friday free for all!
Here’s your open topic post for Friday August 17th, 2007.
Some of the stuff thats going on (I’ll add some links later)
-Liquidity crisis
-Interest rate increases
-Affordability limits
-Lots of construction
What are you seeing out there? post your news, links and anecdotes here!
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August 17th, 2007 at 8:13 am
Fed cuts the primary credit rate 50 basis points; the markets rally and then fade: wouldn’t it be amazing to see them end down after the cut?
Exactly how all the credit and stock market action filters down to there being less money available for RE speculation is unimportant. What is important is that it will happen.
Go with the broad brush strokes: Easy credit is toast.
August 17th, 2007 at 8:28 am
For those who are interested:
here is a good, layman’s explanation of how and why things went wrong
August 17th, 2007 at 9:26 am
Mining is a big part of the BC economy – here’s one company taking a hit from the credit pullback.
August 17th, 2007 at 10:07 am
On CTV news yesterday, they showed an interview with an RE agent and the agent stated that there’s still a lot of activity out there, but he is getting a lot of questions and concerns on what’s going on state side. For each listing, there’s maybe 10-20 viewings and according to him, he’s got 10 people with cheque books ready to go, but there’s no supply.
This is of course a very micro view at a specific point in time.
In our area, there’s no listing at all. Anyone that comes up, it’s sold within 2-3 weeks. The longest listing was 3. So, my experience seems to confirm the agent’s. But I shouldn’t think an extrapolation to all areas of greater vancouver is appropriate.
August 17th, 2007 at 10:20 am
IMHO, I don’t believe we’re at crisis level yet. Certainly a liquidity squeeze.
Banks are still granting mortgages and pre-approvals.
This scenario may change. Some analysts are believing that for the US feds to drop rates 0.5%, they’re thinking that a major institution may falter the coming week. BUT, the cut is with the discount rate, not the fed funds rate!
Fed cuts discount rate, signals growth concern
17/08/07
By David Lawder and Jeremy Pelofsky
Warning is that market should not be calmed
Fed-driven rally cools
ROMA LUCIW
Friday, August 17, 2007
August 17th, 2007 at 10:55 am
Most on the streets are quite apathetic about the markets turmoil. Not surprised as the spillover hasn’t really happened on a grand scale:
VanSun article: “Ho Hum”
August 17th, 2007 at 11:38 am
nice ho-hum article akhen, loved this bit:
“It doesn’t affect me in the least,” said Justin Werb, a Vancouver articling student who says he has debt, so doesn’t have investments. “I don’t even understand it, to be honest.”
And this:
In Halifax, Craig Cooper and his wife Karen believe they got into the housing market just in time, having bought in February, locking in a five-year rate on a 40-year mortgage.
August 17th, 2007 at 12:06 pm
Most people don’t care about the market, and just blame whatever the government is in power when they get hit personally. The truth is, there is only so much difference a provincial government can make. Just look at Florida. Same government for the boom and bust.
August 17th, 2007 at 1:26 pm
Countrywide is the company that is rumoured to be going down according to numerous forums and insiders next week. I’m not sure I believe all these rumours but they’re not baseless. I double a 50 basis point cut is going to help them, but might help others and is probably easier than making mass infusions of money in the credit market daily.
August 17th, 2007 at 1:48 pm
Consumer confidence is starting to be significantly affected. Data released today largely missed by most market participants dealt with the large drop in the consumer confidence index tracked by the University of Michigan. Let’s hope that this does not start a new trend down in the CCI … otherwise, the feds move today is more of a knee-jerk reaction that may have little long-term impact.
Sorry for the whole article…can’t link as subscription is needed:
GlobeinvestorGold:
Sentiment on Main Street Swooning
13:35 EST Friday, Aug 17, 2007
Probably the most important piece of economic data this week was totally obliterated on Friday by the Fed’s surprise discount rate cut, which signalled its increasing concern about growth risks to the U.S. economy.
The preliminary consumer confidence index for August from the University of Michigan plunged to 83.3, missing consensus of 88, and down from a final 90.4 for July.
Goldman Sachs writes that the sharp drop to overall confidence is the “first clear indication that Wall Street’s swoon is affecting sentiment on Main Street.â€
All five components of confidence, including current and expected personal finances, economic outlook for next year and five years, and assessments of buying conditions, fell, according to the report.
Deutsche Bank Securities says that had confidence dropped by more than 10 points in the Friday report, it would have become “significantly more bearish on second-half personal consumption.â€
August 17th, 2007 at 2:00 pm
This week’s bailout package for countrywide will have little impact when the default peaks at the last quarter of this year.
Trading in financials are largely muted today. If it marked the end of problems, we’d have seen a more excited move up given the already huge move down.
I understand that one of our own banks is part of the syndicate of 40banks that provided Countrywide with its 11.5 billion credit facility.
In any case, this story is far from over. Before it’s said and done, a lot more bloodletting would have happened!
