Vancouver Condo Info

Those heretics over at Canadian Business magazine have a cover article this month called Why Buying a House is a Bad Investment.

The euphoria around home ownership crowds out some of the unpleasant truths about real estate: mainly, that long-term returns are often modest at best. Some studies have found that stock indexes actually outperform housing. More worrying is that real estate prices can and do fall — and they can take a long time to recover. Canada has not been immune to severe price corrections in the past, and we could be on the verge of another one now. With interest rates set to rise and curb affordability, and with economists speculating about a bubble, staking one’s entire financial future on a home is not necessarily a wise bet. In fact, a house just might be one of the most overrated investments around.

..and it goes on and on.

“There’s a unique confluence of factors that has driven house valuations up this sharply,” says Derek Holt, vice-president of economics at Scotia Capital. “They’re all temporary, and that’s a house price bubble that could be pricked as we go off into the next year.” The rate of growth in home prices for the past 10 years has in fact been out of line with prior decades, pointing to lofty valuations today, according to Holt. Prominent Canadians such as money manager Stephen Jarislowsky and former Bank of Canada governor David Dodge have also sounded the alarm recently on today’s unusually rich home prices.

You can read the full article at the Canadian Business website, but these people clearly don’t know what they’re talking about.  After all, real estate prices never go down, everybody knows that.

When Flaherty announced new rules for CMHC insured mortgages in Canada a few weeks ago, there were a lot of questions that remained unanswered. One of the big ones was about the new rule requiring approval based on the 5 year interest rate. The question was which 5 year rate would that be, the posted rate or the discount rate?

Canadian Mortgage Trends is reporting that it will be the 5 year posted rate, which makes sense since the discounted rate is infinitely variable, whereas the posted rate is consistent across all lenders. The posted rate can be found on the Bank of Canada’s website. That rate is posted weekly on Mondays, and as of Sunday night it is 5.39%. The current rule, set to expire April 19th allows lenders to approve insured mortgages based on a discounted 3 year rate, which is currently 3.29%.

This means that as of April 19th, buyers who don’t have at least 20% down and require a CMHC insured mortgage will be approved based on a rate that is more than 2% higher than it currently is to ensure that they can weather rising interest rates.

Just to illustrate what that 2.1% represents in real money, I used the ING mortgage calculator and plugged in some round numbers:

Household income: $100,000
down payment $30,000
Monthly loan credit card payments: Zero
Term: 25 years Property taxes: $2000 Condo fees: Zero

3 year discount rate: 3.29% – you can borrow $491,551

5 year posted rate: 5.39% – you can borrow $397,349

As always, corrections to my math or reasoning is welcome in the comments section below!

The BOC is holding interest rates at a record low .25% for now, but hinting that may change soon.  BC is doing some belt tightening now that the games are over, but in the rest of Canada the economy is growing surprisingly fast.  So when do rates start going back up, and how fast should they be raised to reign in inflation?

The C.D. Howe institute is recommending that they be raised sharply for every rate announcement for the year after their conditional July commitment.  This would mean the overnight rate would move from its current .25% to 2.0% at the end of 2011.

At the end of last year we had a post about contacting your Member of Parliament to find out their stance on Canadian Housing Economics and the role of the CMHC.  Did any readers out there contact their MP and get a response back?  If you did get a response, were there any suprises or did they see keywords ‘housing’ and ‘economy’ and send you back an unrelated form letter?

Are there any MPs out there that are actually looking at the Canadian Mortgage and Housing Corporation and the role they play in pumping up housing markets?

If anyone feels like contacting their MP, here’s a contact list for Vancouver area Members of Parliament.

Anybody looking for a little local ski hill to call their own? Your timing could be just right.

WHISTLER, British Columbia – At the height of its Olympic glory, Whistler — the ski resort hosting glamorous Alpine events at the Winter Games — may be headed for the auction block.

It’s owned by a New York hedge fund that is reportedly behind on a $524 million loan payment, the result of flagging resort business and plummeting property values.

Creditors want their money back, and they’re playing hardball — calling an auction to put Whistler and other property up for sale Friday, the same day Bode Miller is scheduled to compete for his second Olympic medal in the men’s super-G.

Full article at MSNBC.

The Federal Government has just announced their anticipated changes to insured mortgage rules to prevent a Canadian housing bubble (which they see no evidence of yet).

The key changes are:

- borrowers must qualify for the 5 year rate even if they opt for a shorter term.

- on refinancing, the maximum amount of equity withdrawal is reduced from 95% to 90%.

- non owner occupied residences bought for speculation now require a 20% down payment.

More info in this Reuters article. There’s still time to buy (or sell) under the old rules, but you better hurry!

Domus pointed out this article in the Globe and Mail.  Former Bank of Canada governor David Dodge is adding his voice to the opinion that the federal government should act now to cool the Canadian housing market.

“These prices look pretty high by any conventional measure,” he said in an interview, citing measures such as the ratio of house prices to incomes and rents to house prices. “So, the likelihood of house prices falling a bit over the next few years is probably somewhat greater than that they would rise over the next few years.”

“Whether there’s a bubble or not you can only see after the fact,” he added. But it wouldn’t take a bubble bursting to cause consumers pain. If your house price goes down 10 per cent and you’ve borrowed 95 per cent of its value, all of a sudden you’d be in hot water, Mr. Dodge noted.

His comments come as Ottawa weighs action to take a bit of steam out of the housing market. While the government does not believe there is a bubble, it has been evaluating tools it could use to help ensure that more consumers don’t take on mortgages they won’t be able to afford when interest rates rise or if house prices fall.

The worst scenario would be if both of those things occur at once. Consumers would find themselves with higher monthly mortgage payments and less valuable homes.

