Macleans on the CMHC bubble
Some juicy quotes about the CMHC fueled Canadian housing market in this article over at Macleans. How much longer can this madness go on?
“The CMHC is a driving force in the housing market. But critics warn its policies could fuel a U.S.-style meltdown.”
“CMHC’s balance sheet looks strikingly similar to both Fannie and Freddie”
“CMHC has distorted the housing market by making homes, especially ones that are on the pricier end of the spectrum, more affordable and encouraged a lot of people to get in over their heads.”
The full article is here and is worth the read.
March 23rd, 2011 at 11:39 pm 1
"the CMHC’s board of directors—a board that includes a political consultant, real estate developers, a small-town lawyer and even the owner of a plumbing company—though not one single economist or recognizable financial services professional."
Good article. I found this little tidbit interesting.
This "board" is the cherry on top of the cow pattie that is the CMHC.
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March 24th, 2011 at 12:29 am 2
Macleans editorial staff these days seem like a bunch of cynical Gen Xers, like me. I follow some of their writers on Twitter and they seem to be pretty good at telling it like it is.
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March 24th, 2011 at 1:08 am 3
Here's what I don't get… what exactly precipitated the US crash? And why is it not happening here?
In the US their market tanked after interest rates were already low, but here in Canada prices and sales have remained strong. We're all waiting for interest rates to climb but that didn't happen in the states, so what gives?
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March 24th, 2011 at 1:12 am 4
He's a story to brighten your day…
Met a Kelowna mortgage broker who said that many of her drug dealer clients are being forclosed on. She said even the drug dealers in Ktown are hurting. The strange thing is she thought this was funny becuase they were "DD's" and they deserved it. What she didn't find ironic was that she arranged their mortgages and obviously and wilfilly lied on their applications.
So who's better, The DD or the Mortgage broker?
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March 24th, 2011 at 1:13 am 5
The CMHC is at the core of Canada's real estate delusion. In the context of mortgage lending we are reminded ad nauseum that "we are not as bad as the US". The great unwashed have interpreted this to mean "we are good" – and this alleged lending conservatism will save us from a price correction.
In fact, we've been and are only slightly less reckless than our neighbours to the South, and for the same reasons. Banks in the US could hive off their ultimate exposure to a host of other arms length investment vehicles whereas banks here hive off their low ratio exposure to taxpayers through the CMHC. In the US, some mortgages featured initial teaser rates, zero down and cash back. Same here, even today. Banks in the US would loan to anyone with a pulse. After listening to VanCity, does anyone doubt that a pulse isn't a prerequisite North of the border?
In a nutshell, the entire real estate complex in the US was backstopped by the notion that real estate prices would only go up. This belief was held by everyone from Harvard-educated merchant bankers to the guy who asks if you want fries with that. No Virginia, it really isn't any different here.
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March 24th, 2011 at 1:16 am 6
I ran some quick numbers about NET taxpayer exposure to CMHC and the numbers don't look overly "bad". I see the net exposure being around $20BB in terms of loss recovery. But I don't think that will be the big story. CMHC isn't exactly the analogue of a GSE because it deals in insurance.
What Fannie/Freddie found out was that it's not net exposure that's important in the interim. They faced a significant liquidity problem as they need to make payouts but the recovery efforts were delayed due to low sales volumes and so-called "shadow inventory". Hence the huge loans from the US government to cover.
Add to this, CMHC will become the "lender of last resort" because, as house prices fall, more and more people will find themselves over the 80% LTV threshold for requiring MI. As a result, CMHC will be taking on riskier exposure into a downturn.
The total gross exposure could be $50BB or higher, and that's what will be making headlines when this thing blows up. In net, however, years after the whole fiasco plays out, I see the exposure being less than this, and total outlay depends upon interest rates on the bridge loans.
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March 24th, 2011 at 1:21 am 7
@Vansanity:
>>>Here’s what I don’t get… what exactly precipitated the US crash? And why is it not happening here?<<<
Global/Remax news channel?
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March 24th, 2011 at 1:36 am 8
@6 jesse: To be honest I never understood that analysis. If the CMHC/taxpayer has low exposure guaranteeing half a trillion dollars with less than 2% in backing assets, and the banks have already offloaded that risk, who picks up the balance when the market tanks?
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March 24th, 2011 at 1:49 am 9
"In the US their market tanked after interest rates were already low, but here in Canada prices and sales have remained strong. We’re all waiting for interest rates to climb but that didn’t happen in the states, so what gives?"
This is not correct. Look at the chart of Fed Funds rate, and see how it triples in about 2 years from 2004-2006 which is when their housing market rolled over. Canadian rates increased as well in that timeframe, but didn't rise nearly as much, and began their rise much later.
Chart
Also, the period of rising rates in Canada coincided with reduced lending standards (smaller down payments, and in particular longer amortizations) which mitigated the impact. The U.S. lowered standards as well, but most of that was done before rates rose, and they didn't have the same amortization extension that we did in Canada.
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March 24th, 2011 at 1:54 am 10
@fixie guy: "who picks up the balance when the market tanks?"
There is always residual recovery from mortgage insurance so looking at standard ratios to something like auto or fire/theft is not correct. The analysis I did was with $500BB insured assets, average remaining LTV of the pool at 75%, and 20% foreclosure rate over 10 years. Say prices drop 20% nation-wide under this scenario, CMHC must make up the shortfall after recovery, and that includes raiding borrowers' non-registered savings. I think tens of billions net, from this simple analysis alone, is about right.
The bigger problem, IMO, is when CMHC has significant delays recovering capital. That was the big problem in the US, where the government had to bridge notional amounts, and those can be close to an order of magnitude higher than the eventual net losses. And the US has been lucky so far: it is bridging with low interest rates. If/when TSHTF with CMHC insured loans, what will prevailing interest rates be?
