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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April 20th, 2010 at 7:11 am
@M-:
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.
April 20th, 2010 at 7:06 am
@Vansanity_:
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.
April 20th, 2010 at 7:04 am
@vanhattan:
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.
April 20th, 2010 at 6:52 am
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.....Id=1274391
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 across Canada only 6% too high in his opinion;
4) We’re not in a bubble.
Listening to Klump was painful at times. He sounded nervous, unsure of himself and very defensive. His points were muddled. It almost sounded as if he was trying to convince himself of what he was saying. Danielle Park is always very articulate.
Similar to what we see on this blog, the bearish commentator presents us with stats, facts, numerous similar opinions. The bullish commentator presents opinion and attacks the stats and credibility of the bear.
It was interesting, if you haven’t heard it yet, you should.
April 20th, 2010 at 4:31 am
@IgnoreTrolls:
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.
April 20th, 2010 at 1:30 am
Yeay, 16,000!
Strata: Whose bills are you paying? | Vancouver Condo Info Says:
April 20th, 2010 at 1:24 am
[...] Forum « April 19th effect on presales [...]
April 20th, 2010 at 1:22 am
@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.
April 20th, 2010 at 12:59 am
@BBY:
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.
April 20th, 2010 at 12:33 am
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/briti.....z0lceFHcb0