It's something we have some experience with here in Victoria, since it is widely known that our last correction turned out to be this flat landing for the better part of a decade while wages, interest rates, and housing policy caught up to inflated prices.
But how flat do prices have to actually be before we can call them flat? Our resident halibuts have a heavy hand on the straightedge, and tend to call anything within ~10% of peak flat enough to pour the foundations on. I've been measuring decline from peak based on the 3 month smoothed median, by which prices are down about 10% so far.
So how flat was the correction in the 90s really? Well from our current lofty vantage point, it looks pretty flat.
What if we apply our same 3 month median measure?
Clearly detached homes fared the best, with peak drop only 12%, and values mostly hovering at less than 10% under peak for 7 years. Condos got a worse deal. Hit with a double whammy of the correction and the leaky condo scandal, they continued to decline to a peak drop of over 25%. That might kick them out of the flat landing category.
If we're going by percentage corrections, then we're still currently within the realms of a flat landing. Of course in the end it's all about the money. 10% in 1994 was only some $20,000 ($29,000 in today's money), while 10% today is over $55,000. So in percentage terms we might still be in flat landing territory, but in terms of lost dollars, we are already beyond our previous correction.
257 comments:
«Oldest ‹Older 201 – 257 of 257"LOL. Good joke. Just like the policymakers in the US were predicting a soft landing."
I like some of the quotes by 'housing market experts' in the US immediately before the crash.
Alan Reynolds, Senior Fellow, Cato Institute, was quoted in the Washington Times in 2005:
"In short, we are asked to worry about something that has never happened for reasons still to be coherently explained. 'Housing bubble' worrywarts have long been hopelessly confused. It would have been financially foolhardy to listen to them in 2002. It still is."
"This chart does not tell us that this general concept always holds true.
You are confusing facts - like without oxygen you die - with a hypothesis about the future of the real estate market which is not shared by many."
That chart shows examples of 50 different national housing bubbles that corrected in the same manner. I'd say that shows a general concept that always holds true.
You have yet to come up with one (1) country that experienced a bubble price run-up in real estate that did not correct back the same amount.
Even if you find one example of this, it would be one example against my 50. You would lose.
"Our study shows that bubble crashes are not always inevitable in the short run,” write the researchers. “While prices do revert back to market value, this reversion may take decades such that a restoration of balance becomes more of a fading out than a crash."
Show me one example in that chart that proves this. There is no example of a country that experienced a bubble price run-up in real estate that corrected in the slow manner described in your link.
It doesn't work that way. Bubbles always burst and correct relatively quickly.
or they were not bubbles...
James K. Glassman, Senior Fellow, American Enterprise Institute, wrote this gem about the US housing market in May, 2005:
"While such signs of speculation are troubling, there is little solid evidence that a real estate bubble is puffing up... Even in places where prices are soaring, worries of a bubble could be overblown because higher prices appear grounded in good old fundamentals."
Sound familiar?
In December, 2003, Jim Cramer, host of CNBC's "Mad Money" & co-founder, TheStreet.com, had this to say:
"Housing bubble? What housing bubble? The signs are in place for a further run-up in real estate. Breathe easy, mortgage holders. There's still no place like home."
Many American families bought houses at bubble prices after reading stuff like this. Those same American families are currently in financial peril as a result.
How about you read the study yourself? Just google: House Prices and Fundamentals: 355 Years of Evidence
It is a collaboration between Pennsylvania State University,University of Maastricht - Limburg Institute of Financial Economics (LIFE) and Massachusetts Institute of Technology (MIT) - Center for Real Estate. I personally think the paper goes too far back for data, but others here would disagree. What the paper does establish is that your hypothesis is not the gospel.
As for "you win"... grow up buddy. My purpose in being here is twofold:
1. I like real estate;
2. I like to understand my local market well so I am ready when opportunity arises, now or later.
I have no interest in "winning". I have an interest in correct information.
Being connected in the blog to the market is useful as it makes me question my assumptions and evaluate my choices and make sure I'm up to date.