Good luck to our Vancouver RE speculators!
August 17th, 2007 at 3:50 pm
also read on HBB that WaMu was a possibility for going tits up…
the fat lady is gonna be singing real soon!
August 17th, 2007 at 5:07 pm
locking in a five-year rate on a 40-year mortgage
translation: locked into a 5 yr lease at twice the current rental rate.
August 17th, 2007 at 7:20 pm
OT: I read a comment on Calculated Risk that highlighted that someone had purchased 80m shares or $1.5bn (approx. 40% of the daily volume) in Countywide right at the end of the trading session and at the day’s low.
The next day the discount rate is cut and the stock pops over 20% before retreating.
Insider trading anyone??
August 17th, 2007 at 8:33 pm
Ulsterman said…
“Insider trading anyone??”
Interesting isn’t it. I think the bailout packages is welfare among friends.
Once the BIG private money is out, it will be the small investors and taxpayers that will be left on the hook.(central bankers are playing monopoly with my money- the bastards)
The best place to be is in 90 day treasuries until this thing blows up for good.
They can plug up the holes for quite some time until the real economy is affected.
I also think the Gold Bugs will have a field day.
August 17th, 2007 at 9:16 pm
The truth is, there is only so much difference a provincial government can make. Just look at Florida. Same government for the boom and bust.
Well of course. Because the bust is a direct result of the boom, and government policies were responsible for the boom.
The way to stop housing busts is to stop the booms from happening in the first place. And that means keeping RE prices from detaching from yields (rents).
100% taxation of all capital gains from real estate. I mean 100% taxation, not inclusion. Exempt principal residences. No more housing bubbles. Ever.
And of course no government will ever do this. And if you think this is some sort of anti-capitalist rant, read up on Henry George.
August 17th, 2007 at 10:23 pm
100% taxation of all capital gains from real estate. I mean 100% taxation, not inclusion.
This is exactly what I am afraid of – idiotic policies that treat the symptoms and not the cause.
The only real solution is to abolish the lender of last resort.
August 18th, 2007 at 12:31 am
Come on give me a break.
When could you bears stop being blue.
since 2002 the real estate market here are in a healthy upswing and have no sight of slowing down.The current upswing is well supported by healthy fundamental and Olympic event which would definitely make van to be a world class city.Healthy economic growth will sustain RE market for the yrs to come.
Stop being a bear and buy before you guys are being priced from Van forever.
August 18th, 2007 at 12:36 am
Healthy economic growth will sustain RE market for the yrs to come.
Ever heard of relative value?
August 18th, 2007 at 2:16 am
Here’s another article worth reading on the whole subprime mess. I especially appreciated how Hornbrook equated the liquidity of the suspended BNP Paribas hedge funds to a house that is discovered to be on a toxic waste site.
August 18th, 2007 at 2:48 am
I just heard a statement from Federal FinMin Flaherty that the Canadian economy has struggle fundamentals, and one of them is HOUSEHOLD SAVINGS. WTF? Is he really confusing savings with available home equity? Hardly anyone stashes a part of their pay cheque these days. Or has that suddenly changed?
August 18th, 2007 at 4:51 am
100% taxation of all capital gains from real estate. I mean 100% taxation, not inclusion.
This is exactly what I am afraid of – idiotic policies that treat the symptoms and not the cause.
Au contraire. The cause of RE bubbles is people buying for speculative gains rather than yield. Capture speculative gains and buyers will pay a price based on yield only. QED.
And you can stop being afraid – no government will ever do this, because it would be seen as attacking J6P’s supposed golden goose.
The closest thing to this in the real world is in Hong Kong, where all land is owned by the HK government and is only leased out. Not the same of course but it does capture a big chunk of speculative gains. This has been the policy since the beginning of British rule, and is one of the reasons why HK has such low taxes on personal and business income.
The only real solution is to abolish the lender of last resort.
Well don’t keep us guessing, who might that be? Money Mart?
August 18th, 2007 at 6:33 am
Just started reading “Irrational Exuberance” by Robert Shiller.
What can I say…he is a smart man!
According to the professor the bubble is based on mass psychology. More and more investors buy just because prices are going up and up. That sure sounds dangerous. But what will happen next?
August 18th, 2007 at 8:27 am
The main culprit in all of this is the creative repackaging of bad loans to make them look solid, done in such a way that nobody knows which loans are good and which are bad. Here’s how it works.
Most mutual funds, pension plans etc. that invest are forced to take high security assets rated AAA+. There are a few risk takers out there who will go down to the risky BBB- if they think the return is there.
In 2001 some clever monkeys figured out that if you took thousands of BBB+ loans and sold them by a new formula you could say that 80% are AAA+ and 20% are BBB- simply by saying that the first 20% to default come out of the BBB- share without touching the AAA+ shares.
This was fine as long as Banks behaved as they always had. But now the banks had an incentive to make as many bad loans as they could because not only could they SELL them they had people begging to buy them!
