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March 24th, 2007 at 7:07 pm
Rentah:
I aagree with you on this. People around (even many bearish ones) are deep down very wary of the market. They have seen it resuscitate from apparent decline a few times and do not know when things will turn.
In fact, many younger ones have never even seen the ugly face of a proper and painful market crash. But they do happen and, when they do, they hit really hard.
This boom has been beating any expectation we may have had: in fact, we are the ones who have been wrong for the past years, according to most RE enthusiasts. But things are not what they seem: the housing market is going down, and when it does it will happen fast. The more I read and observe people’s behaviour and the more I am convinced.
One of the main tenets of economists at the University of Chicago was: ‘There’s no such thing as a free lunch’.
It seems to me that the bill is going to arrive soon at our table. The question is: who is going to pay for it?
March 24th, 2007 at 6:35 pm
Regarding the 40 year mortgage:
1. I’m sure David Dodge at the BOC will kick up a stink about this (he did when amortizations were last pushed out, he was peaved that they were essentially adding liquidity over which the BOC had no control).
2. Now I know why the ‘mort’ in mortgage is derived from ‘death’. Many folks will be outlived by their mortgages.
3. This will just be a bit of juice for a possible final blow-off. I’m now more convinced than ever, from all the hard and anecdotal evidence, that we will have a spectacular crash when this turns.
March 24th, 2007 at 4:44 pm
So, I see maybe a short wave of quick sale to the almost bottom followed by pro-longed stagnation.
thnx for the insight, it does seem to be unstable, maybe end up having both higher interest rates and tightened lending standards.
March 24th, 2007 at 3:38 pm
Possibly the final straw before the bust??
Do Canadian banks and lenders these days ever bother to call up any of the 2 credit bureaus anymore? Equifax and Transunion??
Because, just by looking at my recent credit report and FICO scoring table, all these mortgage lending practices so far just don’t make any sense.
Traditionally, US homeownership had hovered around 63%, but it’s rising at an alarming rate. I’m sure we’re not too far behind or pretty close to equal. Just looking over the national distribution of Fico scores for Canada, 75% of the population have pretty decent scores. Only 5% have scores close to 900 and that’s from a range of 300-900. The next 2 scales aren’t too shabby with a maximum of 5% default rate. But that’s close to 60% of the population. Assuming all these folks have gotten homes and are mortgaging or re-mortgaging them to buy more flips, that leaves the riskier borrowers buying our homes now.
To those who doesn’t know what a FICO score is. It is a mathematical formula developed by Fair Isacc & Co (FICO) that can determine roughly the credit risk of an individual. How likely he or she’ll default on a loan. It’s a standard that all lenders use as a gauge. Some lenders do hard or soft probing on your credit history as soon as you even show an intention to apply a loan. And telephone offerings counts as a soft probe interestingly enough.
So your CIBC call and trying to sell you a mortgage offering counts as one! Only Transunion seems to be keeping a track on this. I know of 1 individual that had 6 soft probes done in 1 year. Act of desperation I say?!?
Why am I mentioning this?? It is because, past the 50% of the national population, we are getting into riskier territory my friends. People with 600-650 FICO scores are considered sub-primers. And we do have plenty of them in Canada. Assuming that lenders are trying to push products out to as many borrowers as possible, naturally the next type of buyers will be sub 600 and lower scorers. Tell me that isn’t true, because I know it is.
Just because we Canadians don’t have sub-prime lending does not mean we don’t have a problem.
The problem I see now mirrored what I saw on the dying days of the dot.com bust is an attempt to populate every living being with cheap or free computers so they could get on the net. Their thinking.. More computers = more need of bandwidth. Remember the days that computers were literally given away? Instead, we had a glut of excess tech gear that were sold at fire sale after the bust! Aren’t we seeing that now??!?! I mean, what else is good booming RE business when you are giving homes away almost free! Yeap, just build more and give more away. More homes = more returns to the banks and maintain RE status quo. Isn’t this a sign of that??
