Buying a house is not an investment

Home owners are stupid

Or at least many of them are. Here's proof (H/T to S2 for the link):

Who needs to save for retirement when your home is the new RRSP?

"House prices will not go up forever," says Mr. Tal... "Home valuations can go down," he cautions.

"If planning is done right, it shouldn't be a large part of your retirement..."

"People are buying houses that are larger than they can afford and larger than they need."

Canadians [have] so much wealth invested in their homes that an increasing number are turning to reverse mortgages to fund retirement.

"Our recent research indicates 77% of senior net worth is in home equity, and 17% view their home as their retirement fund,"

84% of seniors don't want to leave their home.

On a $400,000 house, you could probably get a reverse mortgage of $120,000, at an interest rate of 4.9%. You don't have to make payments, but that debt will grow quickly.

Welcome to Canada, where debt is the new savings and spending is the new investment. For F&%$'s sake people, when are you going to learn that wrapping a car loan into your mortgage or spending 65% of your take home income on shelter does not equal the smart financial planning you think it does?

More must reading (H/T to Reid)

Diane Francis tells it like it is

This article merit's no highlights or editing, re-posted in full:

Ottawa has been creating a housing bubble in Canada with taxpayer money, which is why residential real estate prices rise in defiance of high unemployment and recession.

Ottawa's low interest rate policy and Crown agency Canada Mortgage and Housing Corporation's dramatic increase in mortgage backstopping, for people who put only 5% down, have pushed up activity and prices.

Some, such as Post reader and accountant Derek Bruce, worry that the Tories are allowing CMHC to become like Freddie and Fannie south of the border, a rogue financial institution the size of one of our Big Five commercial banks.

In March, CMHC was allowed to insure up to $600-billion in mortgages, up from $450-billion the year before, a CMHC spokesman said yesterday.

"Last year alone, CHMC did 919,780 deals worth a staggering $148-billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to $600-billion, or about double what it was two years ago," wrote author and former MP Garth Turner.

This is a looming problem that flies in the face of Ottawa's smugness about its superior regulatory regime and Canadian banking conservatism. For starters, CMHC is as big as a bank and not regulated.

It's a mortgage slush fund that distorts the market. It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone. It rewards those willing to speculate with leverage and discriminates against those who are prudent. It's unfair because the Canadian banks charge the same mortgage interest rates to those who put only 5% down with CMHC backing as those with skin in the game and large down payments.

Thus Canada's real estate markets are hitting highs in the middle of the worst recession since the Depression.

"Since CMHC is insuring so many mortgages, the banks have no incentive to test the credit-worthiness of home purchasers. Then the mortgages can be neatly packed into MBS securities and have a CMHC 100% Canadian guarantee on the back of the investments, thus insuring end-investors these papers are insured from loss," Bruce wrote.

Some may argue this is simply another stimulus strategy, but this is cancelled out by the fact that it encourages bad and unfair behaviour and banking practices. It also has serious monetary/currency implications because air will eventually have to be let out of the bubble by imposing higher interest rates. This will mean a higher Canadian dollar.

The question is why should taxpayers be involved in this when it shoots them collectively in the foot? Why shouldn't banks have skin in the game? And homebuyers? If not, why shouldn't they share the upside with taxpayers? This amounts to a subsidy to our highly profitable commercial banks, real estate developers and speculators. The greater good would be served if housing prices fell to where a fair and unfettered market dictates, thus squeezing out real estate inflation and creating sound ownership opportunities.

A similar bubble was attacked by Australia, where interest rates jumped to 3.25% (from 0.5%) and damage, as a result of a higher currency value, resulted.

Clearly, CMHC must be reined in and regulated properly.

Yes, this is a bubble. Yes, it's been fueled and guaranteed by Canadian taxpayer's money. Yes, you should be angry. Yes, when the president of the VREB states he sees no downside risk to Victoria real estate prices and sales volumes he is clearly ignoring the facts.

The Daily on Shaw

Tune into The Daily on Shaw beginning at 11pm tTuesday until 4pm Wednesday afternoon for a chance to see real estate reporting including a blogger's viewpoint for the first time in Victoria. Did an interview via Google Talk this morning, hopefully the message gets across. Let me know if you see it and how you think it turns out please.

Peak real estate

H/T to Tim Ayres for the graphic.

Peak average price for a Victoria single family home was April 2008 at $626,000. In September 2009, average prices hit $619,000. In April 2008, the average mortgage interest rate for a 5 year term was roughly 7% before discounting. In September 2009, the average 5 year term was 5.5% before discounting. Folks, we have a conundrum.

Mortgage rates for 5 year fixed terms are on the rise. Mortgage rates for variables are starting to drop because lenders are discounting them again in order to keep their sales volumes up.

The graph above clearly demonstrates the disconnect between mortgage rates and payments that occurred over the past 5 years because of escalating prices. Is this a permanent disconnect or a bubble signal?

Have we reached peak average prices based on average income affordability? I think we have. I believe that prices corrected between April 2008 and January 2009 because, first, we reached peak price based on affordability, and second, we then had significant supply increases due to weakening demand.

We have no more mortgage wiggle room. Unless the powers that be extend amortization periods again (that ship has sailed IMO), the only affordability room that economically exists is on the price side. From here on in, for every percent that interest rates rise, there will be (the laws of economics demands there must be) a corresponding drop in prices to correct for affordability. Any further increases in average prices will be attributable to a disproportionate number of million dollar plus homes selling month to month (much like we witnessed in September).