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March 24th, 2011 at 2:00 am 11
@Best place on meth: So because of the media pumpers here it hasn't happened? That's it?
This is what I mean, I'm missing something, what is it?
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March 24th, 2011 at 2:10 am 12
@McLovin: I guess those are perfect examples of stated incomes.
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March 24th, 2011 at 2:11 am 13
@Vansanity:
They ran out of idiots. Same cause as every RE crash and every bubble burst in general. If prices are out of proportion to rents and incomes this is inevitable.
Because the idiots haven't run out yet. But even in Vancouver, they are not inexhaustible.
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March 24th, 2011 at 2:14 am 14
@jesse: Does the CMHC exposure take into account falling RE values or is it just based on current values?
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March 24th, 2011 at 2:22 am 15
So who’s better, The DD or the Mortgage broker?
******
Uumm the drug dealer, without question.
At least a drug dealer is honest and never tells his "clients" that prices, like interest rates, will never go up.
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March 24th, 2011 at 2:27 am 16
@Vansanity: The us had big bubble markets across the country. Here in Vancouver it can be hard to remember that national houseprices in Canada didn't start really going bubbly until a couple of years ago. Also, the CMHC started flooding the market with credit in 2008 in reaction to the downturn so the Canadian schedule is behind the US by quite bit. They're just hoping that they can pull off the trick no one else could: economic boost through housing with no big hangover.
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March 24th, 2011 at 2:28 am 17
And why is it not happening here?
Because the idiots haven’t run out yet. But even in Vancouver, they are not inexhaustible.
***
Sure, we just import them to keep the party going – come on HAM!
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March 24th, 2011 at 2:34 am 18
How does a person find out what a house actually sold for? I heard that 3338 Inverness sold, and I was curious what they got, so I looked at MLS. On Tuesday it was still listed as for sale for $819,000, yesterday it told me no such MLS number exists in the system.
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March 24th, 2011 at 2:36 am 19
@DQ:
"At least a drug dealer is honest and never tells his “clients” that prices, like interest rates, will never go up."
And the drug dealer serves clients who know the product is bad for them. The mortgage dealer pretends like he's helping his clients.
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March 24th, 2011 at 2:39 am 20
@Aleks: It sold for $800,000 (down from asking price of $819K) on February 15th.
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March 24th, 2011 at 2:40 am 21
@data junkie: Sorry, March 11, Feb 15 was the list date. In my defense, I haven't had my morning coffee yet.
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March 24th, 2011 at 2:43 am 22
@Aleks:
Cheapest way is to make friends with a realtor (perhaps by making him think you're interested in buying something) and get him to look it up from their database.
If that's stooping too low, you can wait for the sale to complete and get the information from BC Online for a fee.
Or if you can wait longer the sale will show up on the BC Assessment website.
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March 24th, 2011 at 2:51 am 23
@Anonymous: "Does the CMHC exposure take into account falling RE values"
CMHC is "exposed" regardless of RE values. It's a matter of how much loss they could incur if/when prices drop.
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March 24th, 2011 at 2:51 am 24
@jesse: Yes, from the cursory analysis I've done, the CMHC may be politically very unpopular in coming years as it will suck cash from the federal treasury to pay out claims from defaults. Things will have to get pretty bad for that to happen, 20% + national house price decrease with high unemployment.
That said, it is extremely unlikely that the CMHC's troubles would have an impact on Canada's credit rating or any lasting impact on the federal fiscal situation. It will be painful for the governement of the day to deal with and it may mean the demise of the CMHC as we know it.
I would be very happy if that day came and the market (ie. banks) correctly priced borrowing based on borrower risk and demanded down payments based on borrower risk as well.
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March 24th, 2011 at 2:58 am 25
@McLovin: Nothing illegal about stated income mortgages.
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March 24th, 2011 at 2:58 am 26
@fixie guy: "To be honest I never understood that analysis. If the CMHC/taxpayer has low exposure guaranteeing half a trillion dollars with less than 2% in backing assets, and the banks have already offloaded that risk, who picks up the balance when the market tanks?"
They're counting on homeowners not defaulting. An American level of prime defaults would sink them like a toy boat. And negative equity is the #1 predictor of defaults. That is the real problem with 95% or 100% loans. It's moral hazard all around.
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March 24th, 2011 at 3:09 am 27
@mohican: "…the market (ie. banks) correctly priced borrowing based on borrower risk"
Yet MI isn't necessarily a horrible thing in its own right. The question I asked over at financialinsights was how competitive and sustainable are the private MI businesses like Genworth Canada? Are they truly free-floating or are they effectively backed by the government as well? That is, if CMHC were to stop new insurance tomorrow, would/could private insurers fill the void, and would they be capitalized enough to ride out a significant housing recession without defaulting (with the liquidity issues that we know go along with that)?
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March 24th, 2011 at 3:12 am 28
Thanks Data Junkie!
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March 24th, 2011 at 3:19 am 29
@jesse:
"CMHC must make up the shortfall after recovery, and that includes raiding borrowers’ non-registered savings."
What non-registered savings? If these folks are defaulting they likely have already raided their own savings to stave off the shame of forclosure or more likely, never had savings to begin with! I bet most of these folks don't have any registered savings either as their house was their retirement plan!
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March 24th, 2011 at 3:23 am 30
@jesse:
I have read that in the US today over 95% of high ratio mortgages are underwritten or guaranteed by Fannie/Freddie/FHA. That is, even after a huge price decline and with the average price in the US now about half what it is in Canada, the private sector in the US will still not go near risky mortgages.
So how interested do you think the private sector would be in risky mortgages in Canada today? Do keep in mind that Genworth is backed by the taxpayers so it's the public's money that they are putting on the line.