The problem that we’re facing now is that the only information people have about their investment is the rating. Nobody knows if those AAA+ loans they’re holding on to are nearly 100% guaranteed return or a split of junk loans. As housing prices drop and defaults rise there are billions and perhaps trillions of dollars of shaky loans on the market that could become worth half or less of their purchase value.
That and the artificially low interest rates set after the tech bust and 9/11 have created a kind of perfect storm of real estate bubbles.
Psychology is a factor but it’s a symptom, not a cause of bubbles. All bubbles have some core quirk that causes psychology to kick in (like a tulip virus). The market has to rise for a while before people will believe that it will go up forever.
August 18th, 2007 at 8:55 am
In 2001 some clever monkeys figured out that if you took thousands of BBB+ loans and sold them by a new formula you could say that 80% are AAA+ and 20% are BBB- simply by saying that the first 20% to default come out of the BBB- share without touching the AAA+ shares.
And that is the secret ingredient that turned the generally safe and non-volatile into a bubble of dotcom proportions. Made worse by the false security that housing doesn’t go down, and that its industry watchers can’t connect the dots. It is frigging obvious that something is amiss when pool boys and house maids own multiple million dollar properties. But no, RE doesn’t go down, is long term, blah blah blah.
Now back to Canada. As somebody mentioned in another post, there are lots of sources of info on the inner workings of the U.S. mortgage mess. But what about Canada? Mohican says that 100% of a mortgage is covered by CMHC if their requirements are followed. That is nuts. What risks do banks/investors have?
August 18th, 2007 at 9:12 am
I became friends with a lovely real estate agent in our holiday, near Kelowna.
She said that she thinks RE is a scary business to be in at the moment and sometimes wonders if she should not look for another job. She thinks it is all going to end up ugly. Knows too many people who will loose their shirts and are starting to panic.
I loved her honesty.
August 18th, 2007 at 9:26 am
According to the professor the bubble is based on mass psychology.
this is what I believe is pushing and currently holding up the market.
just the “faith” that it will continue.
but after this past week I think there are cracks forming in this monolith.
we have seen some of the things that can go bad and how quickly….
swing wide open the gates of hell indeed.
August 18th, 2007 at 9:46 am
I once heard that CMHC owns whole former one industry towns. Basically, the one employer goes out of business, everyone abandons their unsellable houses, and CMHC somehow ends up with them.
I wonder if the CMHC will end up owning some Whalley condo buildings? Once those places start depreciating, I bet you can’t sell them, and low-end speculators give-up ownership enmasse.
August 18th, 2007 at 9:51 am
CMHC will end up owning some Whalley condo buildings?
CMHC will blow out the individual units at $69,900 after all the dust settles… there will be plenty of takers
August 18th, 2007 at 11:13 am
It’s a miracle! modern economics, (with politics) has discovered what would be the equivalent of time travel.
A stock market bubble blows up – start up the Money Printing Machine.
Housing bubble blows up – start up the Money Printing Machine.
Credit bubble blows up-start up the Money Printing Machine.
Finally, no more recession, inflation, deflation, and I now understand how fine tuning the economy with monetary levers works.
It’s almost too good to be true.
August 18th, 2007 at 11:16 am
the timing might be right for vancouver…tinyurl.com/yfw62g
watching your market you seem to be on the same path as britain
edmonton has busted
calgarys on the verge
vancouver maybe next
who in the hell is this satv fool
dose he have a brain
where is it
maybe you guys need some attitude
here
bad that is
your city is infested with speculating fools
looking for free money
remind them that at any time someone can do this
tinyurl.com/2ytf76
then the fools can take one of these
tinyurl.com/2uqwuu
you guys know i am in calgary
but if no one objects i will post some good links here
squid
August 18th, 2007 at 12:41 pm
100% taxation of all capital gains from real estate. I mean 100% taxation, not inclusion. Exempt principal residences. No more housing bubbles. Ever.
And of course no government will ever do this.
Hey patriotz, in Germany you have to hold property for 10 years before it becomes exempt from capital gains tax. Coincidentally, there has been no housing bubble in Germany….
August 18th, 2007 at 1:10 pm
Tulip Mania -”It’s a miracle! modern economics, (with politics) has discovered what would be the equivalent of time travel.
A stock market bubble blows up – start up the Money Printing Machine.”
I read an article by the CAW economist where he noted that even though our currency appreciation has kicked the heck out of our manufacturing sector, no one was clamouring for the Central bank to jump in then. Guess it depends who is being affected by market vagaries.
August 18th, 2007 at 1:27 pm
“CMHC will blow out the individual units at $69,900 after all the dust settles… there will be plenty of takers”
Do you think 1 bdrm Whalley condo would rent for $700 during an 80s-style recession. IMHO, with 20% down, you would be losing money on top of depreciation if you bought these units at 70K during hard times. Imagine the difficulties with turnover and collecting rent cheques. As for low income buyers, good luck with mortgages in the next few years.
