At home in the tulip patch
Don sent in a link to this interesting editorial on Canadian housing bubbles and the CMHC in the Winnipeg Free Press. The author does a good job of touching on the background of bubble mentality, including the classic Dutch tulip bubble. They then talk about the US housing bubble and compare it to the Canadian market.
Millions in the United States are homeless as a result of the subprime mortgage debacle, which had the effect of vastly inflating both the seeming buying power of consumers and seeming value of houses.
In short, Americans were getting credit at rates so low that they could buy way more house than they could afford if credit charges increased, which they did.
We don’t have a subprime problem here, so we won’t have a real-estate bubble, we are told.
In fact, just this week, Bank of Canada officials were assuring everyone that steep increases in house prices are the “natural” consequence of pent up demand during the recent trough, which also had the effect of suppressing prices so that surging prices now appear to be surging faster than they are.
Now, I’m no expert and I’m inclined to believe what the experts tell me.
But I also hear opinions of people in the property racket who aren’t so sure. And their concern is not so much that Winnipeg house prices have climbed 78 per cent in the past four years, as the new reassessment reveals. Or that there are stories about house hunters sleeping in the streets of Vancouver in hopes of snapping up a $1-million house that we would pay no more than $350,000 for.
No, their concern is that low interest rates and long-term amortization periods are making it easy to get into the market — maybe too easy. But more concerning is that all this demand is being insured by the Canadian Mortgage and Housing Corp.
ahh, yes, the good old CMHC. So what could be the problem of the CMHC insuring demand for Canadian houses?
As the financial crisis started to hit in 2008, the federal government increased the ceiling of mortgage insurance CMHC can have outstanding — from $350 billion to $450 billion, and then $600 billion.
The move is widely regarded as a key measure that helped prevent the kind of credit crunch that so hurt the United States. And just about everyone who has commented on the changes, including Liberal finance critic and former bank president John McCallum, are cool with that.
But my sources wonder if CMHC, which insured 920,000 housing units in 2008, 350,000 more than it intended, according to the Globe and Mail, was in a position to ramp up its due diligence as fast as it ramped up its underwriting.
It’s a good question because, if there is a bubble, Canadian taxpayers will be on the hook for all the paper.
The full article can be found here and is a good read.
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January 22nd, 2010 at 5:11 am
@blueskies:
I wish people would stop using the term “subprime” in reference to Canada, period. My aversion to this is based on two reasons:
1. It gives people the impression that the root cause of the US bust was not excessive prices (and by extension that excessive prices alone will not result in a bust in Canada), and that the prices would have been sustainable if lending practices had been different. The US bust would have happened even if every single homeowner had paid cash. The prices were simply not sustainable.
2. There is an organized campaign in the US to blame the bust on supposed government mandated lending to minorities, and “subprime” is used as a code phrase for this.
Using the term “subprime” for Canadian mortgages (other than those actually called “subprime” by lenders such as Xceed), or for US mortgages in any other sense than that used by the US mortgage industry lends credibility to these fallacies IMHO.
It’s all about the prices.
January 22nd, 2010 at 12:27 am
Off topic, thought you might enjoy.
22-year-old, independent gangster arrested on drug, gun charges
http://www.vancouversun.com/ne.....story.html
It’s good to see young people going into business for themselves. Kids, you don’t all need to be a corporate gangster and go to Wall St. Think of the flexible work hours and lifestyle available to a mercenary for hire. You’ll have more time to spend with the family so they’ll visit you in prison. And won’t you feel less guilty not knowing who your victims are?
January 22nd, 2010 at 12:04 am
Dave,
take an average of starts in Vancouver metro for the past 5 years. Then take the total number of net immigrants over the same period. Put the two together. What do you get?
Incidentally, in the same period RE prices exploded. Cannot (repeat: cannot!) be sustained.
January 22nd, 2010 at 12:00 am
@domus: The CMHC and current government policies could be viewed as a kind of predatory lending whereby borrowers are lured with initial low interest rates and end up paying big bucks because they overpaid on the asset and also when rates rise to historical levels. Mind you, Flaerty and Carney have echoed these concerns so I give them that. But it is like a drug dealer telling you that drugs are bad for you after they get you addicted. Too little too late.
January 21st, 2010 at 11:58 pm
I was browsing craigslist and found something interesting.
http://abbotsford.en.craigslis.....49649.html
Looks pretty nice for $1400/mo. Rented by developer. What’s the asking price? Why it’s $539,500.
http://www.idke.vancouver.com/.....e_id=59300
And property taxes? About $3500 per year probably.
http://investbc.gov.bc.ca/Comm.....nityID=493
Now I am no financial genius, but does this even cover the cost of funding? What did this lot cost? How much did it cost to build? Maybe someone can fill in an educated guess. Here it is on a map.
http://maps.google.com/maps?f=.....h&z=15
And who in their right mind would ever “invest” in this? The yield is at best 2%. What about taxes on the sale? HST? Even slightly higher interest rates?