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March 24th, 2011 at 3:25 am 31
@Aleks:
"How does a person find out what a house actually sold for? "
Sign up for a bi-weekly email of sold prices in your chosen areas : livelistings.ca
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March 24th, 2011 at 3:28 am 32
@jesse: Yes, there is a role for MI in Canada. I would prefer it be a private affair without taxpayer involvement.
Genworth probably does not have the scale to completely take over from the CMHC at this point but I could see the federal governement privatizing all or part of the CMHC at some point.
Genworth is a public company so we can easily see what they are doing: http://investor.genworthmicanada.ca/phoenix.zhtml…
So far, they are doing quite well. They have a deeper and more talented management team than the CMHC.
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March 24th, 2011 at 3:32 am 33
This is a must watch video!
Hedge Fund manager Jim Chanos has been shorting China for awhile and has been ringing the alarm bells that it is a toothless Dragon which is growing beyond its means!
http://www.sbs.com.au/dateline/story/watch/id/601…
From the video: at the 6 minute mark
"Is China experiencing a property bubble?"
"Absolutely, a property bubble like which I don't think we have ever seen."
"Bigger than the one in the United States."
"Yes, I think it will make the United States pale in comparison.
It is said there are around 64 million empty apartments in China"
- Think about it, if you only put one person in each apartment – the entire population of Canada (every man, woman, child) could fill just over half of the excess supply.
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March 24th, 2011 at 3:34 am 34
@patriotz: "Do keep in mind that Genworth is backed by the taxpayers"
That's an important point, I just wasn't sure how the backing was set up. Do you know off the top of your head?
If MI were truly privatized with new capital rules, I have little doubt MI would be significantly more expensive than it is today.
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March 24th, 2011 at 3:41 am 35
@mohican: Just a note to confirm what Patriotz said – the Gov of Cnaada is still exposed to Genworth's operations through the governement gaurantee they offer through an agreement. See page 41 and 42 of Genworth's annual report for more detail.
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March 24th, 2011 at 3:48 am 36
@rp1: Just because you're under water, doesn't mean you're defaulting. In US, 25% of mortgages are under water, but they're not all being foreclosed on. Any analysis of CMHC exposure must at least account for expected price declines, expected default rates, and expected recovery rates by lenders and CMHC.
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March 24th, 2011 at 3:57 am 37
@Devore: A rapidly rising market like ours has been for a while, will mask financial issues people have and therefore foreclosures. In this market, people can easily sell when the SHTF without further consequence. When the market goes the other way, look out.
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March 24th, 2011 at 4:34 am 38
@mohican:
Since the banks depend on MI for their own solvency, "private" mortagage insurers would inherently be too big to fail and would have to be backstopped by the government if need be. Exactly as happened with Fannie/Freddie.
The only way the government could reasonably protect itself from this happening would be to establish caps on mortgage lending, i.e. pre-emptively preventing bubbles. That's never happened in the past and I have no confidence in government doing it in the future.
The alternative to MI is preventing banks from lending over 75% and letting buyers borrow the rest as 2nd mortgages from non-bank lenders on whatever terms are mutually agreeable. This is a free market solution where the 2nd mortgage lenders either enforce reasonable pricing or risk going broke. If they go broke, their shareholders take the hit not the taxpayers.
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March 24th, 2011 at 4:45 am 39
@patriotz: Yes, I understand that the impact on the bank's ratios would be catastrophic if government backed MI was pulled altogether but there needs to be a workable way to get the government out of the business altogether.
I would not be comfortable with a cap system either.
The first and second lender solution is appropriate and risk could be aggregated within the banking/lending industry so that the borrower only has to make payments to one lender. Under that type of system, there would be an enormous incentive to bring a large down payment to the table or pay down the loan quickly, since the interest rate on the >75% LTV portion of the loan would be very high to compensate for the risk involved.
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March 24th, 2011 at 5:10 am 40
@patriotz: "preventing banks from lending over 75%"
In some markets 75% is not enough. Banks already know this: more than a few hedge loans that are less than 80% LTV.
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March 24th, 2011 at 5:21 am 41
@24 mohican Says: "…CMHC … will suck cash from the federal treasury to pay out claims from defaults. Things will have to get pretty bad for that to happen, 20% + national house price decrease with high unemployment."
20% down is absolute, won-the-lottery, best case scenario in my view. The analysis also appears based on the perspective that nothing else important changes when the market tanks, counter to the experience of other markets. Will credit dry up when prices turn, rate changes or not? Will consumers continue to pile on debt when the bottom of the HELOC piggy bank is visible? Will immigration turn off? Florida saw its first population drops ever with the housing collapse.
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March 24th, 2011 at 6:27 am 42
http://www.youtube.com/watch?v=0jYm6JypmUg
Watched this Google Authors session about the US housing market.
It is like a free look into the future.
I checked out his blog, his alias was Irvine Renter. He was sounding the horns in 06.
One of his posts
http://www.irvinehousingblog.com/blog/comments/pr…
One of the comments:
I have been following all your posts for quite sometime. I think your price dropping theory is way too unrealistic. The income that are charted are income reported to the IRS. Most of the the population in Irvine are Asian about 40%. The graph predictions do not apply to Asians.
Hot Asian market are often over-inflated than most other non-Asian location. For examples, In San Gabriel Valley, the home price in Monterey Park, the poor section of El Monte and Rosemead are way over inflated due to the Asian buyers.
One can not predict the wealth of Asians. Their house spending budget are disproportionate to their income earned. Asian will do anything to have their kids attend a good school at any price. Many older Asian are extremely frugal and they spend less than 20% of their earnings. No vacations, no hanging around at a bar, no ski trips, no fancy four Seasons hotels, no Nordstrom at full price, no shopping at Gelson’s and no high maintainance vehicles. Many also cook at home instead of eating out.