August 18th, 2007 at 2:00 pm
Hey Clarke and Patriotz, are either of you working in the upper echelons of trade unions?
I get that impression because both of you posses the rare combination of being financially literate and competent, and but also hold views which sometimes meshes nicely with labour ideology?
August 18th, 2007 at 3:48 pm
Interesting article about Hong Kong booming, and residents returning home:
The Chois moved back from Vancouver a year after the handover. “We never considered settling. My parents never liked the place,” said Janice Choi, 26, who now works at a Hong Kong investment bank.
“My dad’s life is in Hong Kong,” she said. In Canada, “he had no work, no horse races and no stock markets to watch.”
http://www.msnbc.msn.com/id/19438776/
August 18th, 2007 at 7:04 pm
Boom bust cycles will always be due to our propensity to be greedy (psychological trait). As Hyman Minski appropriate models it, any economic mess corrected encourages further borrowing for investment/speculative purposes. Schiller and Minski is essentially on the same page.
We are on the ponzi stage in the Minski analysis where cash flow is not able to meet interest and financing costs, and that capital growth is relied on to sustain the arrangement.
Now, imagine for a minute that our RE prices is to drop by say even 10%, would you think defaults would suddenly jump?
In the early stage of the cycle where yields is relatively healthy, cash flow is adequate in maintaining servicing costs. Even with a 10% drop, defaults would not increase significantly.
Our RE market is in the same situation as our overall economy which has grown fueled by cheap liquidity.
Canada has had a long period of low interest rates!!!
All I know is that there are significant problems ahead due to tightening liquidity. Even the feds are reluctant in dropping the funds rate. Discount rate is the rate financial institutions lend to each other in the overnight market…not the rate that banks borrow to lend to mom n’ pops, loans, etc. Feds are simply saying, why should the public bail out the market when the market brought on the problem itself! The tightening cycle is needed in the long run to prevent greater problems that inflation can cause!
August 18th, 2007 at 7:23 pm
I wholeheartedly agree that some form of speculative controls need to be in place … whatever form of taxes or policy mechanism.
But however one does it, it only serves to curb speculative ferver, not eliminate it. Even though I don’t think it will work in its entirety, I feel that it’s needed to ensure proper housing for the average family — the same group that accounts for most of the tax revenue in this country.
As much as I believe in free markets, left to its on devices, we will have a nasty society. Those that are familiar with history will know the frequency of depression-like crashes before world war II (I believe or is it WWI). Anyway, government regulation can be credited with the relatively smooth growth of our economy since early 20th century … cash controls through both fiscal and monetary policy.
Unfortunately, politics often motivates regulations in fiscal policy … which will be the same reason why our government will be reluctant to regulate the property market.
Someone mentioned that data shows over 98% of property in BC are actually locally owned. If that’s accurate, we’ve got real problems especially given the affordability index. Who cares about the Olympics. I disagree that fundamentals support a healthy market when average household is spending over 70% of GROSS income on servicing costs!!! At the end of the day, a family has to eat, send their kids to school, get to work, and buy the necessities of life. If they can’t do this, why would they buy a house?
August 18th, 2007 at 7:30 pm
Mass psychology is extremely difficult to change. Anyone that works in mass media will attest to that, and professionals that work in the markets will know that. That’s why trends in the market can continue on its upward trajectory for quite a long time after it passes any fundamental justifications.
You only have to read pass articles published during previous real estate booms to realize how similar the fundamental justifications are for each cycle. Someone had posted a link to an article published during the RE boom cycle in the early 80s…it is absolutely eerie in its similarities to the reasons put forward now!
August 18th, 2007 at 7:34 pm
Sorry for the long posts! Keyboard diarrhea! Once started, the run’s hard to stop…
August 18th, 2007 at 7:46 pm
Mass psychology is extremely difficult to change.
after this weeks credit market problems I’m sure the mood will change, at some point the local lenders will stop funding every thing crossing their desk and increased scrutiny will certainly kill some deals
August 18th, 2007 at 7:58 pm
Mass psychology is extremely difficult to change.
I don’t there are any hard and fast rules. In terms of speculative manias, it is all about feedback loops. Just like a chainletter it has an easy time early on. The advantage it has over a pyramid scheme is that most players are ignorant to let it ride, so as speculators add to their holdings, they raise the value of their earlier holdings.
The psychology can turn for a number reasons, but once it turns, it turns. If nothing else, it will turn because it runs out of fuel.
August 18th, 2007 at 8:09 pm
one thing I have noticed is there is no longer any bubble-denial anywhere… more of a “but will it pop or not” acceptance
August 18th, 2007 at 8:56 pm
” I became friends with a lovely real estate agent in our holiday, near Kelowna. “
Just curious. Was she on vacation in Kelowna or does she work in Kelowna? Or does she work in the lower mainland?