I have no interest in proving you "wrong" because I gain nothing. I do have a third interest in sharing information for those that are looking to buy so they can evaluate their choices.
I do get annoyed with nonsense, but I'm not going to address that further.
I think interest rates will be rising soon as the government tries to stop rising household debt in Canada which is already at a record high.
Extremely unlikely given the direction the economy is heading. As the housing market corrects it will take all remaining pressure off the BoC to raise rates
Speaking of Japan, their housing market peaked back in 1991. This chart shows that Japan's real estate market has been declining since that time.
You're talking about prices in a completely different league than what we have here. At the peak, prices in the core of Tokyo were $20,000 per square foot.
That chart shows examples of 50 different national housing bubbles that corrected in the same manner. I'd say that shows a general concept that always holds true.
Don't trust a chart without seeing the data behind it. Several parts about that chart are highly suspect, such as the extreme volatility in some of the data series (up to 30% YoY change) and the fact that some series start much higher than the supposed "peak" just a couple years before.
I've tried to contact the fellow that wrote that piece, but can't find his email to request the data.
Just google: House Prices and Fundamentals: 355 Years of Evidence
Last few times the long run data from Amsterdam was discussed you dismissed it as totally irrelevant to our market. Now you're citing it as evidence of.. what? A slow decline in house prices?
Well if you look at the price data, you can see multidecade periods of price declines.. How does that fit into your conviction that values will be up in 10 years?
Good paper though. Thanks for posting it.
You are right Leo, which is why I stated that the data goes too far back in my opinion. I don't believe that the markets today will perform like those of 100 years ago in terms of affordability.
That said, this paper demonstrates that not all bubbles burst which is what the emphatic statement was.
My view is that there is a pinhole deflation that can be offset by inflation over time. Perhaps that could happen in a continued low interest rate environment where the economy is stable.
"Well if you look at the price data, you can see multidecade periods of price declines.. How does that fit into your conviction that values will be up in 10 years?"
I don't believe affordability will peform in this manner. I believe you have to look at more recent data for this. Just my opinion and based on my observations in the market.
As for bubbles bursting, it is an example of this topic that is well researched. I haven't looked into it re. dated data vs. crash theory and I probably won't because I'm satisfied I can't predict this and don't trust that anyone else can either.
There are several markets highlighted in that paper that are (or were at publication) behaving the same as Victoria: Paris, Capetown and Amsterdam.
My views are based on my observations of several real estate cycles and current market conditions. I don't believe consumer confidence will crash unless we have a triggering event other than a small decline.
"My views are based on my observations of several real estate cycles and current market conditions. I don't believe consumer confidence will crash unless we have a triggering event other than a small decline."
I agree the economy is in a very fragile state where almost any shocking event can create a housing bubble burst.
A crash in the biggest markets of this country would do the trick. Vanouver houses and Toronto condos.
Pop.
Do you think these two markets are sustainable?
Leo - the reason you cannot find Tyler Durden is that he is a character in the Chuck Palahniuk book and movie Fight Club.
There is speculation that "Tyler Durden" is a pseudonym of Daniel Ivandjiiski, who was penalized for insider trading in New York in September 2008.
This mythical person posts a lot on Zero Hedge.
Leo - the reason you cannot find Tyler Durden is that he is a character in the Chuck Palahniuk book and movie Fight Club.
I meant Thomas Holloway, who wrote the piece for Leith Wheeler. http://leithwheelerblog.sitecm.com/uncategorized/housing-bubble/
Text from our landlord: Hey wondering if you guys want to buy the house, no realtors otherwise i'll keep it as a rental.
I guess our rental must really be making the money for her.
Maybe you've paid of the mortgage and they want to use the cash for something else....
Not sure what brought this to mind, but just before the Wall St. crash of '29, Professor Irving Fisher of Princeton university, stated:
"Stock prices have reached what looks like a permanently high plateau."