Frugality and coupon shopping at the stores and frequent trips to South Coast Plaza to find sales or shopping at the Cabazon outlets are just some of their ways to get the best brands at a bargain. Lexus, Honda, and Toyota are vehicles that Asians drive. These cars have excellent maintanance records.
When It come to buying a home no one really can predict the bags of cash that Asian buyers bring to the purchase. Many older grandparents give their children huge downpayment to purchase their homes so their grand kids can attend the local top rated school to becoming a scholar and a musical prodigy. Purchasing a home in Irvine at any cost has made the Irvine Company very wealthy. During the last recession the Asians were the primary buyers at Westpark and Tustin Ranch. The momentum of the Asians expansion also rejuvenated the older and tired strip retail centers in Irvine as well as inflating the affordability of homes.
While the rest of us are waiting for the price to tumble the Asian buyers are coming out in flocks with the cash that they hid under the mattress.
The Irvine Company does not need to sell land and build houses to sustain its cash flow. While its competitor land owners and builders like Lennar is desperately unloading its inventory at Columbus and risking everything to going “urban” to keep their public shareholders interested and happy. The Irvine Company is just too diversified and recession proof. It is also private. During this slow time it will just focus on its other specialties like retails, office expansions, Pelican resort Villas and hotel constructions, Island Hotel, collecting trophy high rises in San Diego, West LA, and the Silicon Valley and most importantly building more Irvine Apartment Communities to capture more of your and my hard earned rent money while we are still waiting for the price to drop. Do not try to job transfer to San Diego or San Jose, Irvine Apartment Communities are there too to collect your money.
I think The Irvine Company will just let the land sit vacant and wait for the favorable climate to build again. The land is still perfectly good the next time around. I also think the design of the upcoming homes will be designed especially to target the Asian buyers like having good Feng Shui and good Wok “chi”.
There was HAM there too.
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March 24th, 2011 at 6:47 am 43
@real_professional: uhmm….you are forgetting there are still 900M people yet to join the middle class and even more who are living in crowded rented apartments and factory/company domitories. 65 million vacant condos in this context is really not that big. Personally I think this number can go over 100 million or 150 million before the bubble burst.
Also while these condos are empty now, if the bubble bursts and prices crash, I wouldn't be surprised if the government start seizing a lot of them and start handing them out at very discount rates to the average working stiff.
There are huge imbalance and misallocation but one good thing with a government like China is that it has no quarms(sp?) about ripping off the 5% rich people to please the bottom 10%, 20% of the population to stay in power and popularity.
All it needs to do is actually really cracking down corruption while strictly enforcing capital flow and it will get a lot of those vacant condos are proceeds of crime and corruption. 
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March 24th, 2011 at 6:53 am 44
@4SlicesofCheese: That comment is wonderful. Here is Irvine's performance since then.
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March 24th, 2011 at 7:06 am 45
@Anonymouse: I see a Search Watch email I can sign up for but no sold listing email link anywhere. Where is it?
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March 24th, 2011 at 7:12 am 46
I think we are underestimating the power of drug money in this province. Yes, there is chinese money coming in, but most of the easy money invested in RE is drug money. It is the best way to launder crime proceeds.
Our lax legal system makes this possible, and in this regard we are vastly different from the US where you get jail time and zero tolerance.
BC is a paradise for the drug dealers. I am all for marijuana legalisation but if you follow our legislation process,you might get a better clue.
Since almost 10 years, our parlament cant vote on a bill to toughen penalties for people cought cultivaing more than 5plants of marijuana.
They started with bill C-26 1n 2000 which then it became C-15 and now S-10 which will go again into the garbage as new elections are looming.
So 10 years trying to pass a bill through parlament for tougher sanctions for people caught with more than 5 plants and still nothing.
Why do you think it takes so long?
When motivated our parlamnet can pass laws in one month.
I think this might give us a better clue as to why we have such prices in RE and everybody keeps paying its morgage.
The amount of drug money is huge in our province. All other explanations are a smoke screen as to the real culprit: DRUG MONEY
the link below curtesy of Nemesis:
http://tinyurl.com/3gprhg
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March 24th, 2011 at 7:27 am 47
"Sales prices have depreciated 19% over the last 5 years in Irvine. "
So this proves the shitty analytics of bears, especially the ones calling for 50% price declines. Irvine renter was dead wrong with his 40% price reduction predictions by 2009/2010. This was a community with triple digit increases, and they are only off 20%.!
Lol, if bears have to wait five years in Vancouver to buy at a 20% discount, they will have screwed themselves over waiting all those years. That price reduction wont even account for the last two year's appreciation.
Oh, and by the way, it looks like while HAM stories existed in 2006 in California, the poster on that site was RIGHT about HAM holding prices up. Gives good ammunition to the case for HAM holding the Vancouver market up.
Silly little bears and their dreams of huge price reductions. Hahah – indeed, look to the US as to how the market will unfold here! hahaha
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March 24th, 2011 at 7:31 am 48
@paradox: "It is the best way to launder crime proceeds"
How so?
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March 24th, 2011 at 8:03 am 49
@4SlicesofCheese: Awesome!
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March 24th, 2011 at 8:03 am 50
@space889:
"I see a Search Watch email I can sign up for but no sold listing email link anywhere. Where is it?"
I don't see the link there either, but I do get emails from them twice a week
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March 24th, 2011 at 8:07 am 51
@SoCal: Let's see how long this can hold up. The poster was talking about local Asian's saving being used to buy houses but that is not an infinite amount. As well, what's the demographics like? Will there be more sellers than buyers as the number of students going to good schools go down? Or more non-Asian people starts selling to get out?
Seattle was saying it's pretty bullet proof last year too, now they are like OMG, we are down 30% and still dropping!
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March 24th, 2011 at 8:14 am 52
@jesse
how so?