The problem is. Homes aren’t free. Loans aren’t free either. But borrowers believe they are or otherwise they won’t sign on the dotted line.
Making 100% of our Canadian population own a home is an ideal, except that’s very unrealistic.
The industry is trying to make the unreal real I suppose.
Now, if the bust does come. I worry about 2 things. Banks probably do ok after this. Employees, however, probably won’t.
Lending practices will be tightened for sure. Keep in mind that, sellers rigged the system to attract the bottom feeders. However, in the down market, lenders will face reality and use every scoring system to weed out the bad apples. Just looking at the national fico distribution chart, only less than 20% of the population would probably qualify for these tighter loan restrictions. Foreigners won’t stay around to face the music or lack of it. So, I see maybe a short wave of quick sale to the almost bottom followed by pro-longed stagnation.
March 24th, 2007 at 2:35 pm
Good analysis “Whybuywhenucanrent”. I get your point – there’s tons of downside. He may not spend the 10k on repairs and upgrades because the place is brand new.
Someone commented that my friend must be earning plenty to afford 2k / month rent. He’s actuallly sharing it with a girlfriend who also earns good money, they probably can afford the place OK
March 24th, 2007 at 2:13 pm
>>>Warren said…
ulsterman:
UPDATE: Since writing this, I mentioned the math to my renting friend and he responded with “That’s not too bad. For only $1000 more / month i can actaully own instead of throwing money away on rent.”< <<
Yup.
And
Shell out $24,000 for a down payment, plus $3000 in closing costs. Subtract $1500 from his net worth every year for lost earnings on the down payment. Add costs of $1000/yr for repairs, $1000/yr for upgrades, if the market holds, have the privilage of subtracting 6% ($30,000) in realty fees when he decides to move.
So, let’s compare.
Current: $24K/yr in rent, $1.5K yr in investment return. Freedom to move with little transaction cost.
Buy, anticipate 5 yr residency:
Lose: $3000 in closing costs
Lose: $7,500 in lost investment income
Lose: $10,000 in interest/fees in excess of rent (less principle paydown)
Lose: $5000: repairs
Lose: $5000: upgrades
Lose: $30,000 realtor commission
Total loss: $60,500
Gain: Mortgage paydown, 500/mo = $30,000
Total Gain: $30,000
And, if the market drops 5%, he’ll lose another $25,000. Drops 20%, he’ll lose $100,000. Gains 5%, he’ll break even. Gains 20%, he’ll be be $75,000 ahead.
Why buy when you can rent?
March 24th, 2007 at 2:00 pm
I work in a mortgage approval centre here in Vancouver for a big bank and can tell you the 40 year amortization has just been launched, and this will include up to 100% percent financing (which is a another new product we have launched recently).
Now this genuinely scares me.
Is it actually possible that as we watch the US market tank due to this same shoddy no-down lending, that Canada’s could soar over the next two years using the same strategy? Could this really catch on and further extend the bubble and our prices? Or will watching how such policies inevitably end … in real time … south of the border restrain Canadian banks from using them? Then again could the short-term gains seduce them?
This is the one and only thing I am concerned about re: the housing bubble. This is the only thing I can think of that will extend the coming decline (slow or fast as it goes). So I see it as a genuine fear. Unless you all tell me otherwise…
March 24th, 2007 at 1:18 pm
I just shot up the year end San Luis Obispo numbers
March 24th, 2007 at 12:47 pm
“Did anyone else catch the news hour final segment on our real estate market last night? They featured a ‘record breaking’ sale on the east side – standard size lot sold for just under 1.2 million – and then talked about the signs of market slowdown, 10k less students in the gvrd, families moving to surrey and the US sub-prime debacle.”
Yes I saw that and there was for the first time a negative tone that indeed things may well start to come back down to earth if families can’t even afford to live in Vancouver. Pastrick the stone face and Muir the clown pumped out the usual “don’t expect double digit growth but do expect single digit” mantra.
The overall feeling to me is we are now at the point where our families cannot affford the city (as if we didn’t know) and how is that a good thing for Vancouver ? Whats a city without kids in the neighborhood ? Surrey may be booming but really now,who wants to live in that shit hole.
