April 19th effect on presales

Well, April 19th is here and as most of you already know that means the new CMHC mortgage rules are now in effect and we’re about to see how fragile the Vancouver real estate market is at this price level.

We’ve talked a lot around here about the new rules and how they’ll affect interest rate approvals and how suite income is calculated, but there’s one aspect of the new rules that I haven’t seen anyone here mention until now. Paulb points out this lawyers bulletin that addresses the potential effect these new rules will have on presales. This is well worth the read, and the HST will only magnify these effects.

They point out some basic math in that PDF – a presales buyer of a $500k condo will now have to come up with an extra $30k in cash at closing to bridge the gap between what lenders will now finance. With a 15% market drop (remember a year ago?) that becomes an extra $93,000 in cash the buyer will have to come up with to bridge the gap.

It’s starting to look like the Vancouver presales condo is about to turn from moneymaker to albatross. We got a preview of that during the last minicrash when developers started suing buyers who tried to get out of their contracts. We may see a return to the bad old days sooner rather than later, particularly for those investors who rely on faith as the largest component of their investment strategy.

It also looks like today will coincidentally be the day we get our 16,000th place put up for sale.

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A significant portion of what you pay for a condo is the land value– if that portion of the price drops (ie, if land values drop), then a developer can buy cheaper land and build developments with a lower purchase price.

You have the causality backward – land prices are determined by what builders are willing to pay, which in turn is determined by buyers of the condos (and correspondingly SFH) are willing to pay.

Land prices are high because people are willing to pay ridiculous prices for SFH and condos. Not the other way around.



BoC has dropped its conditional commitment to leave rates low until June 1, 2010.

In plainer language, the bond markets have told the BoC to get serious about inflation or else. The bond markets now control the qualifications for all mortgage borrowers, whether for fixed or floating rates, as those taking the latter must qualify under for former.



On the topic of new condo construction: the last time the condo construction market faltered, in the very late 1990s, units under construction dropped way down, until around 2001, when people started buying again.

Developers don't need prices to be in the stratosphere in order to build a profitable development, but they do need people who are willing to buy. A significant portion of what you pay for a condo is the land value– if that portion of the price drops (ie, if land values drop), then a developer can buy cheaper land and build developments with a lower purchase price.


BoC has dropped its conditional commitment to leave rates low until June 1, 2010. Sets things up for an early rise. http://www.rttnews.com/Content/CanadianNews.aspx?… I just wanted to recap The Current episode. Some of Danielle Park's points were: 1) Interest rates are heading up; 2) Canadian Household debt is now 149% and heading higher; 3) Typically during recession people pay down debt, we've done the opposite in Canada; 4) Prices are at record level of unaffordability, prices 200% higher, income 13% higher; 5) 6-7% of buyers are precariously positioned, more than US pre-bust; 6) This will not end well. Klump's points: 1) Rates not going up too much in short term (he thinks 1% by end of 2010 and 2% by this time next year); 2) No significant drop in price as it will be a "demand driven price decrease"; 3) Prices… Read more »



: you allude to a potential stagnation in the market along the lines of prices are sticky going down

Let me put this more concisely.

A house cannot sell for more than someone is able and willing to pay for it. If a year from now the highest price that someone is able and willing to pay for a given house is 20% less than today, prices must go down 20% from today. Regardless of what the sellers want or the sellers do. Because buyers always determine what a house can sell for, not sellers.


Yeay, 16,000!

[…] Forum « April 19th effect on presales […]


@vanhattan: you allude to a potential stagnation in the market along the lines of prices are sticky going down, which is possible, but like many other you are already forgetting what happened in the most recent correction of 2008. Prices started going down fairly sharply starting in spring 2008, pre-crises.

So, it's hard to understand your conclusion when affordability is being stretched near peaks and the economy as a whole is much weaker in an environment of rate hikes from historic lows. If it came crashing down quick under relatively better economic conditions, a more plausible conclusion would be that it will be at least as fast to come down this time around … further, I'll also mention that supply is piling up faster and higher than 2008.



Not only is Fort St. John closer to just about every place in Alberta than it is to Vancouver, it's even closer to Saskatoon.


Site C dam project "The [Site C dam project] project is expected to generate 7,000 direct jobs and about 28,000 indirect jobs during its construction."

See, the job picture will improve drastically in BC as this mega project creates employment. These rich construction wages will allow Vancouver households to maintain current mortgages and allow more FTBs entry to Vancouver's hotly desirable RE market.

Oh wait. The project is in Fort St. John. Oh. How much of a commute is that? Is it closer to Langley? or to Richmond?