Even if some idiot buys this, the bubble is popping this spring. There is just no way these numbers work or can work without riches falling from the sky. Somebody out there has a balance sheet. It’s game over.
January 21st, 2010 at 11:53 pm
@Dave: 50,000 empty condos would do the trick. You haven’t accounted for current slack in the market.
January 21st, 2010 at 11:14 pm
@Dave: Even though they are strata titled, most of the recently constructed buildings in Yaletown— and many suburban buildings such as the Silhouette in Burnaby— are predominantly occupied by renters— with a 70% renter occupied to 30% owner occupied ratio not uncommon.
I believe that most individuals in the property management industry would describe the market as soft at best.
But you don’t have to take my word for it; just do a little empirical research, and walk around and look at all the “for rent” signs… go talk to the building managers: ask them if they think there will be upward pressure on rents this year?
Actually , the whole year (2009) was, for the most part, soft for the rental market: Two reasons mainly, first time home buyers and the unemployed.
I’m not sure where most of the bulls thought the first time buyers were coming from, but it was renters leaving their $1000 a month suites to purchase equivalent properties for $350,000…we’ll have to wait and see if works out for them.
January 21st, 2010 at 10:59 pm
That looked like a Haiku for a second there ’skies. Makes you wonder what kind of housing haikus the people on here could come up with.
Buying real estate
in the best city on earth
makes Rennie happy.
Distilling wisdom
in the form of Haiku
is a waste of time.
January 21st, 2010 at 9:57 pm
a SFH with a “mortgage helper” suite
would have to be considered “subprime”
if this route is the only way the buyer
can qualify….. made in Canada eh?
January 21st, 2010 at 9:44 pm
I just stumbled across a nice video explanation of critical thinking. I’m sure most of you are here because you already have pretty good critical thinking skills but it’s an interesting explanation anyhow.
Critical Thinking
January 21st, 2010 at 9:35 pm
Yep, I just noticed that, the first report I looked at was a fluff news article that got it wrong.
However, since by your own calculations the province over did the starts by about 15-20,000 houses between 2004 and 2009 I think we’ll be OK if this year is 10,000 short. It still means we’re overbuilding way into the future.
January 21st, 2010 at 9:31 pm
@Drachen:
http://www.bcrea.bc.ca/economi.....recast.pdf
January 21st, 2010 at 9:22 pm
@Dave:
“We had 58,000 new migrants to the Province. The average household is 2.5 people. Housing demand would therefore be around 23,000 units, which means we were short almost 10,000 units for the year.”
Where did you get your stats from? According to the CMHC there were 34,321 starts in 2008 and that number was projected in September to be much higher for 2009. 23,000 units isn’t even close!
Are you sure you’re not comparing the BC migration numbers with the VANCOUVER housing starts? On purpose… Again!
January 21st, 2010 at 9:20 pm
@logic:
“Are you coming on to me?”
Only if you own vancouver real estate.
January 21st, 2010 at 9:18 pm
“Have you ever seen a grown man naked? Do you like to watch movies about gladiators? ”
————-
Are you coming on to me?
January 21st, 2010 at 9:16 pm
It was joke logic, I was cruelly mocking browntown.
Are you a homeowner logic? Have you ever seen a grown man naked? Do you like to watch movies about gladiators?
Did you honestly tell an anonymous person on the internet to “fuck off”?
Thats pretty big talk son. Do you kiss your mom with that mouth? (my moms dead in case you were going that route)
January 21st, 2010 at 9:08 pm
“We shall see, nutslaps. ”
——-
Browntown at work, err bridgeman, or whatever. Differnt name, same level of retardedness.
January 21st, 2010 at 9:07 pm
“ll be a happy ending (i.e. current homeowners). ”
——————-
Well done browntown, you have a new name.
Two words: fuck off.
January 21st, 2010 at 8:35 pm
@dave
“Housing starts for 2009 were estimated at around 14,400 units. I’m not sure how much housing was removed from inventory, but let’s exclude that for now. We had 58,000 new migrants to the Province. The average household is 2.5 people. Housing demand would therefore be around 23,000 units, which means we were short almost 10,000 units for the year.”
Respectfully, I don’t believe the average household for immigrants is 2.5 people. Not only is it impossible (to have half a person living with you) most immigrant households are above the average. Someone has to be above average- and it’s immigrants.
January 21st, 2010 at 8:32 pm
@Drachen
“Hmm, since the actual definition does not need to reference FM&FM to be complete you are wrong.