Later, on October 21, he stated that the market was "only shaking out the lunatic fringe" and said that prices still had not caught up with their real value and should go much higher.
On Wednesday, October 23, he announced in a banker’s meeting "security values in most instances were not inflated."
I'm not sure why but the Y2K scare popped into my mind this morning. "Journalists had bold headlines, fantastic feature articles, an array of angles to pursue. Newspapers, magazines, flew off the shelves"
"In finance, subprime lending (also referred to as near-prime, non-prime, and second-chance lending) means making loans to people who may have difficulty maintaining the repayment schedule."
This definition, and the text following it, contains no objective metrics. In fact some borrowers in the US were classified as "subprime" based on their race alone.
Of course any borrower at all "may" have difficulty repaying based on various contingencies, and in fact defaults in the US took place over all borrower categories, although those classified as "subprime" did have a higher default rate as a group.
I see things pretty simply - real estate needs to be supported by fundamentals, price to rent, price to income. In the long run, these two measures should conform to long run averages. When these measures of affordability stop making sense (as they haven't for past 8 years) that is when the market can be susceptible to a correction. Do i know when they correct to their long term averages? No. But I also don't know when individual borrowers will be tapped out, when banks/CMHC start to shrink their mortgage exposure, when interest rates will start to rise, when ownership rate has reached the peak, when demographics change. The only thing that i see in favour of real estate now is interest rates and i don't know if it is enough to keep prices inflated. So for me, it's not about if but when. I suspect in 5 years things will look much different...
This definition, and the text following it, contains no objective metrics. In fact some borrowers in the US were classified as "subprime" based on their race alone.
Ben @ theeconomicanalyst has examined this as well, and found that the CMHC will insure some people that would have been classified as subprime in the US.
More precisely. CMHC will insure people with credit scores above 600, but the Federal Reserve Bank of Boston published a paper where they defined subprime as lending to anyone with a score of under 620.
Ben found that Canada and US were in fact different in their lending practices and stated:
"To be fair, other subprime mortgage products offered in the US have no true parallel product here in Canada. The NINJA loan (No Income, No Job, No Asset) was a massive underwriting oversight in the US. It is true that most of the big banks offer 'self employed mortgages' which, as CIBC describes, involves, "A streamlined mortgage approval process which doesn’t require any detailed financial statements or income verification, meaning less paperwork and hassle." However, the credit history has to be excellent...which is a far cry from some of the fraudulent mortgages issued in the US where credit history was not even considered.
The point here is not that Canada has embraced anywhere near the level of subprime lending that took place in the US. It has not."
FICO scores are only one factor. LTV is also in the picture as is term, as is how all these factors are actually applied. Despite the CMHC 600:610 min FICOs, he states that those in the mortgage industry suggest that borrowers with FICO scores below 650 did and do have a difficult time securing a mortgage in Canada.
The bottom line is that Canada does not seem to have or have had anywhere near the situation the states did with "subprime mortgages" - not to mention the non-recourse issue in some states.
http://www.theeconomicanalyst.com/content/subprime-lending-canada-wading-through-rhetoric
The point is that all the comparisons talking about how Canada has no subprime are missing the fact that some of our subprime is hidden by CMHC. How much? Impossible to tell because CMHC doesn't share any of that data.
So we don't have the extent of clearly fraudulent subprime lending, but the exact extent of subprime lending is unknown. You don't have to match the US to have lots of problems.
The big wildcard going forward is interest rates. Because almost everyone in Canada is on 5 year terms or less. In other words, if rates go up, every single person in Canada will have been on what they would call "teaser" rates in the US. That is a risk that the US never had with their 30 year terms.
When I got my first mortgage in 2003 I was self employed and came under a lot if scrutiny. I was also only approved for 200k. I also know friends who had to get co-sgners on their mortgage. If there was mass lax lending going on it didn't last that long and therefore could not be at the same scale as down south.
Whatever credit rating you give the borrower or whatever label you give the mortgage does not affect the ability to repay. That's determined by debt versus income.