Read more: http://www.cbc.ca/canada/british-columbia/story/2


Mar 1, 2010 = 12255 Mar 2, 2010 = 12324 Mar 3, 2010 = 12459 Mar 4, 2010 = 12670 Mar 5, 2010 = 12775 Mar 8, 2010 = 13019 Mar 9, 2010 = 13244 Mar 10, 2010 = 13439 Mar 11, 2010 = 13551 Mar 12, 2010 = 13609 Mar 15, 2010 = 13755 Mar 16, 2010 = 13779 Mar 17, 2010 = 13870 Mar 18, 2010 = 14042 Mar 19, 2010 = 14103 Mar 22,2010 = 14258 Mar 23, 2010 = 14312 Mar 24, 2010 = 14322 Mar 25, 2010 = 14446 Mar 26, 2010 = 14558 Mar 29, 2010 = 14635 Mar 30, 2010 = 14721 Mar 31, 2010 = 14679 Apr 1, 2010 = 14,667 Apr 6, 2010 = 14,832 Apr 7, 2010 = 14,915 Apr 8, 2010 = 15,221 Apr 9, 2010 = 15,399 Apr… Read more »


Well, you can't steal a march on Garth Turners blog tody, as usual he's right on the money. The timing of a macro is hard to pin down and market cycles, especially those held up by a sleazy government incentive program can have a way of deceiving the impatient and the young. But macro trends never lie and always come around, ain't never been one fail. My antique crystal balls are telling me that we're in for a nice ride. It is not only in Canada that rates are rising, they are in China as well. A 10% drop in prices will wipe out 90% of the specuvetors. There an old saying in the RE trade "First and fastest , last and least." meaning that if you take the urban center as the 'epicenter' of a market you have the… Read more »


@Don Lapre:

Is there any practical way to short the canadian housing market?


Are there any options trading based on the teranet indices?

I don't think so, but even if there were, that is not the same as shorting the market. Index options trading is making a bet with someone about the future direction of the market. IOW you would have to find someone to bet with who thinks the market is going up. With stocks you can do that because the underlying asset is liquid in both the long and short directions so the option can track the asset. With RE you can't. Everyone who would be interested in trading such options in RE would likely be a bear, so there would be no bulls to bet against.


ReductiMat: I agree but the main reason why rents have been so low around town in relation to what housing costs are is due to the constant building that has gone on for the past 10 years. Take the supply away, demand will go up. Rent prices are like everything else, higher demand, higher prices. Of course, it is almost impossible to say with any certainty, what the housing supply actually is because no one has taken the time to make serious efforts at finding out. I agree, if there is an actual huge glut of overbuilding that has occured than you will of course be correct. My own anecdotal evidence is that most of the buildings in DT/FC/WE and CH are mostly full with the exception of the higher priced units >1M. Most people in the rental pool are… Read more »



Vanhattan, people can't get a loan to pay for rent. Unless people start making more money, rent will not go up.

And you needn't worry about vacant rentals. We should have the next ten to fifteen years covered with this recent build-up.


I am a long time reader of this blog but never took the time to post until today. I have never quite understood why so many people get so giddy when the market seems to be headed down? For myself, a homeowner, I am more than happy to see the real estate scene here stablize but to crash? Not sure why so many want it to crash? I have plenty of friends who live in the USA and trust me, the housing market crash has not done any of them any good, realestate owner or renter. All are doing much worse than they were several years ago. Anyways, I think the new mortgage rules are a mixed bag of good and not so good but I really don't think that the unintended consequences of these new rules have been thought… Read more »

Kite towards moon

@Bystander: Thanks but i don't drink.however, you keep your drink and your scores,those are the only few items you will ever take away from this forum.


@Kite towards ground:

No need to be rude, have a drink on me, tonite. There will be plenty of time ahead of us for blood, sweat & tears and maybe something else…

Kite towards moon



Are you even Vancouverites?

there is no mother fucker on earth ever born to put his city in pain,however it's not even 11 o clock yet, so hold on to your breath.



Great, let's drink to it. Cheers!

Don Lapre

Is there any practical way to short the canadian housing market? Are there any options trading based on the teranet indices?


@Bystander: Yes. The bubble popped at precisely 8:01am this morning, when Rob Chipman asked the gimp Aaron to fetch his messages and Aaron said, "But uncle, there aren't any!" The sound of the burst bounced from Hastings and Boundary in a northward direction until it hit Mount Seymour. It reverberated, growing in strenght. Now headed back south, the growing wave of sound rebounded off the 'W' building in gastown, bidding a hasty retreat northward. Growing, ever growing in magnitude. Again North! It was a deafening roar. The gentle forest creatures in the approaches to Grouse looked up from their morning activities to see what was coming. They shuddered as it passed and bounced off the mountain and again headed South. The crescendo was deafening. Off the Shangri-La it went and returned north, quickening and gathering in strength. From there, to… Read more »


Conservatively speaking, lets just say the market only crash by 40%, how many people will be in negative equity?


From Garth Turner at greaterfool.ca:

[regarding the hidden cost of a $600,000 mortgage with a prime VRM]

"At 2.25% (on a 25-year amortization), over five years you will pay $62,076 interest on this mortgage. At 5%, the interest payable mushrooms to $140,450. So, while mortgage rates hike less than 3%, the interest burden soars by 126%, costing an additional $15,674 per year."

Remember that Elvis Costello song '5 Gears In Reverse' ?


@Best place on meth: Did he pee in your coffee?