If one wanted to know how many licensed realtors there were in the lower mainland, how would one find out?
August 18th, 2007 at 9:06 pm
Richard,
She lives in Kelowna. She was worried about all the young and not so young people who bought property that they clearly can’t afford and are going to loose so much . I think she was having a moral problem with it all.
I could find out how many RE agents are in that region.
August 18th, 2007 at 9:20 pm
Akhen said…
Most on the streets are quite apathetic about the markets turmoil. Not surprised as the spillover hasn’t really happened on a grand scale:
Since moving back from Europe 10 years ago one thing I noticed is that Canadians don’t really read the papers or even watch news for that matter. Europeans read at least 3 different papers a day while Canadians maybe look at their local paper. My husband who is a Brit was really shocked at the quality of Canadian papers such as Globe & Mail and Poste. I have heard that from other Europeans also. Here in Victoria I have met so many people who only get their news from the Times Colonist. Never even read the nationals.
We are always at the Americans for the lack of knowledge about other countires and their news but I wonder if we are not just as bad and ignorant.
Is this true or am I just cranky?
August 18th, 2007 at 9:28 pm
We are always at the Americans for the lack of knowledge about other countires and their news but I wonder if we are not just as bad and ignorant.
Is this true or am I just cranky?
It is probably not a good idea to stereotype, but if we are talking about the average person on the street, I think it ranks:
1. European
2. Canadian
3. American
in terms of general knowledge.
That has nothing to do with intelligence, but more to do with educational and cultural emphasis. I was astonished with how even teenagers in Europe could competently discuss many world issues. I have run into enough Canadian teens to know that isn’t the case here.
August 18th, 2007 at 9:33 pm
Well we seem to be copying the Americans with our Canadian Idol. One of my co-workers keeps bringing up those shows and I keep reminding him that I avoid watching TeeVee. The insipid radio stations they play at work are driving me crazy. The two daily newspapers in Vancouver are owned by the same company. Yeah, Canadian media is a barren wasteland. Can you hardly blame people for not paying attention?
August 18th, 2007 at 9:44 pm
“I could find out how many RE agents are in that region.”
Thanks, but i don’t want to put you to any trouble. In any case, i was more interested in the lower mainland. It’s just that i heard there were a lot more realtors since the market’s so hot. So I’m assuming there’ll be fewer realtors if things cool down a bit. It would have been interesting to see the numbers or a graph of the realtor population…
August 18th, 2007 at 10:03 pm
Found the excerpt below from an article on today’s NYT website:
http://tinyurl.com/2latz6
What always amazes me is that many of those going bankrupt have reasonable incomes (in this case US$85,000) and paltry mortgages ($180,000) after one refi.
This couple refinances AGAIN because they have amassed $40k in further debt. Then they tell us that they were paying all their “bills” via credit card. WTF? What do they do with that 85k. The mortgage numbers are so paltry vs the Vancouver average that it just makes me laugh.
“For Sue Ellis, 47, a nurse in Northford, Conn., the road to bankruptcy began with a home improvement project six years ago. “If I had it to do over again, I never would have redone my kitchen,†she said.
The first refinancing added $40,000 to her original mortgage of $140,000 on the small ranch house she bought in 1997. She was a single parent and wanted to have a backyard for her two children. The monthly payment on the original mortgage was about $850.
Ms. Ellis has since remarried, and she and her husband, Robert, a salesman at an industrial equipment company, make about $85,000 a year. But the higher mortgage and other bills led to two more refinancings, in 2003 and 2005, each to pay off about $40,000 in credit card debt. “We were using credit cards to pay the bills and then we refinanced to pay off the credit cards,†she said. “It’s a vicious cycle.—
August 18th, 2007 at 10:23 pm
The mortgage numbers are so paltry vs the Vancouver average that it just makes me laugh.
that’s the scary part, we accept this valuation
August 18th, 2007 at 10:53 pm
Freako,
I think my view that the central bank’s decisions on when to intervene in the market may have some ideological motive is valid, and does not merit being written off as being the fevered rantings of a labour activist. Losing thousands of manufacturing jobs is just the free market working, but a liquidity crash-my god, cannot have that…..Some idiot investors might get hurt.
Not that this is relevant but I am not in or affiliated with any union-cause unions are all evil, right freako?
August 18th, 2007 at 11:21 pm
also hold views which sometimes meshes nicely with labour ideology?
Say what? Organized labour has long advocated policies to support artificially high RE prices and overinvestment in RE. Keeps J6P’s paychecks coming and his net worth high. Or so he thinks.
Have you heard one discouraging word from the BC Fed or the CLC about the current RE bubble, for example? No, they are just advocating the usual cocktail of lower interest rates and buyer subsidies.
The real path to long-term prosperity is to encourage investment in productive assets, not half-lived-in houses. As we are soon going to learn in spades.
