Vancouver Condo Info

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.

Paul Jenkins, the senior Deputy Governor at the Bank of Canada has joined Flaherty and Carney in declaring that there is no Canadian housing bubble.  So many officials seem so desperate to make comments about this subject right now, but why are they so desperate to reassure us?  Of course there is no Canadian housing bubble, just look at house prices in Windsor.  What I’d really like to hear them say is that there is no housing bubble in Vancouver, then we could all relax.

The federal government said last week it will bring in new mortgage rules to cool the housing sector and prevent home buyers, tempted by record low interest rates, from overextending themselves.

At the same time, it said there was no housing bubble, a point echoed on Monday by Jenkins, who was speaking at a panel discussion at the Government of Canada and Financial Times Global Business Leaders Day in Vancouver, where the housing market is especially hot.

“At the moment, we are certainly seeing a certain amount of the recovery in the Canadian economy coming from the housing sector” he said.

“I would certainly not say we are looking at a housing bubble,” he added.

Article in the Vancouver Sun.

From the Vancouver Sun:

Although January construction numbers are up to 198,600 jobs, it is below the 202,100 jobs from a year ago, and a far cry from the 220,800 jobs during the boom.

The good news is that new construction is on the rise in the province, with the seasonally adjusted annual rate of housing starts reaching 186,300 units in January, a 5.8-per-cent increase from December.

That’s much better than the 149,081 housing units to begin 2009, but the construction starts have progressed steadily until now, according to the Canada Mortgage and Housing Corp. It’s even better than the figure that economists from financial institutions had been predicting.

The pessimistic CREA throws some cold water on this positive news by predicting that the HST and higher interest rates will push the real estate market down in 2011.

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.

Several people have posted a link to this article on the German news site Bild.com: Some athletes and coaches have complained about accomodations at the Vancouver Olympic Village, which is pertinent for this site since those units are set to be sold by the city after the games are over.

One of the complaints is that the walls of the rooms are so thin that the athletes are struggling to fall asleep – not a good time to have snorers nearby…

Ski jumping trainer Werner Schuster compared the Olympic Village with a boy scout camp. The 41-year-old said: “The living standard is very poor. Five, six people have to share a bathroom and the walls are as thin as curtains.”

I wonder if the complaints regard temporary walls or actual walls between units?

The size the accommodation has also been criticised. A particularly sore point is that there isn’t enough space for athletes to dry their clothes.

Don’t they know this is Vancouver?  We pioneered the art of small living in North America.  They should just be glad we didn’t stick them six to a room in a 270 square foot micro condo in the Downtown eastside.

A German functionary said: “The Village is good for summer. But now in winter with this weather it’s a problem.

“The German team have especially bought heaters to dry their things which are always getting wet due to the relentless sleet.”

It’s all about location, location, location.  That’s why we located the Athletes village walking distance from Canadian Tire, where they can buy heaters to dry their clothes.

UPDATE: Nope. We didn’t locate it near a Canadian Tire. Many people pointed out that this is about the Whistler Olympic Village, NOT the Vancouver Olympic Village.

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.

Several readers pointed out the news that the Competition Bureau has launched an aggressive attack on the Canadian Real Estate Association, challenging their monopoly over the MLS and calling for major changes in the way homes are sold.

“Our concern is that [CREA] are improperly and unlawfully leveraging [their control over MLS] in order to impose these restrictions and to deny competitive forces and to deny good old-fashioned market competition,” said Competition Commissioner Melanie Aitken. “This case is focused pure and simple: Let consumers have the choice, let agents have the opportunity to satisfy and serve those choices.”

The Globe and Mail had an online question an answer session with Dale Ripplinger of the CREA and the transcript of that chat is available 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.