I am no expert, but for the majority of small grow ops in BC this is very simple. You have a small legitimate income through your job at your pizza joint or construction industry or other..and at the same time operate a small grow op.
First, a relatively 6'x9' aera in your basement will allow you to generate approx 10k a month tax free cash. You use this money to pay your morgage or food or other, while slowly building equity in your house and directing your salary funds to morgage payment. All clean and safe.
Second, if you have large amount of money in cash, then you need to provide only for downpayment through Visa/other credit card borrowing (and pay the credit card bill in cash) and take a loan and use the cash to pay each month your expenses while your salray goes to the morgage or pay the morgage throu credit card and pay the credit card bill in cash. More sophisticated ways exsist. If you have the cash, evth is possible.
How can you explain that when more than 70% of the gross income in this city goes to morgage payment and yet we have low default rates and even steady price increases?
Think about it, 70% of the gross income, that means that more than 100% of the after tax income is going into the morgage payment if the average tax rate is 35%? where is the 5% income coming from?
What about other expenses like food and gas? where is the money coming from other than from the black economy?
Do you have another explanation or is that figure of 70% flat out wrong?
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March 24th, 2011 at 8:19 am 53
@SoCal
20% down and counting.
All those Alt-A mortgages from 05,06,07 are set to reset in the next few years.
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March 24th, 2011 at 8:24 am 54
@45 jesse: Maybe I'm missing it, do you see 'inflation adjusted' anywhere in those numbers? If not the 2011 $549K value represents $485K in 2006, for an inflation adjusted loss closer to 35%. And Irvine is far from the worst.
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March 24th, 2011 at 8:32 am 55
SoCal
20% down and counting.
All those Alt-A mortgages from 05,06,07 are set to reset in the next few years.
*****
20% down and counting – maybe…we will see…
Even if it kept going down, you are looking at a decade on the sidelines from its peak….
What renter is honestly going to be happy waiting a decade….its bullshit if any renter says, I am so happy about obsessing over the stats every day just so I can enjoy another decade of declines before its a smart purchase to buy (because bears, you have to buy at the bottom or else you have wasted many years renting)
Hope Irvine Renter planned on 10 years before he could buy….of course he hoped for 2 or 3 years of declines before he bought:)
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March 24th, 2011 at 8:34 am 56
Just a note with regards to the grow ops and the money generated – my block in the Arbutus area of Vancouver had four grow-ops operating at one time a couple of years ago. Not one of the houses managed to get a crop off as they were all busted before the plants were mature. Three of the houses were rentals but one of the houses was purchased for the sole purpose of running a grow-op – the owner had apparently borrowed heavily from some very scary looking guys who hovered around for weeks after the police shut the house down just to make sure the owner was aware of the debt owed. My point is that some people make money and others just get screwed – even the renters lost big time what with losing the start-up costs and damage deposits on the houses. It's not a business for the faint of heart.
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March 24th, 2011 at 8:37 am 57
And as an aside, you might ask how four places can get busted more or less at once – the police only need one tip about a grow-op. They come out at about 3:00 am in a cherry picker and scan the electrical lines for usage. Any huge anomolies are flagged and checked – voila, you're done.
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March 24th, 2011 at 8:48 am 58
The "occult income" theory for high house prices in Vancouver is nonsense just as it was nonsense for every other city it was promoted in. Cities with high levels of unreported income have high rents relative to reported income. Rents don't lie, nor do retail sales, restaurant sales, etc, all of which say that incomes have been going nowhere.
The cause of inflated house prices in Vancouver is easy credit just like everywhere else.
And if I see someone claim one more time that 70% of household income in Vancouver goes to mortgage payments, I think I'll scream.
http://www.metrovancouver.org/planning/developmen…
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March 24th, 2011 at 8:58 am 59
@space889 uhmm….
I haven't seen an economy in history that over invested in infrastructure without a massive correction. They said the same thing about Soviet industrials, the 1840s railway mania, the internet boom –
But of course, this time is different there is massive demand waiting in the wake of all of this construction!!!??? There is always potential demand waiting on the sidelines – the point is, it is on the sidelines!
As for:
There are huge imbalance and misallocation but one good thing with a government like China is that it has no quarms(sp?) about ripping off the 5% rich people to please the bottom 10%, 20% of the population to stay in power and popularity.
That will really do wonders for investor confidence in the country and it worked wonders for the Soviets, didn't it? Giving homes to people that didn't deserve them is what brought down the US housing market as well.
History repeats itself – I suggest reading a book.
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March 24th, 2011 at 9:12 am 60
@fixie guy: You're not missing it. The site looks at sale prices which are nominal. Rents in the area are appreciating around 2% per annum. Irvine is far from hot, which is the opposite of Vancouver right now.
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March 24th, 2011 at 9:38 am 61
@SoCal: "you have to buy at the bottom or else you have wasted many years renting"
No. I don't have to buy at the bottom of the market, in fact I don't have to buy at all. If I do buy it will be when it's cheaper to own than to rent to cover the risks of owning.
I'm paying less for shelter costs than my home owning friends, put more into savings and investments and never have to deal with any repair bills. I win!
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March 24th, 2011 at 9:40 am 62
Larry has today's bearish numbers posted. On iPhone and cut/paste is a pain. Someone want to do the honors?
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March 24th, 2011 at 9:40 am 63
Dailies – List | Sold
Vancouver East & West*
New Listings – 84
Back On Market Listings – 0
Price Changes -18
Sold Listings – 39
Vancouver All Areas*
New Listings – 261
Back On Market Listings – 4
Price Changes – 80
Sold Listings – 112
*Attached & Detached – Date: 03/24/2011 Time:17:23 Pacific YatterMatters.com:Courtesy REBGV. Data believed to be accurate but is not guaranteed.