As has been extensively documented, this ratio is just as bad or worse as in the US in 2006. Both on an aggregate basis (overall consumer debt versus income) and for individual mortgages.
If there was mass lax lending going on it didn't last that long and therefore could not be at the same scale as down south
The US only had lax lending standards for a short time too. But again, we don't have to match the US to have big problems.
As has been extensively documented, this ratio is just as bad or worse as in the US in 2006. Both on an aggregate basis (overall consumer debt versus income) and for individual mortgages.
Yes but it's not clear that the level that the US reached is some threshold above which prices cannot be sustained. The US crashed at that level, but that doesn't necessarily mean that every country must.
2006-2008
0-Down 40 Year mortgages with interest only payments allowed for 10 years.
This was the height of the absurdity.
But it all started here:
Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
Here's another personal favourite:
2003-2004- CMHC introduces new products including Rental Refinance, Homeownership On-Reserve and Secured Line of Credit. Genworth (GE Capital) follows by introducing Home Equity Line of Credit Mortgage Insurance. In addition, Genworth (GE Capital) mortgage insurance was expanded to cover cash-back loans.
Why is a government institution insuring loans backed by houses?
Does anybody agree with this policy?
Should we be guaranteeing a loan that Martha and Bill are taking out to redo their kitchen? Should we say that Jennifer will definitely pay back her line of credit because she has a bungalow.
But we all know that home owners are better people. More prudent and have more pride. Perhaps we won't have a crash because we can trust these individuals to pay back their continually rising debt. We hope.
How bout Winnipeg? Housing Bubble or What?
"That's determined by debt versus income."
Generally, maybe...
But how bout if you put in a suite and have rental income offset by the tax exemption which means that your taxable income is no higher but you can pay more?
What if because you have a house you can have homestay students?
How bout you don't have TV, go out to eat, or own a car - but have a mortgage?
What if you have no kids vs. kids? What if your kids are older and you have no daycare? Or you do have daycare? Or later have daycare? Or lose your job or get a promotion?
Mortgage qualification time is snapshot in time which can and usually does change. Normally ability to pay improves over time, but not always.
Our calculations of ability to pay debt are generalizations based on the "normal" consumer.
You don't have to be normal (not that I was suggesting anything) and there are many exceptions to the rule.
We talk about low interest rates and how they should "stay low" for the foreseeable future but why are interest rates so low?
Interest rates are low because we are in a structural recession. Low interest rates are an economic instrument the government is using to encourage debt growth. The debt then gets spent in the economy.
That debt has now reached a ceiling. Canadian's are tapped out. We can only create money by trading houses with each other for so long.
You buy a house for half a million dollars. One year later because of "the boom" someone is willing to pay you six hundred thousand.
Where did that extra hundred thousand dollars come from?
That one hundred thousand dollars is now put by the sellers into another house. The bank can now create a HELOC on the newly create amount that is insured by the CMHC.
To add to the mayhem, the government is encouraging it with low interest rates.
That is to say, that one hundred thousand can now back a HELOC.
Now imagine a doubling of house prices nation wide. That would be a lot of money appearing out of thin air. Hopefully it doesn't just disappear.
How bout you don't have TV, go out to eat, or own a car - but have a mortgage?
The discussion is about the average levels of debt to income. I don't see how the exceptions have anything to do with that.
During the US crash there were literally tens of millions of home owners that were perfectly fine throughout the crash, but it doesn't change the price declines, and it doesn't change the fact that there were many that weren't fine, and those are the important ones in any housing downturn.
"There’s every reason to suspect that the DoF will keep applying air brakes until the housing plane has no more lift. Then it becomes a question of whether home prices glide lower or break into an all-out dive (a lower probability)."
Lower probability?
OSFI Considering Mortgage Amortization Changes
If you don't own a TV, go out and eat or own a car - how do those people that sell those services and products pay their mortgages?
And that is what is happening now as people tighten their belts. Unemployment is rising. And vacancy rates are rising as people "double up", leave the city or move back to their parent's home.