The fall trend

Supply and demand ratios in Victoria may be the ultimate indicator of market trends for us watchers. Typically, supply and demand dance in unison throughout the year: spring's foxtrot morphs to the hand jive by the early summer until fall's traditional swing slows into the winter waltz.

But 2008 and 2009 have been anything but typical. After a lacklustre summer and fall of 2008, sales volumes were slow to trot January through March 2009. And then the Bank of Canada got the dance started with party favours not seen for 7 years: ultra-low interest rates.

It's important to provide some historical comparison in order to understand what is happening today. In 2007, between September and December, total listings dropped from just under 3400 to about 2800. In January 2008, total listings began piling up (nearly 2000 more listings than sales over 9 months) into the summer and by September reached nearly 4800, meanwhile sales volumes were plummeting.

Cue 2009, total listings never piled up. For whatever reason, homeowners didn't feel this spring and summer was the time to sell. But buyer's were--and continue to--buy any quality product that comes on the market. Sales to new listings ratios remain tight and total listings have consistently dropped since April, hence the rise in prices. What lies ahead for the remainder of 2009? All signs point to a mirroring of 2007 listings and sales volumes, without the corresponding jump in prices.

To gain further insight, and a from-the-ground industry perspective, I engaged Tim Ayres, Sooke-based REALTOR® in an e-mail question and answer session (answers in italics):

Despite the very high sales volumes, sellers just aren't listing their properties like they did last year. Is this because prospective sellers may be sitting on the sidelines expecting prices to rise again so they'll wait till next year to maximize ROI?

This is a really tough question. I think a lot of it has to do with new construction basically coming to a standstill late last year and early this year. The excess inventory (especially condos/townhouses) seems to have been snapped up with the low interest rates and relatively stable employment in our region. I'm not sure why anyone would be waiting.

If you have a house under $600K in Victoria/Saanich or under $500K in Sooke/west shore, it's selling like hotcakes, and you should definitely strike when the iron is hot. I've got at least three or four buyers I can't find houses for at the moment. Not just first-timers either. I don't think prices will increase too much year over year at the end of it all, especially when you exclude luxury/waterfront properties.

I think that we're reaching that affordability threshold again, when people will start to lose interest, despite the low interest rates. BCREA did a presentation at the board election the other day showing an interesting affordability graph (I will try and find the relevant slide) that would show what I mean.

Typically the fall months have sales declines because of 90 day closings and the holidays, do you see the high volume sales trend continuing through October and November? If so, do you see total listings remaining stable or declining further as we near the end of the year?

My guess is that listings will continue to decline. IMO, if we didn't see listings go up in September, we're not going to see them increase at all this fall. Stay the same or go down.

Obviously low interest rates have brought a lot of buyers into the market. Especially the first timers. Do you see a correlating trend in the move up market? Especially with the older home buyers--the boomers in the last decades of their working lives--are they buying and selling more, less or the same as in previous years?

I really can't comment too much on this one - I haven't been monitoring statistical trends as closely as some. I would guess that with all the equity and real estate market turbulence over the past year that many boomers/near-retirees are staying put until they feel confident about their financial position, especially if the house is paid off. I could be totally out to lunch, though.

Is it safe for me to assume that the largest actor group in the local market then is first time buyers? If that is the case, are sellers selling to buy up in the market or are they selling and leaving town, selling and renting etc?

No, I think there are plenty of upper-end listings selling too, so there must be lots of move-ups too. But I think a large part of the surge is first-time buyers, no doubt. Lots were scared off by prices and rising interest rates, and there is a lot of pent-up demand, and not enough good product out there.

If you look at the bottom end of the market, there are a lot of houses under $450K, but so many of them are junk! They aren't selling. What's selling is the nicer ones that are still reasonably priced - people are willing to pay a little more if they're not getting junky houses. Perhaps this has helped prices appear to have been escalating in that market segment. I have been looking with one couple in the Victoria core area for about 4 months now. You should see the junk that comes on the market and what prices they want. Properties that would have been priced $379K 4-6 months ago are trying for $429K or $439K, it's ridiculous - they won't sell. So naturally, the properly priced homes that are in good shape get snapped up.

I find Tim's responses interesting and appreciate his frankness. His answers confirmed my assumptions moving forward. Until we see sales volumes drop sharply, or listings volumes jump by 25% or so, I don't see any downward price pressure. As long as the sales to new listings ratio stays above 65%, total listing volumes will continue to decline.

September sales...

Continue to buck the 2008 plunging trend. VREB release here. Cue the TC hyper-echo chamber now. BREAKING: COMMENTS ARE ON! COMMENTS ARE ON! (for how long? your guess is as good as mine)

Tim Ayres gives you the spin free stats via Twitter:

Month-end Victoria Real Estate Board stats:
Sales: 776
New listings: 1129
Total active listings: 3419

Last month's numbers:

Total sales: 764
New Listings: 1094
Total Active Listings: 3509

Current ratios:

Sales to new listings ratio: 68%
Sales to active listings ratio: 23%
MOM volume change: +2%
YOY SFH price change: +12%

Who could have seen this coming? (yes that's a big fat tongue in my cheek).