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March 24th, 2011 at 9:44 am 64
@VHB: hey VHB, looks like we got our 'crickets' lol
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March 24th, 2011 at 9:47 am 65
@ so cal
I'd rather obsess over the stats every day waiting to buy than sleep with one eye open fearing a sharp rise in interest rates.
People who get into a huge amount of debt are just stupid, and we're all going to be on the hook for their short-sightedness.
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March 24th, 2011 at 9:48 am 66
@space889:
Are you serious? The fact is that the strategy of the CCP has been to keep the urban (i.e. richer) minority happy and suppress the rural (i.e. poor) majority by force. Banning free trade unions, exploiting migrant workers who have no residency rights, running peasants off their land for RE development, levying illegal "taxes" which go into the pockets of corrupt officials, etc, etc.
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March 24th, 2011 at 9:56 am 67
@Anonymous: According to thinktom over at RET, Vancouver is seeing a high level of sales in the past few days on detached, with strong prices.
There is also mounting evidence that Richmond is becoming a ghost town after the Japanese earthquake has scared buyers into places with solid foundations. As thinktom put it, we should all remember how fickle momentum cash can be.
Still, if you've got property to sell in Vancouver, slap up a for-sale sign and see who comes a-knocking.
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March 24th, 2011 at 9:59 am 68
@ patriotz
Based on your link, average household income is 55000/year. The corresponding tax rate is about 40% , which gives an after tax income of 33000/year.
Taking your figure of 1761$/month of average cost, that makes 21132$/year mortgage payments, which translates to approx 70% of after tax income.
I think you should read the Maccleans article I linked below before you dismiss the drug money component from RE prices. There is lots of information in there.
http://tinyurl.com/3gprhg
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March 24th, 2011 at 10:00 am 69
Jesse,
Thanks for the link to Irvine's performance.
http://www.trulia.com/property/3044714914-17-Alej…
Wow, that house in Irvine CA lots great for only US$899,000 (which is also about 2% less in Canadian dollars)
For $899,000 in Vancouver, you get some lousy crack shack!
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March 24th, 2011 at 10:11 am 70
@VHB:
Sales are dying right on schedule.
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March 24th, 2011 at 10:52 am 71
@jesse:
>>>According to thinktom over at RET, Vancouver is seeing a high level of sales in the past few days on detached, with strong prices.<<<
About 3/4 of the SFH sales recorded today are still pre March 18th sales so Tom may be desperately grasping at straws.
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March 24th, 2011 at 10:56 am 72
@VHB:
Here are the crickets VHB.
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March 24th, 2011 at 10:57 am 73
@Anonymous:
Beat me to it! ha ha. Awesome
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March 24th, 2011 at 11:09 am 74
@paradox:
You numbers are wrong. With 55,000/year, your net income will be about $44,000/year. If the income is split between two people in the household, the the net is even higher ~ $46,000/year
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March 24th, 2011 at 11:10 am 75
@paradox:
1. $1,761/month is average cost for homeowners with a mortgage. The average for all homeowners is $1,241.
2. $55K is the median income for all households including renters. The median income for homeowners is $69,308.
3. A family of 4, two earners with a total income of $69,308 pays income taxes of about $8.5-11K depending on the split.
Take it from there.
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March 24th, 2011 at 11:19 am 76
Interesting to see the COV doing so much better than the suburbs. This is one day, but I'll be watching to see if it continues.
Back around 2006, some hotshot at my bank suggested buying a place in Mission. He told me it was the next hot market. I'd be very underwater by now if I took his advice. Broke and stuck way out in the Valley, blech.
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March 24th, 2011 at 11:31 am 77
Campaign suggestion in Australia: First Home Property Buyers Strike http://bit.ly/dS4AoF
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March 24th, 2011 at 11:38 am 78
@bubbly: I think this campaign is a better idea than writing letters to MPs (who don't give a damn anyway).
http://bit.ly/eJKBb8
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March 24th, 2011 at 11:42 am 79
Wow the voice of reason and not a moment too late.
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March 24th, 2011 at 12:06 pm 80
@Best place on meth:
I'd wait for a few days of stats before busting out the party hats.
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March 24th, 2011 at 12:08 pm 81
[...] at vancouvercondo.info March 24th, 2011 at 9:12 am – “Met a Kelowna mortgage broker who said that many of her drug dealer clients are [...]
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March 24th, 2011 at 12:09 pm 82
@paradox:
Seriously? According to you, I should be naming my firstborn after my accountant.
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March 24th, 2011 at 12:23 pm 83
guys,
just like you, I am trying to understand why RE prices are so high here and why they have not came down.
Without going into details of the accounting, you have a median income of 55k and average detached home prices of 1.14million in vancouver. So 70% of the income going into morgage seems more than reasonable.Do the math.
Maybe I am wrong, you can certainly discount my drug money suggestion, but i dont see where the money is coming from then to pay such outrageous prices in this city.
Cheap credit does not explain everything, first credit has not been cheap for all the last 10 years the prices have been going up, then if cheap credit is such a powerful driver, why are the prices still going down in the US where the credit is even cheaper than here?
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March 24th, 2011 at 12:45 pm 84
@paradox:
Cheap credit has indeed been around for all of the last 10 years, ever since the first big stock market crash.
Interest rates have varied in that time but have been historically low for the entire duration.
Credit is not cheaper in the US, a 30 year mortgage is 5% while a 5 year in Canada is 4% with a variable at 2.3% so ours are cheaper.
The other big factor is the loosening of mortgage rules in Canada since the Cons took power.
We went from 25 years to 30 to 35 to 40 not to mention all the other ways they loosened lending. Every time they did this it brought a whole new wave of buyers into the market and drove prices up accordingly.
That's one thing the US didn't have, it's been 30 year mortgages the whole time.
