a real beauty Clark!

Sh*ter was full!

And at $350k what a deal!

Remember folks....it always a good time to buy. ™

Leo S said...

I view it in a similar way I would to the time I spend researching, say, a car, prior to buying it

Exactly. All comes down to what you like to do with your time. If I was accounting for my time researching real estate I'd be cracking six figures. But if I wasn't doing that I'd be reading or watching TV or some other leisure activity, so the time is spent either way.

a simple man said...

That listing in Calgary...why would they even take those pictures, and why would the realtor not invest a couple thousand to clean it up..or advise client, whomever that was? That would be in everyone's interest.

Reminds me of a home I recently saw in oak bay, not as bad, mind you, but all we could think while viewing it was how they could show it in that condition? Invest in a clean up crew if you don't want to do it yourself. I see the listing is still on the market...no surprise. And in a good location.

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

That listing in Calgary...why would they even take those pictures, and why would the realtor not invest a couple thousand to clean it up..or advise client, whomever that was? That would be in everyone's interest.

Should have just taken a picture of the exterior. Who knows if the client has a couple of thousand to clean it up...

MC said...

Marko, could you list reasons of why a Realtor might take on a property like that Calgary one?

I feel like there would be so many cons to it that it would be far from worth it.

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

I would take that property on any day if the listing price is correct. Every property has a buyer. Makes more sense than taking on a pristine home, in the perfect location, at 10% over market value.

Al + TOH said...

wrt the Calgary listing, looks like it is a court ordered sale, and there is NO utilities (water and hydro?) to the house for past FOUR years. So it is not a easy job for any normal cleaning company.

If the owner (if there is one) doesn't care (i.e. not to pay anyone to clean it up), why would anyone else care? The listing agent is smart to put the inside pictures so whoever contacts him for viewing would be serious buyer, and he doesn't need to go inside to do the showings to just on-lookers who are attracted by the price.

koozdra said...

Assessed: $523,200
Listed: $439,900

84% of assessed in Cordova bay. Trying to attract the elusive first time home buyer.

http://www.realtor.ca/propertyDetails.aspx?propertyId=12586756&PidKey=912235139

Marko said...

The listing agent is smart to put the inside pictures so whoever contacts him for viewing would be serious buyer, and he doesn't need to go inside to do the showings to just on-lookers who are attracted by the price.

I think a better approach is doing the exterior picture only and adding in the description..."land value only" or "not for the faith of heart," etc.

a simple man said...

Who here would take that house on?

I would, for the right price.

Leo S said...

Re the calgary place. I see so many foreclosures here listed for wildly inflated prices at first. They list for 2 months at an insane price and then they drop it to a realistic one. Just because that place is listed at $350k doesn't mean it'll sell for anywhere near that.

dasmo said...

No Kidding Leo. that bathroom is minus 50k alone....

patriotz said...

Is this neighbourhood jinxed or something? Another judicial sale.

919 CANNOCK RD SW $342,500

A normal sale another block over:

627 CANTERBURY DR $424,900

Seems to me the house of horrors will not go for asking price.

Marko said...

Monday December 3, 2012 7:50am:

November November
2012 2011
Net Unconditional Sales: 366 482
New Listings: 706 847
Active Listings: 4,488 4,329

Please Note
Left Column: stats for the entire month from this year
Right Column: stats for the entire month from last year

Marko said...

I am seeing a median of SFH median of $545,000 and SFH average of 643,832....please wait for official report later today from VREB to confirm these.

Seth Perry said...

Anyone know what 548 Normandy went for? It's been on the market for a little while with a least one price reduction. I think they were asking $579

548 Normandy Rd

Much appreciated.

Thanks for all the great comments lately. I love this blog.

Marko said...

It went for $556,000.

Leo S said...

Let's wait for the euphoric VREB press release ;) Prices up, market healthy!

SilverSurfer said...

Leo said "Let's wait for the euphoric VREB press release ;) Prices up, market healthy! "

Not too euphoric actually, although eternal hope springs from this 2 liner:

"For buyers, there is a good supply of homes on the market, so while they have time to conduct due diligence they shouldn't expect large reductions on all properties. We are still seeing quick sales and the occasional bidding war on homes that are priced well."

Maybe reality is starting to set in. They are already queuing the dissapointments for the next few months too:

"We are now moving into the slower winter season. Both Canada Mortgage and Housing (CMHC) and Cameron Muir, Chief Economist of BC Real Estate Association, predict the next few months will mirror October and November, followed by slow growth for the balance of 2013,"

Leo S said...

Marko do you have the residential inventory for the month?

Seth Perry said...

Thanks Marko.

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