But now that I think about it, “bridgeman” that’s an odd name, someone who lives near or… under a bridge, are you hinting to everyone that you’re a troll?”
It was a hint, a jumping off point, a clue.
Yes, Drachen, I am a troll who lives under a bridge.
Actually, its a reference to the immigrants who arrived in new york. people sold them the rights to the “brooklyn bridge” giving rise to the popular saying “if you believe that, i have a bridge to sell you”
January 21st, 2010 at 8:24 pm
@Arwen:
Two words: PAID SHILLS
January 21st, 2010 at 8:05 pm
@Arwen:
No, only 700 net rental units in total including all classes of rentals (i.e. condos, houses, basement suites).
Housing starts for 2009 were estimated at around 14,400 units. I’m not sure how much housing was removed from inventory, but let’s exclude that for now. We had 58,000 new migrants to the Province. The average household is 2.5 people. Housing demand would therefore be around 23,000 units, which means we were short almost 10,000 units for the year.
So how is rent going to drop again?
January 21st, 2010 at 7:59 pm
@Bdk toll: Dave this Bdk is trying to corbon himself i think he is real for the words that was mention for him “Bdk Toll”.So never mind.
January 21st, 2010 at 7:56 pm
@Dave:
You’re not serious, are you?
Friggin’ W alone must be at least 100 rental suites if not more… WTF are you talking about?
January 21st, 2010 at 7:51 pm
Dave – only 700 purpose built rentals, yeah? The inventory of total housing was certainly greater than that. I’m living in a house, and paying rent.
January 21st, 2010 at 7:51 pm
@bridgeman:
“How about this: everyone interested spend a few minutes and post what they have found to be the *researched* definition of a subprime mortgage (not what you think it is). Hint: it has to do with conforming and non-conforming loans per Freddie Mac and Fannie Mae.”
Hmm, since the actual definition does not need to reference FM&FM to be complete you are wrong.
But now that I think about it, “bridgeman” that’s an odd name, someone who lives near or… under a bridge, are you hinting to everyone that you’re a troll?
January 21st, 2010 at 7:50 pm
What I don’t really understand, and I’d like to, is why RE bulls come here? I mean, bears – well, we’re all sitting around shaking our heads and pointing at the Emperor’s New Clothes, trying to figure out how long he can stay naked before his butt freezes. (A long time, it turns out.) But this happened on the Housing Bubble Blog in the states, too. There’d be these bulls coming in talking big: why? And where’d they go when the bubble popped?
I mean, if you see an Emperor who has his clothes on, why find a group who thinks he’s naked and hang out there?
I find it strange. I don’t hang out with people or on websites just because I disagree with them.
January 21st, 2010 at 7:48 pm
@domus:
Well our population grew by 40,000 to 50,000 people. Yet, only 700 rental suites were added to our net inventory in 2009. I don’t see rents falling.
January 21st, 2010 at 7:36 pm
For Dave and like-minded RE bulls:
“Rents Fall to 3 1/2 Year Low in Orange County”
http://www.calculatedriskblog......range.html
They must be all moving to beautiful BC for the Olympics?
The Vancouver RE market is going to crash so hard that it will be memorable. People will talk about this crash for decades to follow.
January 21st, 2010 at 7:18 pm
Good work, Patriotz.
January 21st, 2010 at 7:07 pm
If you’re interested in learning about the relationship between the different mortgage categories in the US (or anything else about mortgages) there is no better authority than (the sadly departed) Tanta of Calculated Risk. For example:
http://www.calculatedriskblog......prime.html
Note that although the distinctions are not “sharply clear” as Tanta said, Alt-A and subprime are two different loan categories. But Option-ARM might well be a subclass of Alt-A which is broken out for statistical purposes:
There are plenty more postings to read if you have the time.
January 21st, 2010 at 6:31 pm
@Drachen
“He sees the light! Took you long enough Bridgey. At least you can acknowledge it when you’re wrong, however glancingly.”
Call me Mr. Bridgeman, if you’re nasty.
Not wrong, I was soliciting peoples definition’s of subprime. (read my original posts) Since living through the melt down in the states, it is interesting to see how people here define lending terms in a foreign country.
Namely, I was hoping that people would realize what patriotz would not- that if my income is 55,000 with excellent credit, and I take on a mortgage for 950,000 (which is roughly the avg. gross household income and the average SFH price in Vancouver) then I am a sub prime borrower, by the currently accepted definition in the United States. The quality of a loan is determined by the borrowers ability to pay- so credit score, interest rate, debt, and SIZE of loan relative to income are all taken into consideration.
The reason those standards were thrown out the window is because a secondary market developed to buy sub prime mortgages and because the lending institutions originating the loan no longer held it, they decided to loan to anyone with a pulse, because they assumed, incorrectly, that housing prices would always go up, massive defaults would not happen, and they would be spared any of the fall out if it did. We saw how that story ended.