March 24th, 2007 at 11:54 am
I don’t want to belittle the housing bubble issue, but as far as the media goes, I think its this week’s Anna Nicole Smith.
Yeah but this corpse is just starting to smell, and it’s not going to be buried for another two years.
March 24th, 2007 at 11:22 am
I’m always amazed at what passes for “news”.
Similarly, I’m always amazed as to how the market responds to “news”, such as NAR proclamations. Bloomberg announces that suddenly everything’s OK when the NAR reports MOM increases (Feb over Jan). But … it’s not over. It’s just begun.
March 24th, 2007 at 11:01 am
reknab, I’m sure you’re right. This is why I’m applying to live in a co-op. Also, I’ll make sure to remove any financial institutions from my mutual funds.
This whole thing is going to get a lot worse before it gets better.
March 24th, 2007 at 10:41 am
I work in a mortgage approval centre here in Vancouver for a big bank and can tell you the 40 year amortization has just been launched, and this will include up to 100% percent financing (which is a another new product we have launched recently).
March 24th, 2007 at 9:39 am
If this link works, it should link to free chocolate at a leaky condo.
March 24th, 2007 at 9:23 am
Did anyone else catch the news hour final segment on our real estate market last night? They featured a ‘record breaking’ sale on the east side – standard size lot sold for just under 1.2 million – and then talked about the signs of market slowdown, 10k less students in the gvrd, families moving to surrey and the US sub-prime debacle.
March 24th, 2007 at 9:16 am
zero-down mortgages create the opposite of ‘affordability’. It just creates a situation where those who have been disciplined and saved a down payment are actually at a disadvantage to those that can’t scrape a few thousand dollars together for the minimum down payment.
If your down payment represents hard work you may not be inclined to piss it away on a speculative investment, whereas if you can get 100% financing then you can live in a tidy 500 square foot box with granite countertops. If the market tanks or you lose your job and get foreclosed on what have you lost?
March 24th, 2007 at 8:02 am
I think blogs like this are in some Vancouverites future.
March 24th, 2007 at 7:59 am
“You can’t throw a beer can out the window without hitting a reporter writing or talking about the bursting housing bubble.”
I don’t want to belittle the housing bubble issue, but as far as the media goes, I think its this week’s Anna Nicole Smith. When I travel to the US (as I do frequently for work), I’m always amazed at what passes for “news”.
March 24th, 2007 at 7:39 am
Some of us don’t realize just how big a news topic the housing bubble is south of the border. This phrase from iTulip puts it in perspective.
“You can’t throw a beer can out the window without hitting a reporter writing or talking about the bursting housing bubble.”
March 24th, 2007 at 1:03 am
UPDATE: Since writing this, I mentioned the math to my renting friend and he responded with “That’s not too bad. For only $1000 more / month i can actaully own instead of throwing money away on rent.”
Maybe I am not keeping up but even $2k a month seems a bit high for a two bedroom townhouse……Then again, it sounds like the fellow has good income if $3k a month is not that big a deal.
I seem to recall on this or a related blog that one poster recently commented that most people seem to have the intelligence of “squirrels on crack”. There might be something to that.
March 24th, 2007 at 12:55 am
I agree that government carries a large part of the blame for the current bubble. If tax policies discouraged speculation, and the gov’t stopped such idiocies as 100% financing there would be much less fuel for the fire.
But why won’t government act? Because 2/3 of the population, and a larger % of voters, are owners (or should I say have already bought), and it’s in their interest (or so they think) for prices to go as high as possible. Instead governments bring in “affordability” programs which are just supports for high prices.
We have met the enemy and he is us.
March 23rd, 2007 at 10:45 pm
ulsterman:
UPDATE: Since writing this, I mentioned the math to my renting friend and he responded with “That’s not too bad. For only $1000 more / month i can actaully own instead of throwing money away on rent.”
That’s awesome, I hear similar things all the time. There really needs to be some sort of “budgeting in the real world” class in high school. Clearly it would help a lot more people than Chemistry ever did.
