Category Archives: economy

Paying debt with debt

This Globe and Mail article starts like this:

A new poll suggests that most Canadians are quite comfortable with using debt as a financial strategy – at a time when debt loads have risen to alarming new highs.

Shouldn’t that be the other way around?  Canadians are quite comfortable using debt as a financial strategy and that has driven debt loads to alarming new highs.

The survey shows 9 out of 10 respondents would consider borrowing money to pay for an unexpected $2,000 cost.  Yeah, that’s right: $2k. These people appear to have little or no financial buffer.

While 55 per cent said they were extremely or very confident they could raise the cash, 92 per cent said they’d consider borrowing to come up with some of the cash.

Less than half – 45 per cent – said they’d never faced a debt problem.

The poll results come as Canadian debt-to-income ratios sit at a record 152 per cent and top officials issue warnings to start paying down debt before interest rates rise.

The findings suggest consumers have been unmoved by warnings that rates will inevitably rise and that the resulting financial burden could sink some households.

“It’s frightening to see that Canadians have become totally blasé about debt – it’s becoming their new ‘normal’ and they’re numb to this dangerous trend,” says Douglas Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates Inc.

“For many, the use of debt to not only pay for big ticket items like cars, but also to cover day-to-day living expenses, has become commonplace.”

Now compare this to the USA in 2006 where household debt grew at a record level, but a housing boom had also boosted networth.  Some were concerned about unsustainably high house prices, but Ben Bernanke said that he would not prick asset bubbles.

And he didn’t.

In fact the US government did everything in its power to prevent house prices from collapsing.  They pumped money into the system, drove down interest rates and came up with all sorts of programs to prevent people from losing their homes.

You may be surprised to find out what happened to house prices in the US since then, especially the ‘hot’ markets like Florida, Arizona, California and Nevada.

We built this city on real estate

From a Vancouver Sun article about shifting tax burdens for the province posted by New Junky:

The convention comes on the heels of a business taxation report that suggests provincial and federal government decisions have had negative financial implications for local government.

The report by an expert panel also suggests the province doesn’t have any more money to dole out, Moore said. But he takes heart in a recommendation that the province work with municipalities to find alternate forms of funding to provide services.

“We really feel there hasn’t been a lot of cooperation,” he said.

Delegates’ resolutions include using development cost charges to fund projects such as recreation centres, fire halls and flood mitigation. Moore said other suggestions will focus on grants and shifting existing taxes — such as income, corporate and sales taxes — from the province to the municipalities, where they originate.

Moore noted changes in everything from improved workplace standards in fire halls to cameras in jail cells and rifles for RCMP vehicles have a financial effect on local government.

“We have to pay the price with no revenue coming with it,” he said.

It seems that local governments are becoming increasingly dependent on Development Cost Charges.

It seems like a bad way to pay for essential services like fire halls. How are we going to pay for these things after all the real estate development stops/slows because of a real estate crash???

Are city councils going to approve real estate development projects that are bad for the community simply because city finances are addicted to Development Cost Charges just to keep the fire halls functioning???

Read the full article here.

The Little Mountain that Couldn’t

Apparently Vancouver has an affordable housing problem.

For buyers housing affordability is at a new low despite our problems with construction quality.

And lately we’re seeing more news stories about more families leaving BC due to the high cost of living.

So are we building more affordable housing?  Well, we’re trying I guess, but if you live in Vancouver you may have noticed a big vacant spot for homes just up Main street near Queen Elizabeth Park.

Several years ago the housing units at Little Mountain were torn down to make way for a new higher density housing development.

So why has nothing happened over those years?

According to Michael Geller it’s developer inexperience.

“The developer … doesn’t fully understand how to do business here,” Geller said in a phone interview.

Four years ago, BC Housing started moving the 224 residents of a social housing project into other subsidized homes. Now, only four residents remain in one building on the 6.2-hectare site by Queen Elizabeth Park and bounded by 37th and 33rd avenues and Main Street.

In June, a city report said there was a blueprint for Holborn Properties to redevelop the site with as many as 1,800 units in stepped towers up to 12 storeys, most buildings being four to 10 storeys in height. The province has committed to replacing all 224 social housing units plus another 10 for aboriginal residents. Most of the buildings at Little Mountain were demolished in 2009.

Geller also referred to the years of delays Holborn has faced in building a proposed 64-storey hotel and residential tower at West Georgia and Thurlow.