We will soon see if the same loosening of credit and lending standards in mortgages in Vancouver will have the same outcome as in the US. A lot of people say it will be a happy ending (i.e. current homeowners). We shall see, nutslaps.
January 21st, 2010 at 6:20 pm
“Sessionals make zero money and never secure tenure track positions”
—————–
Untrue. I think the word you is looking for is “very rarely”, which is 1 degree better than never.
January 21st, 2010 at 6:17 pm
Bridgeman,
Somehow you had successfully drag down Fannie Mae and Freddie Mac into the thread co incidentally it proves difference between sub prime or non sub prime countries.
What is difference?
Fannie Mae market value US$1.07
Freddie Mac market value US$1.30
Toronto Dominion BK Ontario C$62.27
Proves that Canadian financial institutions are not just a simple finacial institution they are strong leading institution for this world to learn a lesson because hey “VANCOUVER REAL ESTATE NEVER GOES DOWN”.-Bank of Canada is optimstic.
January 21st, 2010 at 6:16 pm
Dave,
I am a self-made millionaire from the spiderweb industry. Also am a orthodontist and a cable-layer.
We are all “special” on the interwebz.
January 21st, 2010 at 6:10 pm
@Dave:
Well I guess I could consider that flattering in some respects, but it’s way off base.
I have in fact indicated the sector in which I work in this blog, go find it. It’s private sector BTW.
January 21st, 2010 at 6:09 pm
@bridgeman:
“There is no standard definition of subprime”
He sees the light! Took you long enough Bridgey. At least you can acknowledge it when you’re wrong, however glancingly.
January 21st, 2010 at 5:55 pm
I seriously hope he is not a sessional.
Sessionals make zero money and never secure tenure track positions. If he is a sessional, he can talk till he is blue in the face but he will never be able to afford ANYTHING in Vancouver.
January 21st, 2010 at 5:45 pm
@dave
I don’t know, he doesn’t strike me as particularly bright.
January 21st, 2010 at 5:43 pm
55
Dave,
I certainly hope neither a master’s or PhD student refers to themselves as “professor.”
At best, I suspect he is a disgruntled sessional who has too much time on his hands and too much insecurity to move on from insulting anonymous bloggers.
January 21st, 2010 at 5:40 pm
“You are assuming that the only two categories of US mortgages are prime and subprime and that distinction is based on fundamental lending risk.”
It is. One bank’s Alt-A is another banks subprime. A mortgage loan that would have been considered Alt-A at Citi would have most decidedly been subprime at ING Direct America (and probably would not have been made- they had 100 total, not a typo, 100 total mortgage foreclosures in all of 2008)
There is no standard definition of subprime, which is a euphemism for junk on the Street. (like a high yield bond is a euphemism for a junk bond) Each lending institution has different standards on who makes the cutoff for subprime and prime, and who gets the better interest rate. Traditionally, people have looked to Fannie Mae and Freddie Mac for what is considered a prime mortgage, until the government (Clinton Administration- I’m a registered democrat but lord did they screw that pooch) had them ease lending standards.
Based on current, more prudent lending standards in the US, adjusted back to the historic lending guidelines put in place after the great depression, most mortgages issued in vancouver in the last few years would be considered sub prime.
It is commonly understood in the
January 21st, 2010 at 5:30 pm
@bridgeman:
I made the ‘accusation’ a couple months ago. A number of posters have tried to figure out my identify, so I thought I would reciprocate. I believe that I have a good sense of intuition and that was my best guess. I think he’s in research or academia and lives somewhere near SFU. He probably isn’t actually a tenured prof., but he fits somewhere in the picture (e.g. Master’s student). I could be wrong though.
My guess is that Patriotz is a high school teacher (commerce?).
January 21st, 2010 at 5:26 pm
i need not explain as the moon is made of cheese
January 21st, 2010 at 5:26 pm
@Anonymous:
“I’m even nice to idiots who don’t get it into their heads that they’re NOT geniuses”
Removing the double negative you get:
“I’m even nice to idiots who get it into their heads that they’re geniuses”
Doesn’t that seem contrary to the context of Drachen’s post? That being that he tolerates idiots that don’t put on airs but not idiots that get all uppity. I think he had it right the first time.
January 21st, 2010 at 5:25 pm
45
Sure, but I don’t jump down other’s throats when they make them, as you have frequently done. And yes I can find posts if you say otherwise.
As Dave said, you got called out. View it as a humbling mistake and think twice about commenting on other’s grammar or slinging insults about other’s intelligence.
January 21st, 2010 at 5:22 pm
“@bridgeman:
“…if you could a chimp how to originate a mortgage…”
You lost me. Wanna try that one again?”
Not really.