Stoneridge subdivision in View Royal is one development where I like to watch the sales activity. This was one of the first new developments where home prices first began rising.
A recent sale in the complex exemplifies what has been happening in the market. The home first sold for $268,524 in May 2002. It has changed hands three times since.
$268,525 May 2002
$384,000 June 2006 up 43%
$482,500 July 2007 up 80%
$450,000 May 2013 up 68% from the original purchase.
The Zero down - 40 year amortization added a hundred thousand dollars to the value of this home in just one year. But that surge in prices is slowing being eroded.
And in my opinion, that erosion in prices can not be reversed until the number of sales increases and inventory is brought down to under 4 months.
That's just not going to happen. There is nothing that even remotely suggests that our local economy will return to the level of activity we had in the last decade.
I really saw the pain this weekend at the markets. People standing in long lines to buy $8.00 loafs of bread and $5 popsicles. Going out to eat at brasserie l'ecole and people again standing in long lines to get it just to eat. Going to leo kottke and so many people suffering in those terrible seats. All those people this morning waiting in line outside Mole as they had to suffer drinking their $4 coffees outside Habit. It really does feel like the next depression out there.
"To explain overconfidence, Kahneman introduces the concept he labels What You See Is All There Is (WYSIATI). This theory states that when the mind makes decisions, it deals primarily with Known Knowns, phenomena it has already observed."
http://en.m.wikipedia.org/wiki/Thinking,_Fast_and_Slow
Just Jack took me out to lunch at the yacht club and you're right, everyone is doing well.
S2
OSFI probes longer-term uninsured mortgages, could act
It really does feel like the next depression out there.
Hard to call 5% unemployment in Victoria a depression.
Exactly " What You See Is All There Is"....
For instance... The moss street market, and downtown lower pandora and all those smiling faces spending their money is somehow equivalent to elitist scum sipping cognac in a private yacht club....
A mortgage over 25 years only benefits the bank...That should be the upper limit IMO. If you can't manage it with 25 years, rent.... You will pay a significant amount more in interest with a marginal decrease in payments. Most of this is front end loaded of course. With my latest mortgage. my bank just started to make it 30 years, without even asking. I said no way. I don't event think it was a $100 difference between the payments but it probably works out to more than 50k extra for the bank. (No math was performed in the making of this statement). I think Mr.F want's to reduce the populations debt load through these restrictions and maintaining a low interest rate. Otherwise he would have just started raising rates.
Thanks Leo, I might pick up his book. Looks like an interesting study of human behaviour.
I find this quote also relevant...
"He explains that humans fail to take into account complexity and that their understanding of the world consists of a small and not necessarily representative set of observations. Furthermore, the mind generally does not account for the role of chance and therefore falsely assumes that a future event will mirror a past event."
I feel like I'm talking to myself out here.... G'night all, seya in the next post.
I really saw the pain this weekend at the markets. People standing in long lines to buy $8.00 loafs of bread and $5 popsicles
Clearly this is the difference between the people who live in Fairfield and the people who live in Central Saanich. At our markets, the bread is $4.50 and the popsicles $2. Did you exaggerate those prices or is it really that much more expensive at the Moss St market?
fa·ce·tious
/fəˈsēSHəs/
Adjective
Treating serious issues with deliberately inappropriate humor; flippant.
A mortgage over 25 years only benefits the bank
I disagree ... sort of.
In responsible hands a longer amortization mortgage can offer benefits.
Example - self employed with good earnings but some "dry spells". The longer amortization period gives you lower payments for when cash is tight but you still have flexibility to double up or pay lump sums.
The problem with that picture is (a) too many people use the longer terms to stretch their budget (b) too many people have good intentions to pay down but just end up paying the minimums.
Monday, May 13, 2013 8:00am
MTD May
2013 2012
Net Unconditional Sales: 235 659
New Listings: 584 1,740
Active Listings: 4,642 5,015
Please Note
Left Column: stats so far this month
Right Column: stats for the entire month from last year
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