While it’s virtually assured that interest rates will rise at some point, Mr. Dodge is of the view that it’s also realistic to assume house prices will fall. He notes that mortgage rates are likely to rise, which will put a damper on the market. Secondly, “we’re probably into a fairly long period of relatively slow income growth,” he said, and that too will curtail some housing activity.

Read the rest of Dodges comment in the full article here.

I think Domus was the first to point out this article in the Wall Street Journal - it looks like the Canadian Housing Bubble is getting some attention in the US media.

But some economists who are concerned point out that home prices are rising far faster than other measures of economic health. The 2009 price increase of more than 20% came as personal income in Canada fell nearly 1% and total employment was 1.4% lower than the year earlier. In a December report, the Bank of Canada warned that household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.

Another possible danger: Because Canadian banks typically reset adjustable-rate mortgages every few years, those who are buying now at low rates will likely see increases soon. Toronto-Dominion Bank forecasts suggest that the rate to which many Canadian mortgages are pegged, the prime rate, could nearly double by the end of 2011. The Bank of Canada warned in its December report that if interest rates increase as expected, by mid-2012 about 9% of Canadian households could have so much debt that they’d be “financially vulnerable.”

“This is exactly what happened in the U.S., when affordability had moved way out of whack with prices,” says David Rosenberg, an economist who witnessed America’s housing bubble at Merrill Lynch in New York, and now sees similar trends up north from his post at Toronto-based wealth-management firm Gluskin Sheff.

Reading the article it quickly becomes apparent that Canada = Toronto (with a dash of Red Deer).  So we finally get some mainstream media coverage and there isn’t a single mention of the Vancouver market in there.  What are we, chopped liver?

Nero pointed out this article in the Globe and Mail about the Big Six Canadian banks urging the government to tighten up mortgage rules to control runaway speculation in the Canadian real estate market.  Just to be clear, these are the same banks that are making pretty much risk free income from these government insured mortgages.  About 40% of their loan portfolio is Canadian mortgages.  As Nero says:

In what world do the banks have to tell the government to rein in lending and squeeze profits?

The article points out that the banks aren’t so much concerned about people defaulting on their mortgages (the government owns that risk), what they’re really concerned about is mass foreclosures affecting peoples ability to pay off their credit card bills and other loans, since THOSE debts are not government insured.

So these are the big banks, why don’t they just tighten up their own lending standards? Patriotz summed the issue up nicely:

The banks are essentially facing a prisoner’s dilemma problem. They know that if the bubble continues, and collapses, they all will be worse off. But there is no incentive for any individual bank to restrict lending, because its competitors would just take the business, and thus that bank would end taking the biggest hit.

Also an agreement among the banks to restrict lending, even if it could be arrived at, could be viewed legally as a conspiracy in restraint of trade.

So the banks must appeal to a higher level to restrict lending to all of them equally.

So will Flaherty listen to the banks and tighten up mortgage lending standards and if so, what form will that take?  One point to remember is that this issue is about a national housing bubble, and I don’t believe there’s another major market in Canada that is as detached from local incomes as Vancouver.

update: Patriotz points out that Flaherty has made his decision, and somewhat sensibly decided to stick with the ‘warn them mildly and let them dig their own grave’ approach.

“In terms of Canada, we’ve been watching and monitoring carefully and we continue to do that. There are certain tools available to the government if we choose to use some or all of them. As you know, we did so in 2008, and we’re continuing to watch. Right now, there is no compelling evidence of a housing bubble in Canada. There are some signals in the market that are concerning,”

Mark Carney of the Bank of Canada feels the same way:

The central bank has no immediate worry about a housing bubble. However, Mr. Carney reiterated that households should be cautious about taking on home loans at current rates, which will inevitably rise.

“We’ve alerted to this issue, the broader issue of household debt,” Mr. Carney said. “We want to ensure people manage their affairs recognizing that the current situation with interest rates is extraordinary and extraordinary won’t persist.”

Both Mr. Carney and Mr. Flaherty have been urging consumers to act cautiously when buying homes for several months now.

Several people wrote in and posted a link to this article in Macleans about the Canadian housing bubble.  It’s an interesting read and a good introduction to anyone who wonders what all this bubble talk is about.

Room 32 of the B.C. Supreme Court in Vancouver is where dreams of owning a home go to die. It’s the main foreclosure court in the Lower Mainland, where banks and other lenders ultimately turn when homeowners can’t keep up with their mortgage payments. The homes get seized, then sold off. “There are many tears on that carpet,” says Andrew Bury, a partner at Gowlings and the top foreclosure lawyer in the city. But lately the cramped courtroom has come to represent something else entirely—the utter insanity of Canada’s red hot housing market.

Last week Bury was in court to seek approval for the sale of a one-storey foreclosed home in central Richmond for $670,000. That was already $40,000 more than the house had been valued at two months earlier. Then, as he always does, Bury asked whether any other bidders were interested in the 2,000-sq.-foot home. Ten hands shot up. What happened next left him stunned. After a secret auction, the winning couple offered a whopping $852,500. “That’s an extreme case, but it’s the kind of thing we’re seeing all the time now,” says Bury. “It’s a feeding frenzy out there.”

The article points out that we have many scary similarities to the US housing bubble and excessive household debt levels that have raised alarm from many corners.  All the same arguments have been made for why ‘it’s different this time’ from ‘wealthy foreigners’ to ‘drug money’ to that old ‘running out of land’ gem.  Meanwhile the elephant in room keeps getting bigger and bigger.  Interest rates going up just a few percentage points ( a near certainty ) will push many people into deep financial trouble.  Unfortunately as the situation down south showed us, it’s not just first time home buyers and recent purchasers that get hurt when speculative housing bubbles collapse.