I do hold some views in common with organized labour on non-RE issues, after all they did want Canada to stay out of the Iraq war while Jim Pattison was on TV telling us we should join in.
August 18th, 2007 at 11:27 pm
Not that this is relevant but I am not in or affiliated with any union-cause unions are all evil, right freako?
Chill comrade! It wasn’t a loaded question or a put down or set up for a ubercapitalist neocon rant.
Say what? Organized labour has long advocated policies to support artificially high RE prices and overinvestment in RE.
Roger that.
August 19th, 2007 at 2:12 am
Fear not people, Ozzie Jurrock has seen the future and it looks bright (from RET):
“NEW THIS MONTH ON Jurock.com/insider
UNBIASED, INDEPENDENT REAL ESTATE ADVICE
FEATURE STORY:
U.S. News Dim? The Blame? Subprime! The Outcome For Canada?
The news out of the U.S. continues to be grim. Yes, the subprime market is crashing. And so it should. The impact will be in our view – primarily financial and not economical … as the economic results of retail sales, GDP and consumer confidence keep showing.”
Gee and I thought Walmart, the auto manufacturers, etc were hurting. Thanks for setting us straight Ozzie.
Oh just one thing – how is “financial” distinct from “economical”? Like it doesn’t matter whether people or firms can borrow money or sell shares?
August 19th, 2007 at 8:27 am
“The real path to long-term prosperity is to encourage investment in productive assets, not half-lived-in houses. As we are soon going to learn in spades.”
Curiously, everybody talks about housing like an investment, and no body actually discusses the fact that it is just shelter, and its actual return is the rent. The only place you hear this is on these blogs. I would suggest we disallow the linkage of the words “house” and
“investment”.
I am not sure it is the mandate of organized labour to protest against the housing bubble, and even if they did so, it is a pretty safe bet the local media or business community would not exactly “encourage” their contribution to the discussion. Ultimately, organized labour wants employment, and high paid employment, so they can have big memberships.
Labour has relatively little influence on where capital chooses to invest itself. I am sure the BC Fed would be just as happy if we were building manufacturing plants or more big infrastructure -possibly moreso, as there would be a lot more residual employment.
August 19th, 2007 at 8:31 am
Ozzie’s article is misleading. The consumer index tracked by the University of Michigan released on Friday (overshadowed by the Fed’s decrease in discount rate) clearly showed a significant drop (from 90.4 to 83.3). The expectation was 88, but it came in at 83.3…
That’s significant. Further, the data is trailing, not forward looking. If the next release shows a further decline, it would strongly point to a new mindset!
Entirely biased! As an objective pofessional, he should have advised “caution”, “not all goes well”.
August 19th, 2007 at 9:01 am
sorry 2005 remind him of buying something.
August 19th, 2007 at 9:36 am
Entirely biased! As an objective pofessional, he should have advised “caution”, “not all goes well”.
All the usual suspects are out in force reassuring their respective flocks, using everything from fuzzy logic to invoking Buffet wisdom. Ozzie doesn’t spin much if at all, so I don’t know what this was all about.
August 19th, 2007 at 9:42 am
satv, do you work night shift? I ask because it seems that you have watched your fair share of soap operas. Or perhaps dayshift with Tivo actino?
August 19th, 2007 at 10:04 am
freako my life is @360 because of slackers.will be back @10pm.
August 19th, 2007 at 5:45 pm
satv:
verbosity is the bane of keyboaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa
August 19th, 2007 at 8:39 pm
Don’t mind satv, he’s just a bitter renter trying to make the bears capitulate so he can have a shot of getting into the market after it turns…
August 19th, 2007 at 8:45 pm
thanx tony,
I am working on next post that will be ready in 10 min.
August 19th, 2007 at 9:04 pm
Curiously, everybody talks about housing like an investment, and no body actually discusses the fact that it is just shelter, and its actual return is the rent
Um, you have just explained why housing is an investment. An investment is an asset with a cash or marketable yield.
As opposed to things like Beanie Babies or rare stamps.
I think you are using the popular, but bogus, definition of “investment” as “an asset with a guaranteed capital gain”. Not only does housing not provide this, no other asset can, either.
August 19th, 2007 at 9:11 pm
lack of services in other cities driving people towards vancouver and that patren will be countinue for years to come.
Residential sales year to date change.
Okanagan+13.7%
Victoria+11.4%
Vancouver Island+9.9%
kootenay+8.4%
year to date,mls residential sales is up 16.6 per cent.home sales climbed 3.6 per cent to 65,103 units.
average price increase 12.5 per cent $434,381.
August 19th, 2007 at 9:20 pm
“But what about Canada? Mohican says that 100% of a mortgage is covered by CMHC if their requirements are followed. That is nuts. What risks do banks/investors have?”
If I’m not mistaken, CMHC insures the part of the mortgage that is considered high ratio. For example, as of right now a purchaser can take out a mortgage for up to 80% of the appraised value of a home without having to purchase high ratio mortgage insurance.