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March 24th, 2011 at 1:07 pm 85
@paradox:
The median person doesn't buy a SFH in Vancouver.
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March 24th, 2011 at 1:27 pm 86
mohican says: from the cursory analysis I’ve done, the CMHC may be politically very unpopular in coming years as it will suck cash from the federal treasury to pay out claims from defaults
no chance, the cmhc has direct ties to the central bank, any liabilities will be monetized directly. in fact, the cmhc will continue as a reflation tool, government liabilities will be filtered through the cmhc, not the other way round. what is the cost to canadians? a lower dollar, which won't be a concern. oh yeah, the cmhc will continue involvement in the bond markets also. i advised on this years ago and will advise again, pure deflationists will view the cmhc as an arch enemy for years to come. the macleans article is a decent coles notes on the cmhc.
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March 24th, 2011 at 2:24 pm 87
@Dave #84:
This all comes back to the same old question again then. If not the average (median) person/household then who?
The only people I know personally that have bought in Vancouver the last 3 years all had incomes around the median and with down payments provided in most part by their parents.
These people are all in the early to mid thirties making roughly 70k-80k in total household income buying houses in the range of 500k-700k.
Another couple I know want to buy but they don't have a down payment large enough to afford it although they are probably ~100k in total house hold income. None of them I argue can afford the average Vancouver house. In fact come to think of it I don't know anyone outside my workplace that could actually afford to buy the average house in this city.
Go figure.
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March 24th, 2011 at 3:32 pm 88
@real_professional: ……It is said there are around 64 million empty apartments in China”…….
Almost as bad as Yaletown.
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March 24th, 2011 at 3:58 pm 89
@paradox: I am no expert, but for the majority of small grow ops in BC this is very simple. ………
It's a lot easier than that. For those of you that want to start a grow op and want a very easy way to wash all that ill-gotten lettuce:
You need some seed money, just enough to legitimized a down payment on a house, not a nice house, preferably one that needs lots of fixing up – say $100k down on a #1M Vancouver property (hell, apparently you can even get CMHC to guarantee the loan for you if you lie about your income). Then, you fix it up. You don't fix it up of course, you pay someone else to fix it up (you pay in cash of course) and you provide all the materials (which you pick up and pay with cash and deliver to the work site). Then you sell. it's your principal residence so you don’t pay any tax (it's not really you principal residence but who the hell would know that) so there’s no expectation that you would retain any receipts that you did since you can’t deduct anything anyway. And in this market who the hell would ever suspect anything unusual about a renovated house selling for a lot more than the original purchase price, expecially since you did all the renos yourself (wink, wink).
So, you put down $100k, you put another $300k (in cash) into labor and materials, then you sell that $1M former dump for $2M and pay off the $900k outstanding on the mortgage. You've just completely washed that $300k in cash and made a rather nice profit (tax free I might add) of $700k. Then you do it all over again (only now you have lots of seed money so you can go even bigger – or get your sister, brother and cousing in on the act – thy need principal residences too, right?). What could be easier?
If you don’t think this is really happening, you are naïve! It's no coincidence why the drug and real-estate industries are so seemingly intertwined.
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March 24th, 2011 at 5:55 pm 90
@paradox: "Cheap credit does not explain everything, first credit has not been cheap for all the last 10 years the prices have been going up, then if cheap credit is such a powerful driver, why are the prices still going down in the US where the credit is even cheaper than here?"
Cheap credit and mass psychology is the driver of prices. We had a slower, later start, and the government is far more involved in propping it up. In the US the 10 largest cities first saw their first +10% increases in mid 1998, the rate of price increase hit a maximum of +20% in early 2004, and the bubble popped decisively in 2006:
http://tinyurl.com/68ydmfr
In Canada we have the comparable Teranet index. You can download their data at http://housepriceindex.ca and for the biggest 6 cities, this is the rate of change:
http://i.imgur.com/7nHTS.png
You can visually see that ours started in 2002, the increases peaked at +15% in 2006, and we started to pop in 2008 as the financial crisis unfolded. So at that point, our bubble had been shorter and shallower than the US one. Canadians were in a stronger financial position with less debt.
We had problems in the housing market in 2008. Zero down, 40 year mortgages had been recently introduced. We had a lot of speculators caught off guard by the crisis. That was arguably a good thing. If you're going to have a correction, far better to concentrate losses in the hands of people driving prices in the first place.
What happened instead is something that the country will surely come to rue. Interest rates crashed to 0.25%. That was probably inevitable. The Harper government orders the CMHC to approve mortgages for as many high risk borrowers as possible. Was this a good idea? After a short, steep decline, housing posted a record breaking rebound in 2009. We had further increases to new record highs in 2010. Carney is holding interest rates at 1% while household debt explodes. Does this sound familiar? It is exactly what Alan Greenspan did.
It is quite clear what is going to happen, but it is not exactly clear when. We are in a worse debt position than the Americans now, but nobody in this country is hitting the brakes. 5% down and 30 year amortizations don't matter when real interest rates are negative. Only positive real rates will slow the accumulation of household debt.
It appears there was really no point in being prudent up until now, but the stakes and risk are now higher than ever. This is a disastrous economic policy. It has been completely and explicitly one sided, and if it ever changes people are going to get crushed. The people jumping into housing now are already loaded with debt. They have nothing to lose.
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March 24th, 2011 at 10:29 pm 91
@slurker:
There simply isn't a lot of SFH product available in Vancouver. Who can afford it? More people than you might think. Lots of people make significantly more than $80k household income per year. I guess it depends on what circles you are in.
I read an interesting thing about that recently. It has been suggested that most people have an income that is the average of their five closest friends. We tend to surround ourselves with a similar demographic and income level. That raises the potential of confirmation bias because somebody making say $50k, probably surrounds themselves with people that make around $50k. Such people probably don't hang with the $300k crowd.