March 23rd, 2007 at 10:27 pm
patriotz:
I don’t think either dog or myself were implying that the developers cause the boom. It’s caused by speculation (you’re correct, the buyers) and fuels itself.
But misallocation of resources is one of the results and people in public-sector positions of influence who give in to political (read: business, speculative, for-profit) pressures and facilitate such misallocation, are not without blame.
—-
Great Economist cover. If it was Business Week, I’d fear that it indicated more upside.
March 23rd, 2007 at 9:49 pm
Anyone for a real-estate investment? Friend of mine has just rented a brand new townhouse on East Georgia St right off Commercial.
I found one for sale ($485k) identical to his (in the same development). 2 bd, 3 level, 1100 sqft. MLS # V632221
I figure with 5% down, 5.2% mortgage, tax and fees it will cost about $2900 / month. He’s renting for $2000. There’s an owner banking on capital appreciation!
UPDATE: Since writing this, I mentioned the math to my renting friend and he responded with “That’s not too bad. For only $1000 more / month i can actaully own instead of throwing money away on rent.”
March 23rd, 2007 at 9:40 pm
The UBC developments are on the campus proper, not the Endowment Lands, which are now part of Pacific Spirit Park. People get confused because boundary between the two is not visible (it’s the southern extension of Acadia Road).
The development derby is very familiar to anyone who was around in 1981. It’s the same old, same old. And I think it’s going to have the same old outcome.
The developers are not responsible for the current ridiculous prices. Quite the contrary – the increased supply will eventually crater the market. It’s the buyers who have been responsible for the current runup. As always, everywhere.
And check out the front cover of the latest Economist
March 23rd, 2007 at 7:46 pm
This is happening elsewhere, witness UBC developments encoaching on endowment forest.
This phenomenon needs to be filed under ‘misallocation of resources’, one of the consequences of booms that we have to live with when they’re long gone.
Actually, this is a good move by the park board and UBC board, sell high and buy back low?
Maybe when the real estate crash hard, UBC can buy them back pennies on the dollar and convert them into yet another student residences.
March 23rd, 2007 at 6:38 pm
Great post today (“Housing: Supply Demand Imbalance”) on Calculated Risk (calculatedrisk.blogspot.com) on the mechanisms involved in determining price in a housing market. U.S. oriented, but applicable up here for sure.
March 23rd, 2007 at 6:02 pm
dog: They claim they need the money for some improvements and there have been tons of people interested in buying that land for a long time.
So like a cheap whore they’re going to sell out to the highest bidder.
Or perhaps the developer has family at the board. Who knows.
This is happening elsewhere, witness UBC developments encoaching on endowment forest.
This phenomenon needs to be filed under ‘misallocation of resources’, one of the consequences of booms that we have to live with when they’re long gone.
File next to ‘shoddy construction quality’
March 23rd, 2007 at 4:59 pm
Where will rents go?
Does anyone have a link to a chart showing the rate of new-unit construction to the rate of household formation?
It seems that unless new unit construction exceeds HH formation, rents will stay about where they’re at.
March 23rd, 2007 at 4:42 pm
Today at the office I read the story in the Province about the Parks Board planning to sell some of the forest around Cultus Lake to private investors as building parcels.
They claim they need the money for some improvements and there have been tons of people interested in buying that land for a long time.
So like a cheap whore they’re going to sell out to the highest bidder.
Or perhaps the developer has family at the board. Who knows.
Pathetic.
March 23rd, 2007 at 4:17 pm
Has anybody passed by Vancouver’s leaky 5 star hotel? The Burrard side of the Sutton Place hotel is having some repairs done and what appears to be a rotten exterior is being removed. It’s not on the main tower but the conference wing on the south side of the property. Maybe it’s not actually leaky but it sure looks like the same California stucco many leaky condos had.
March 23rd, 2007 at 4:12 pm
Dog: while I agree with your main point, I’m confident reality will intervene. Vancouver has a long history of irrational exuberance in boom-times, but thats never prevented a crash before.