If a person takes out a mortgage for say 90% of the appraised value of a home, they are required to buy the insurance. The insurance would cover only the amount that is above a conventional non-insured mortgage, ie) the extra 10%.
In the event of a default, the bank would still be on the hook for the 80%, but CMHC insurance would pay the bank for the mortgage amount that is above the 80%.
This seems to make the most sense, because no mortgage insurance is required if the mortgage is for 80% or less of the appraised value. Is there anyone out there that can confirm or correct this?
August 19th, 2007 at 9:51 pm
yes casual 100%correct.
August 19th, 2007 at 9:58 pm
casual,
High-ratio mortgage insurance will still be required for mortgages greater than 80 per cent of the home’s value.
Those borrowing 80 to 85 per cent of the purchase price pay a premium of 1.75 per cent of the amount borrowed, rising to 2.0 per cent on 85-90 per cent, 2.75 per cent on 90-95 per cent, 2.9 per cent if they are borrowing with a five-per-cent down payment, and 3.1 per cent if they have no down payment.
While the insurance premium is a one-time charge, it is typically added to the mortgage amount and subject to compounding interest.
August 19th, 2007 at 10:00 pm
If I’m not mistaken, CMHC insures the part of the mortgage that is considered high ratio.
That is what I thought, but Mohican says that it is for the full mortgage. Check his blog, it was in one of the latest posts.
Um, you have just explained why housing is an investment. An investment is an asset with a cash or marketable yield.
Well, it turns out that it doesn’t matter if owners (70% of the market) doesn’t consider it an investment. Prices are set at the margin, and only a small amount of rational actors (investors) are required to keep a market accurately priced.
In the long run of course. In the short run it can be pretty mucked up. One reason is inexperienced and greedy speculators streaming in. The other is the traditional RE investors reluctance to take opportunity cost into account (they don’t sell). One medium term balancing factor is construction. If prices go out of line, the builders will keep building and building and building until we run out of fools or people stop lending them money.
August 20th, 2007 at 12:47 am
“That is what I thought, but Mohican says that it is for the full mortgage. Check his blog, it was in one of the latest posts.”
Mohican may be right about the full mortgage being covered. I checked several info sites as well as CMHC’s own website. They all seem to say pretty much the same thing.
Basically, with a high-ratio mortgage that is insured, the lender is protected against losses arising from borrower default. There was nothing that I could find anywhere that put limits on those loss amounts – ie) being limited to the amount above the conventional mortgage ratio. Here’s a quote from one of the sites.
“CMHC limits the risk to approved lenders by providing mortgage insurance against principal and interest losses arising from mortgage defaults. As a result, CMHC approved lenders feel positive with the availability of mortgage insurance through CMHC. The home purchaser requiring high ratio financing in excess of 80% of the property’s value obtains the mortgage insurance through a selected lender as part of the mortgage arrangement. CMHC’s mortgage loan insurance helps Canadians to realize their dream of owning a home.”
If this is truly the case, then if I was running the mortgage dept. of a bank, I would prefer that all of the mortgages issued be high-ratio mortgages, and subsequently be insured for default risk. As a lender, my butt would be about as completely covered as you can get.
This would have the effect of making high-ratio mortgages less risky for the banks to make than conventional mortgages. I hope that this is not the way mortgage insurance works. Does anyone know for sure?
August 20th, 2007 at 4:17 am
“I think you are using the popular, but bogus, definition of “investment” as “an asset with a guaranteed capital gain”. Not only does housing not provide this, no other asset can, either.”
Thanks for the correction Patriotz. I could not seem to find the proper phrasing for the concept of “investment” as typically used in popular discussions on real estate.
I seem to run into more and more people that have recently bought into the market.
Invariably, every discussion I have with these people involves their belief that this is a great “investment” because RE always goes up. Valuation of this investment in terms of the income stream it generates or the rent expense it offsets, is simply not considered. Makes me wonder how these people would value shares of stock or bonds. Bear in mind I work in the financial services sector, and the people I usually run into who have just bought in are colleagues and associates. Be afraid, very afraid.
August 20th, 2007 at 6:31 am
Satv said,
“Residential sales year to date change.
Okanagan+13.7%”
I don’t know where you’re getting your figures for the Okanagan, Satv, but they don’t match the OMREB July release.
August 20th, 2007 at 6:48 am
Here we go again…up and only up
Canadian home sales forecast lifted
ROMA LUCIW
Globe and Mail Update
August 20, 2007 at 10:26 AM EDT
Even as the U.S. housing market continues to unravel, the Canadian Real Estate Association has hiked its 2007 year-over-year sales growth target from 6.5 per cent to 8.1 per cent.
Canadian home sales are now expected to reach 523,100 units this year, up from a previous target of 514,450 units, and the highest level on record in most provinces, CREA said in a new residential forecast released Monday.
