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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patriotz
10 years ago

@blueskies: a SFH with a “mortgage helper” suite would have to be considered “subprime" 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… Read more »

zug
zug
10 years ago

Off topic, thought you might enjoy.

22-year-old, independent gangster arrested on drug, gun charges

http://www.vancouversun.com/news/year+independent

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?

domus
domus
10 years ago

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.

observer
observer
10 years ago

@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.

rp
rp
10 years ago

I was browsing craigslist and found something interesting. http://abbotsford.en.craigslist.ca/apa/1562349649… Looks pretty nice for $1400/mo. Rented by developer. What's the asking price? Why it's $539,500. http://www.idke.vancouver.com/realestatedisplay?r… And property taxes? About $3500 per year probably. http://investbc.gov.bc.ca/CommunityProfiles/Pages… 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=q&source=s_q&am… 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… Read more »

observer
observer
10 years ago

@Dave: 50,000 empty condos would do the trick. You haven't accounted for current slack in the market.

gvrdpropertyowner
gvrdpropertyowner
10 years ago

@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… Read more »

Drachen
Drachen
10 years ago

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.

🙂 g'night everyone

blueskies
blueskies
10 years ago

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?

Drachen
Drachen
10 years ago

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

Drachen
Drachen
10 years ago

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.

Drachen
Drachen
10 years ago

@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!

bridgeman
bridgeman
10 years ago

@logic:

"Are you coming on to me?"

Only if you own vancouver real estate.

logic
logic
10 years ago

"Have you ever seen a grown man naked? Do you like to watch movies about gladiators? "

————-

Are you coming on to me?

bridgeman
bridgeman
10 years ago

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)

logic
logic
10 years ago

"We shall see, nutslaps. "

——-

Browntown at work, err bridgeman, or whatever. Differnt name, same level of retardedness.

logic
logic
10 years ago

"ll be a happy ending (i.e. current homeowners). "

——————-

Well done browntown, you have a new name.

Two words: fuck off.

bridgeman
bridgeman
10 years ago

"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.

bridgeman
bridgeman
10 years ago

"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"

Anonymous
Anonymous
10 years ago

@Arwen:

Two words: PAID SHILLS

Dave
10 years ago

@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?

Bdk toll
Bdk toll
10 years ago

@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.

Bdk toll
Bdk toll
10 years ago

@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?

Arwen
Arwen
10 years ago

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.