Why this is actually irrelevant

Hence why they did it. H/T VG.

CMHC is an arms-length crown corporation. What this means is that they receive no government direction, and they don't, and that they receive little government funding, and they do; so they must be self-serving and self-sufficient, and they are.

I do agree with Mohican over at the Financial Planning Personal Sanity blog, it is nucking futs. But that said, I don't believe this will have any impact whatsoever on the Victoria real estate market. And here is why (Yes, I've purposefully picked the cheapest investment property I can think of):

2-bed 1-bath condo worth $200K with $1200/year property tax and $150/monthly assessment.

With a 0% down mortgage you'd be mortgaging $215K ($15K insurance premium to CMHC) for a monthly mortgage payment of:


Say you're a RE "investor," you take out this mortgage on this dumpy condo, you rent it out for market rates of around $1.25/SF. So you're getting around $1000/month. But you're paying out
$1222 in mortgage, $100 in tax, $175 in MA for $1497 or a $500ish loss every month. Let's say you squeak out a bit more for rent. You won't get $500, maybe $200. That's irrelevant.

The only "investor" for this deal is actually a speculator betting that they'll make their money in inflation and mortgage paydown. CMHC already ate up 7.5% of your inflation (before interest) and considering that condos are overbuilt and already coming down in price (new ones especially) I don't think we'll see too many banks willing to do this deal. So the "investor" will have to go to the alternative market which means they are paying more interest (not to mention that alt-mortgage funds are extremely threadbare with the credit crunch) and their already negative margins just got more negative.

Now this new product may have broader implications in other segments or markets, but in the local Victoria rental pool where rents are barely 60% of carrying costs for the most part, a 100% down mortgage makes no economic sense whatsoever.

Anyone stupid enough to get into this product deserves to lose their shirt when the market corrects. CMHC may get caught holding the bag, but the debtors get taken into bankruptcy first. The premiums that CMHC will charge are designed to make them money. Pure and simple. This is a huge risk that they are aware of; they built that into their business model. In other less-inflated markets, pretty much anywhere east of Manitoba, this product will be a big time money-maker with limited market implications. CMHC is facing increased competition, they got some free advertising today, I doubt if they got much else.

Saturday Open Houses

We went out a house hunting yesterday, more to check out the feel of the market than to actually look for a place. Which is a good thing because we didn't come across too many open houses.

The one that we did come across, at The Amana on North Dairy was good. For two reasons. First it was DEAD in there. And second, I was impressed by the place.

Let's deal with the first issue. When we go out to "buy" anything of value I always subscribe to the Bill Cosby as Dr. Huxtable school of thought on monetary purchases: Always hide the fact you have money. So I go looking like a shrub. Ms. HHV can make a track suit look good on her so it kind of defeats the purpose, but I look like a shrub none-the-less. Why do I do this? I want the salesperson to ignore me until I have a question and I want the price negotiation to seem like I'm stretching all my finances to get into the product. Has this been a good strategy for me? Who knows.

Anyway, the Realtor yesterday, incidentally selling a $400,000K condo, was over-joyed that we walked in his door. He was a good guy. Left us alone, answered our questions, didn't talk too much and asked us the questions he needed to for his marketing--where did you read about the place, the open house etc. I liked him enough that if I was in need of a Realtor to sell my place, I'd interview him.

But he made no attempts at qualifying us as buyers. No, what do you do questions or anything like that. No, who does your financing. It was almost as if two youngish people looking at a $400K place with no potential rental income was normal. And that I find very scary. But we were there 20 minutes of a 2-hour showing and no one else came or went.

The place was actually very nice. It was a 1-bed 2 full bathrooms with a loft master bedroom. So really it was 2-bed 2-bath. For its 1000SF it felt huge. Really high ceilings (14'+), nice layout, skylights, full size appliances including washer and dryer (not stacked). It even came with two parking stalls. It wasn't luxury, like they claim, as I don't consider melamine cabinetry, arborite counter tops and black appliances luxury, but that is irrelevant. Most places don't live up to their luxury billing anyway. So whatever.

It was a nice place. Somewhere we'd be happy and proud to call home. Somewhere where we could live for an extended period of time. But at $400K, which is only about $2500/month mortgage payments, that place would suck up fully 50% of our income to live in. No thanks.

The place was "staged" fairly well. As we were leaving, Realtor says, if you're thinking of making an offer, think about keeping the furniture that's in here, I'm fairly certain the developer doesn't want to move it out. I had a good laugh at that. And not jokingly stated, "Will you take $350 inclusive?" Silence. So we left.

Roger had an interesting comment earlier this week. If the market corrects, will it start with condos? That would seem to make sense to me in that there are more condos being built than houses. So if we are to get some build up of listings, then we should see price reductions there first. And in our experience we are. Tuscany, Richmond Gate, The Julia, The Amana, The Pearl on Hillside, all of these places are in neighbourhoods that we wouldn't mind living in.

But none of these are close to selling out. And the funny thing is it's the most expensive units that are still left. Those units have one target audience: the downsizing boomer. I don't believe the down-sizing boomer is a reality. Many boomers are moving up in the market. Drive up Bear Mt. How many people who don't fit the boomer generation do you know that can afford to buy those $800K monster homes?

The Songhees condos, and others like them around town, are being marketed heavily in Alberta and Ontario as vacation/retirement properties. We think the downsizing boomer isn't looking to live in any one particular town. They may buy a place here for use a few months of the year, but they will likely maintain a property in their "hometown" too. Who knows. But I don't see a condo on Quadra at Hillside as being a product that competes with a condo on Bear Mountain or the Songhees.

Unfortunately people my age do. They think that retirees from Gordon Head will sell their $550K houses and downsize into $250K condos. We think they're dreaming. And it will likely be a nightmare that wakes them up sooner than later.

As a complete anecdote, I spoke with my friend who lives in a great condo on Chatham and Government. I love that unit. She paid $200K 3 years ago. She was shocked to learn a similar unit just sold in her building for $230K. "Is that it?" she said, "I thought this market was supposed to be hot? Shouldn't it be closer to $300K by now? I would barely have made a dime by the time I pay the sales-related costs."