“Activity is forecast to edge slightly lower in 2008, but will reach the second highest annual level on record in almost all provinces,†CREA said. “Prices are forecast to set new records in every province this year and in 2008, but price increases will be smaller next year.â€
August 20th, 2007 at 6:51 am
“I think you are using the popular, but bogus, definition of “investment” as “an asset with a guaranteed capital gain”. Not only does housing not provide this, no other asset can, either.”
I say:
That means you never had an education? And that you’re destined to become a low wage earner for the rest of your natural lives?
Let’s make one thing clear what is an asset. An asset is an entity for generating cash flow, which is the opposite of liability.
We all possess some asset that make us unique. Our brain, for example, is a given asset. It contains knowledge, to allow you and myself to perform admirably in our vocation. Our vocation is what provides us with income, aka cash flow. How do we get that knowledge?!?
By going to school right?
Yeah, but apparently many of you seemed to have forgotten this.
The last time I’ve checked, going to UBC or SFU to earn a degree wasn’t free, nor going to BCIT wasn’t free either. Who pays for this?
When you go to school to learn a new thing, you are inevitably “INVESTING” in the future. And that the new knowledge (aka asset) will help you attain guaranteed higher income than your current cash flow can allow. If you study law, politics, engineering or medicine, your income will undoubtedly be higher than a high school graduate could attain. Knowledge is power and a guaranteed capital gain in the end in the form of wage compensation.
While a car is a liability to us, but it is an asset to a taxi driver or a traveling salesman. Because, they need a car to make a living and produce a guaranteed income. No car, no taxi driver. Get it!?!
A home is also an asset to some people. Home daycare for instance is a good example. Use your home as a daycare center. Not only can you deduct business expenses, and with some creative financial arrangements, you can also deduct interest expenses too and apply that to your mortgage. Happens all the time.
What about home businesses or people who telecommute?
I agree that these days, most homes are bought to generate capital gain yield. This is the attraction. Borrow with low interest to buy asset that could bring in higher yield, but different individuals obviously gain differently depending upon how they use their homes for..
August 20th, 2007 at 7:14 am
If this is truly the case, then if I was running the mortgage dept. of a bank, I would prefer that all of the mortgages issued be high-ratio mortgages, and subsequently be insured for default risk. As a lender, my butt would be about as completely covered as you can get.
I say:
That’s the way banks operate in a deficit mode and loan structure are designed to do what?
“To always protect the lender first”.
You see, banks only have about 5% of cash on hand for depositors. The rest goes to business loans and mortgages. We all know what happened to some of the shady business loans (Enron, Global Crossing and 360 net). They were failures, but still all banks recovered after since. Who suffered? Shareholders of those companies did.
In this round of mortgage mess, banks will not suffer because as long as there is no on mass bank runs, the banks will do just fine as they had always did for centuries. They are protected against any calamities.
The homeowners, however, are going to be suckers in this game.
If you read the CMHC guideline, it mentioned “NOTHING” against protection of loss of build equity in the home for home owners. Your down payment or your payments towards reducing your principle are not protected. If you have 20% built-up equity in a home and the market lost 10%, you would loose 50% of your own equity. Banks loose nothing. You see the beauty of this. You loose, they don’t.
We all know the market could correct back to 1997 levels. That’s not a 10% correction btw.
In the end, most of these suckers will have no choice but to continue mortgaging at a loss, but some will just sell.
August 20th, 2007 at 8:11 am
Alpha_Bear.,
Okanagan Mainline up 13.7%
South Okanagan—-up 11.8%
mls residential price up $446,386 thats 15.2% up yoy.
August 20th, 2007 at 11:45 am
Satv,
According to the OMREB, the YTD residential sales in the Central Okanagan were 1855, while last years residential sales YTD were 1620, for a YTD increase of 14.51%
For the North Okanagan, the residential sales YTD totalled 753, while last years figures YTD were 767, for a DECREASE of 1.83%
I can’t see how you manage to get a 13.7% increase from these figures.
If you add the North Okanagan and Central Okanagan figures together, you’ll wind up with 2608 residential sales YTD, and 2387 residential sales last YTD, for a percentage increase of 9.26%
August 20th, 2007 at 7:41 pm
alpha bear,
sorry thats one sided true numbers don’t look for source.
August 20th, 2007 at 7:52 pm
yeah one thing I can tell you that would be good to guess.
residential sales volume on mls in bc up 44%
residential unit sales up 25%
no more question please you will find out next month.
thanx alpha.I know source are very importent to present solid arguments ,but I am not arguing this is just a little info for us for here.
August 23rd, 2007 at 1:49 pm
casual observer,
if I was running the mortgage dept. of a bank, I would prefer that all of the mortgages issued be high-ratio mortgages, and subsequently be insured for default risk.
During one of my mortgage applications, my broker told me I got a 0.05% reduction in my rate because I was CMHC insured.
I’m surprised these discounts aren’t more common!