March 23rd, 2007 at 4:09 pm
Jason: Unreal! That HAS to be a joke. There’s no way anyone would pay that for a small apartment in coquitlam.
March 23rd, 2007 at 2:58 pm
jason: GREAT find, thanks for sharing.
This looks like a classic case of a landlord determining rents by what they need them to be (carrying cost etc) rather than what the market will bear. You can rent entire houses on the westside for $2500-$3000, so good luck to this poor deluded soul.
March 23rd, 2007 at 1:56 pm
This landlord must be dreaming in technicolour…..check it out.
$2000 for a one bedroom in….COQUITLAM!!!!
http://tinyurl.com/25762e
March 23rd, 2007 at 1:33 pm
Bubble anecdotes, ongoing:
Here’s an example at RET of the urgency with which people are sealing deals:
Dream Home
March 23rd, 2007 at 1:20 pm
And that calculator is an interesting link, too. Thanks, millionpitfall.
However, I think RET’s ‘Amadeus the speculator’ presents a logical conundrum that is as hard to operationalize as “How do you solve a problem like Maria?”
March 23rd, 2007 at 11:44 am
Interesting link Rentah, sounds like a job for the probability calculator.
http://tinyurl.com/2ex2qo
March 23rd, 2007 at 11:22 am
Rentah,
In addition to that cash register ringing, I have noticed that the “greed” factor has also set in now and some people are listing their homes for outrageous prices.
A friend showed me a home in South Surrey, not the most upscale area either for 939k 2400 sq. ft on a 5900 sq. ft. lot, no kind of view period. We just killed ourselves laughing as for that kind of dough you certainly could get a much bigger and better and newer house with a view to boot.
March 23rd, 2007 at 11:08 am
Here’s a link to a thread at RET that contains anecdotal information regarding independent developer speculators in the Lower Mainland. Enjoy!
What’s wrong with my calculation?
March 23rd, 2007 at 10:48 am
I posted something along these lines buried in a thread elsewhere, but I’ll throw it in here for our w/end discussion:
In the last two weeks, I have heard from 4 ‘family units’, each of whom own a SFH (3 Westside, 1 Northshore), who are independently considering ‘cashing-out’ simply because the current market valuations of their properties have reached life-changing amounts. Some are considering leaving the city, others renting or scaling-down.
And I said ‘independently’ because it’s not as if this is a close group of friends who have all had the same idea because of discussion, they don’t know each other.
Now, I don’t expect all 4 parties to act on their ideas, but, I don’t know THAT many people, and I suspect that if I know 4 such parties, there must be hundreds of other owners at least considering selling for similar reasons.
This seems to me to be an another important variable in the whole boom/crash equation, as any such action would add supply, perhaps at a high rate.
What is more, there may be a significant number of those planning to realize their paper profits who will only act when they see the market pullback, when they suddenly fear losing what they believe they ‘have’.
As we’ve discussed elsewhere, we know that any significant pullback is highly likely to add supply from speculators who are overextended, cash-flow negative, and completely dependent on price increases to stay in the market. This latter group will definitely be ‘lightening-up’ ‘big-time’ when the market pulls back.
This is the kind of scenario that I think could make the market ripe for a vicious quick selloff (over months).
I’d up to now been anticipating that sleepy ole Vancouver, especially the SFH sector, would see a more leisurely sell-off, over years (which is still perhaps more likely). But hearing of these folks with their fingers hovering over the sell button has opened my eyes to the possibility of something more rapid.
March 23rd, 2007 at 10:42 am
the condo king just put up the sale sign for the tower on kingsway at nanaimo st (the eldorado hotel site). I shook my head when I saw it.
March 23rd, 2007 at 10:36 am
No new FTBs?
Affordability finally exceeded, or so it seems?
Here is e few remedies for that:
-They will build “starter” properties for “starter” buyers that are smaller and smaller and smaller yet.
-They will build them without windows, without kitchens, without washrooms… they’ll introduce common areas for all this and claim this to be an unnecessary luxury anyway.