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March 24th, 2011 at 11:17 pm 92
@UnagiDon:
Good point, but I don't think so because there is a pretty wide range of income levels in our society. There are lots of people who make around 30k and lots who make well in excess of 100k.
There is probably some effect due to rising incomes with age. People in their 40's and 50' make more than those in their 20's and people tend to be friends with those of similar age.
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March 24th, 2011 at 11:22 pm 93
@paradox:
You think credit hasn't been cheap for the last 10 years?
Were you around for the previous 20 years?
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March 24th, 2011 at 11:30 pm 94
@Dave: "Such people probably don’t hang with the $300k crowd."
Out of curiosity, I'm quite curious who the $300k crowd is. Which jobs in Vancouver pay more than $200k?
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March 24th, 2011 at 11:56 pm 95
@UnagiDon:
I am not sure you call those income levels 'jobs'. Most people at that level are working for themselves and run businesses. There are also lots of professionals who make that level of income. Trust me on this.
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March 24th, 2011 at 11:56 pm 96
Out of curiosity, I’m quite curious who the $300k crowd is. Which jobs in Vancouver pay more than $200k?
——
Uuumm real estate "professionals" duh….
And anyone, and I mean anyone, in the junior mining market here…
And of course, all homeowners in the past 10 years – because they count their rise in home prices as part of their income…
So lots of 300k plus people
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March 25th, 2011 at 12:00 am 97
I always love Dave's "trust me on this."
It's one thing if Dave previously acknowledged in posts that he was a securities lawyer or an engineer, and commented extensively on compliance with private placements for (ahem) geo-thermal heating systems. Maybe, just maybe, I might think something of his "trust me on this."
But when a generalist, with no stated profession, qualifications or experience says "trust me on this" you have to just laugh.
Just trust me on this assessment folks
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March 25th, 2011 at 12:03 am 98
@Dave: Ok so my friends are making median incomes. What is your point? I suspect MOST peoples friends are making median incomes… that's why it's called median.
You still didn't really answer my question though. I asked who is buying houses in Vancouver and you go 'People making 300k a year!'.
Now given all I know about Vancouver income distribution, rents, job market and general price levels (aside real estate) I highly doubt that there are enough people in Vancouver making that kind of money to carry the market.
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March 25th, 2011 at 12:13 am 99
@slurker:
The market in the Lower Mainland isn't Vancouver SFH's. That's only a small segment of the market. The original question was about who was buying Vancouver SFH's, not who is buying Burnaby Townhouses.
High income drives the Westside. Lessor incomes drive other markets.
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March 25th, 2011 at 12:25 am 100
@Gyts n blod:
I prefer to be anonymous and I have nothing to gain by telling you what I do. When I use the phrase, 'trust me on this', you can be assured that I am completely certain of my statement. 100%. When I tell you that I had involvement with the SE False Creek NEU, I am being factual. When I tell you that I have first hand knowledge of geothermal systems, it's because I do.
Laugh away. I really don't care. Your loss.
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March 25th, 2011 at 1:13 am 101
When I use the phrase, ‘trust me on this’, you can be assured that I am completely certain of my statement.
*******
Lol – this is the best phrase ever!
"Trust me on this because trust me on this"
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March 25th, 2011 at 1:23 am 102
@Dave:
"Laugh away. I really don’t care. Your loss."
Oh Dave we do. But it's not really our loss, per se. We gain the medical benefits of laughter from you, and because you are such an unreliable person we don't run the risk of accidentally trusting you on anything. When the market collapses look me up and I'll donate some food for your family, just for old times.
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March 25th, 2011 at 1:26 am 103
@Gyts n blod:
"It’s one thing if Dave previously acknowledged in posts that he was a securities lawyer or an engineer, and commented extensively on compliance with private placements for (ahem) geo-thermal heating systems. Maybe, just maybe, I might think something of his “trust me on this.”"
Only a few years ago he was telling us his career did not involve real estate, it was just a sideline for him. Was he lying then or is he lying now (probably both times). Who cares? He is dishonest as hell and he's going to get burned in the collapse, that's all that really matters.
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March 25th, 2011 at 2:53 am 104
@UnagiDon: From my observation & personal contacts, these are some positions that would pay over $300k (excluding CEOs & business owners):
- Surgeons (not GPs = although there are GPs who freelance, who could pull this down)
- Dentists (large practices)
- Partner Lawyers (only at big firms)
- Partner Consultants (IT)
- Investment Bankers (not many in Van)
- Stock Brokers/Market Makers (only those with large books/private placements)
- Any VP+ position with Fortune 500 (not many in Van)
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March 25th, 2011 at 3:44 am 105
Unfortunately I couldn't find any data specifically about Vancouver, however at the last census the top 1% of income earners in Canada made at least $181,000 per year. The population of Greater Vancouver was 2,116,581, which means the top 1% is 21,116 people. There were 30,595 sales in 2010. By definition, half of those sales were for above the median sale price. So to be dragging prices up, the people making $181,000 or more would have to have bought 15,297 homes in 2010, and would have to buy a new home every 16.5 months for the duration of the price surge. How likely is that?
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March 25th, 2011 at 5:02 am 106
@Aleks:
$180k seems low for the upper 1%.
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March 25th, 2011 at 5:56 am 107
Take it up with StatsCan, Dave. I'm sure they will give your arguments the attention they deserve. Especially the "trust me on this" one.
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March 25th, 2011 at 7:08 am 108
@Dave: “I read an interesting thing about that recently. It has been suggested that most people have an income that is the average of their five closest friends.”
This sounds impressive, but it is a consequence of the law of large numbers. If you picked a random salary X from the distribution of all salaries, then randomly picked 5 more salaries Y1,…,Y5 for their friends, then with decent probability, X would be close to the average of Y1,…,Y5.
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