“If one wonders why this one is taking so long, one might also wonder why the same developer’s project on West Georgia took so long — although I see construction is finally underway,” he said.

“All of these things are symptoms of the lack of experience with high-profile, highly complex undertakings.”

So apparently we sold that land to a developer that doesn’t know how to get things done and to make matters worse, they bought it for an undisclosed sum right before the mini market crash of 2008.  If prices keep falling as they are now is anything going to get built there?

And if it does get built how much responsibility will the city end up taking for falling profit margins or ‘developer inexperience’? Are we looking at the potential for another Olympic Village scenario?

Housing market keeps on cooling

The Globe and Mail has an article about the drop off in real estate sales across the nation.

It’s got some gems in it for predictions from bankers and real estate associations, but it’s also got the standard partial information about ‘government interference’.

As evidence mounted that rock-bottom interest rates were fuelling house prices and consumer debt loads, Mr. Flaherty has changed mortgage insurance rules four times, each time making it more difficult for consumers to take on housing-related debt.

While the three previous rounds crimped both housing activity and the demand for credit, economists and real estate industry experts say this latest round, which took effect July 9, looks as if it is having a bigger impact.

And off course what’s missing is any mention of the government previous moves to make it easier for consumers to take on housing-related debt: moving amortization from 25 to 30 to 35 years, dropping down payment requirements all the way to zero down and shoveling money into mortgage buybacks via the CMHC.

So anyways, it’s getting harder to buy than it was when you could get a zero down mortgage with a longer amortization schedule.  And what sort of horrors has this wrought?

A number of economists, real estate agents, and industry observers say that many prospective first-time buyers have found themselves unable to secure a mortgage, especially in Toronto and Vancouver, and are therefore remaining renters.

Paula Roberts, a mortgage broker based in Markham, Ont., said one of her clients, a young teacher, was preapproved under the old rules, but now that she has found a home she likes, is having trouble securing the mortgage. She will likely have to get someone to co-sign the loan, or come up with a larger down payment, Ms. Roberts said.

“It’s really hindering people,” she said. “Her rent is basically the same as her mortgage payments.” In Ms. Roberts’ opinion, “it’s always better to try to buy something instead of rent.”

Of course, it’s always better to try to buy ..Says the mortgage broker.  Business slowing down Paula?

But this article ends on a bit of a down note for those hoping for a ‘plateau’

David Madani, a bearish economist at Capital Economics, reiterated his forecast Monday that house prices will fall 25 per cent in the next year or two. “The first sign of trouble at the peak of the U.S. housing bubble was that home sales began to drop in 2005, well before house prices began to fall in 2006,” he wrote in a research note.

Read the full article at the Globe and Mail.

Renovation Time!

Sales have dropped off a steep cliff in Vancouver.

Last July came in more than 30 percent below the 10 year average.

But one thing is picking up: Renovations.

Instead of upgrading to a better home more people seem to be staying put and trying to make their home better.

The amount spent on renovations has gone up every year for the past several years, Simpson said, but added that he isn’t sure if that’s because more people are renovating or because they’ve become more expensive.

Canada Mortgage and Housing Corp’s third-quarter Housing Market Outlook, released in August, said renovation spending in 2011 was $61.7 billion in Canada. CMHC says that amount will moderate in 2012, growing to $63.3 billion, but is expected to strengthen in 2013 to $65.6 billion.

In B.C., spending on renovations in 2011 was $7.6 billion. Spending is expected to remain stable in 2012 and grow to $7.8 billion next year.

For the most part, business is good for contractors, even in this year’s moderate market, Simpson said.

“One contractor I talked to said he’s having his best year ever,” Simpson said. “He said one client bought a home and they’re spending money to update it, but most clients want to stay where they are and bring their homes up to date.”

I guess the advantage of living in a construction zone is that you can do it a little bit at a time when you can afford it, like buying a little bit of a house at a time instead of all at once.  Sounds like some people are also finding it harder to get financing for their dream homes:

Another contractor told Simpson he’s had some customers having a harder time borrowing money from the bank, which may be a result of new mortgage refinancing rules. “Some people seem to be getting a little pushback from the banks, or they might not be able to borrow as much as they want,” Simpson said. “If they can’t obtain the financing, they just have to scale it back a bit. With a renovation, you don’t have to do it all at the same time.”

Read the full article over at the Vancouver Sun.