-They will introduce 40, 50, 100 year mortgages if need be…
-They will sell them to groups of total strangers as shares properties using mixer mortgages…
-Finally they will sell “virtual” properties that don’t exist yet if that ends up to be necessary… after all you don’t really ned a property to sell – all you need is a promise.
Sounds futuristic, unreasonable, almost insane? But wait, aren’t they already doing it all ???
If there are people willing to sink their every penny into this scheme without a second thought there will always be new ways to make it “affordable” for them.
People have long lost the perception of value. Or perhaps they’ve lost their senses. In either case the scary monster will never run out of new victims.
We’d need to turn off our tvs, stop reading lie-ridden newspapers and give our heads a good, long shake before this market changes. All of us.
Is it even possible?
I certainly hope so.
March 23rd, 2007 at 10:27 am
P.S.
The house I mentioned continues to collect dust as it sits up for sale at the ridiculously high price. I’m glad to see, buyers are smarter than the realtors give them credit for.
March 23rd, 2007 at 10:23 am
I found this comment on the Alberta Bubble blog:
garrisonwould said…
“Enlightened, I’ve heard from more than one Realtor/friend (who are disgusted with the RE industry in Calgary right now) that there are groups or networks of Realtors selling to each other to manipulate their numbers.”
**We had a similiar situation happen to us. A realtor was pushing us to purchase another realtors home that was for sale. It was grossly overpriced for the working class neighbourhood it is in. Nothing had ever sold or was ever listed in that price range in that particular neighbourhood. They certainly look after their own, that’s for sure.
March 23rd, 2007 at 9:54 am
Yeah I REFUSE to be priced out. That’s why I’m not buying.
In its latest affordability report, the national realtor noted that first-time buyers are still jumping into the market in the face of double-digit price increases and rising unaffordability, mostly buying condominiums.
Of course they’re still buying. Thats why prices have gone up, but if FTB’s are counting on future increases like we’ve seen thats an expensive gamble.
I’ve seen people claim that the market would be fine even if FTB’s get ‘priced out’, but I don’t see how that could be true. Without increased demand how can prices keep going up?
March 23rd, 2007 at 9:02 am
I loved that flipped house article, it should take away any doubts anyone has about who has been buying in this market. 1/2 of the people knew someone who had flipped a house in BC & a whopping 72% believed this activity to be very profitable. Thats a whole lot of speculatin’ goin’ on.
March 23rd, 2007 at 8:55 am
Every single entity which builds, markets, sells or finances real estate is in it for the money.
They’re not there to make you, a consumer, rich or happy, or to, god forbid, provide you with affordable housing. They don’t care about how this affects the economy or your budget or your childrens’ future. They don’t care how this impacts the enviroment, your neighborhood or the city landscape.
In my neighborhood a city owned property that was home to a daycare, a doctor’s office and a leased church/convention centre got sold to a private developer who is now rushing to squeeze as many condos as he possibly can ont the space available.
All everyone cares about is profit.
They will go to any lenghts to extend this bonanza for as long as possible. They will squeeze the last drop of water from the rock, until there is nothing else left.
They will defy affordability walls over and over again finding new ways to sell more of the shoddy, overpriced and laughably small cubicless that are useless for normal living – but that’s OK, they’re not meant for living – they’re an investment, stupid.
They don’t care about anything but the money they can make here and now, while the going is good. All these “smart” flippers making all this money are merely a by-product of a greater scheme of things.
The thing is, there are many apparent winners in this silly game, but there is only one loser: a regular guy who just wants to buy a house to make it a home and give his family a roof over their head.
I find it sad, really.
March 23rd, 2007 at 8:24 am
I called CIBC on a different issue this week and they tried to sell me on a mortgage offering to give me the 5% down payment.
Is it just me or is the condo market starting to sound like a low budget furniture warehouse ad?
NO MONEY DOWN! DO NOT PAY UNTIL 2008!
March 23rd, 2007 at 8:21 am
Thanks to Cecil, Millionpitfall and MK-Kids for the links!