Real Estate

Vancouver housing bubble?

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Jul 3, 2011
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Why isn't the fact that real estate has tripled over 10 years enough for it to drop?...
Adamtheman, It’s not a fact only if one closes their eyes and pretends those of us who say a correction will happen aren’t saying a correction will happen.
... why won't the CMHC debt ceiling be enough to cause that? No one seems to address the CMHC debt ceiling issue here.
Because none of you understand the brilliance behind the manoeuvres by OSFI and Flaherty regarding the new mortgage rules and the CMHC. Reading these posts leaves the distinct impression that you crash proponents expect that all insured owners will suddenly and all at once default on their loans thereby enriching the mortgage cos vaults with $600 billion in cash – no subrogation, no mitigation of losses, nothing. That is absurd! That’s akin to expecting every car owner to suddenly crash and demolish their cars wherein the finance cos then bankrupt the insurance cos.

I said it many months ago when others were pontificating about CMHC’s ceiling being imminently breached that they would not be increasing that ceiling this year – and they will not. Anyone who thinks the announcement that the government was going to privatize CMHC was a faux pas by the media should think again. Harper actually put out an unofficial invitation to tender and only triple A Canadian registered insurnace companies need apply. The very intention of all the changes this year are to ensure that renewed (insured) mortgages are not increased and those that can’t meet the requirements must sell. Therefore any increase in the insurance in force is expected to be offset at the very least by deadwood sellers. If any increase to the limit is required it will be minimal and instituted only for CMHC’s purchasers’ benefit next year.

That’s a nice chunk of change hitting Ottawa’s coffers isn’t it?
Why? Let's see... in 2005 as you mentioned, the government introduced the 40 year mortgages. You write this off as being insignificant, yet I disagree.
I do not write it off as insignificant you prefer to think I do. That you won’t recognize the truth to my statements that those mortgage renewals started coming up for renewal 16 months ago means that you would rather dismiss the fact that only 12 months remain until the vast majority of all 40 year mortgages issued have run off. None could have been issued after November 2008. That 40 year terms taken over 16 months worth of the 29 months have long been removed from the books eludes you. So your following statement is irrelevant:
I wouldn't finance someone for a 40 year 0% down mortage, would you? But the government did. They backed it all.
With the rest of your statements it appears you’ve now switched your argument to the reason for the bubble as opposed to whether or not the market will correct or crash.

The causes are now irrelevant to the current direction of this market because we cannot go back in time and undo them. The real estate market will always experience peaks, corrections or crashes for various reasons some of which will be unavoidable.
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licenced wrote: Because none of you understand the brilliance behind the manoeuvres by OSFI and Flaherty regarding the new mortgage rules and the CMHC. Reading these posts leaves the distinct impression that you crash proponents expect that all insured owners will suddenly and all at once default on their loans thereby enriching the mortgage cos vaults with $600 billion in cash – no subrogation, no mitigation of losses, nothing. That is absurd! That’s akin to expecting every car owner to suddenly crash and demolish their cars wherein the finance cos then bankrupt the insurance cos.
What happens when new financing is pulled against an asset class that is entirely dependant on financing? The price of that asset class crashes, right? That's the problem with CMHC and its "insurance" model -- the "insurance" itself is causing the price of the asset class itself to be propped up (the banks mostly stopped lending to the market in the wake of the 2008/2009 crash). Once the insurance can no longer do that, prices collapse. Just like a Ponzi scheme that is unable to attract additional investors.

$600B is the current cap, but as the market slides, and as defaults occur with the marginal credits, many people who previously bought with 20-70% equity will be forced to buy CMHC insurance because of their decreasing equity and increased perception of poor credit-worthi-ness. Some of those will end up defaulting as well. It will just keep going on and on until the market has been liquidated of overpriced housing, which, in the contemporary environment, is probably somewhere between 1X and 2X income.
That’s akin to expecting every car owner to suddenly crash and demolish their cars wherein the finance cos then bankrupt the insurance cos.
No its not. No asset is destroyed in the process of forcing the price down on an asset and defaulting on debt. The banks still get to write new loans against the defaulted houses one they revert to new owners. But not at the 3% loans that are going out these days -- but at far higher rates of interest. Destruction of an asset (a car) is completely different than deflating the price of an asset but still leaving the asset intact as collateral.

I said it many months ago when others were pontificating about CMHC’s ceiling being imminently breached that they would not be increasing that ceiling this year – and they will not. Anyone who thinks the announcement that the government was going to privatize CMHC was a faux pas by the media should think again. Harper actually put out an unofficial invitation to tender and only triple A Canadian registered insurnace companies need apply.
Nobody is going to buy into a privatized CMHC. There is no value there whatsoever, unless the government continues to provide the guarantees. The organization is not only worthless, but is sitting on an iceberg of a liability in the hundreds of billions of dollars. Go read about Fannie Mae and Freddie Mac in the United States and the massive amount of taxpayer support those "private" companies have required.

If the government even hints at a sort of privatization of the CMHC that doesn't involve taxpayer guarantees, Canadian banks will race to unload CMHC-insured debt and force the loans into default prematurely by whatever means necessary. Raising "Prime" to 20% would kill off all the adjustable rate loans that are CMHC-insured, eh? It would be quite the calamity.
That’s a nice chunk of change hitting Ottawa’s coffers isn’t it?
LMFAO, nobody's going to pay a dime for that junk, and the only money moving out of Ottawa's coffers will be insurance claims paid by the CMHC to the chartered banks who hold subprime debt insured by the CMHC.
TodayHello wrote: ...The Banks are smarter than you - they have floors full of people whose job it is to read Mark77 posts...
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adamtheman wrote: I wonder how many people are going into debt, say, $500 or $1000 each month? We know that numerous rental properties are negative cash flow for the owners after maintenance fees and property taxes. As I mentioned, the last condo I rented was $850 a month. It was a $250,000 condo, with a monthly maintenance fee around $250 a month and property taxes/utilities of maybe $50 a month after the HOG. That means my landlord was getting a $6,600 annual return on his $250,000 investment. That's a 2.64% return, which is barely enough to cover a variable rate mortgage (which I am sure he had). On top of that he was supposed to be paying taxes on the rent (minus mortgage interest deductions, etc) which would bring it down even more.
He would have been able to claim a capital cost allowance which would have basically resulted in no income tax arising from the transaction. However he basically would have earned almost no return on his equity, and no return on his management expertise. Additionally, he faces all of the downside risk in the asset, whether it be disruptions to cashflow (ie: vacancy), or disruptions to price (ie: depreciation). Plus condo fees typically are only a portion of what is really required for long-term maintenance and include no interior maintenance.

The problem is, just like the stock market, when everyone wants to sell, and no one wants to buy, there is an issue of supply and demand.
Its not that nobody wants to buy, its that nobody can buy. The CMHC has no more room to guarantee sub-prime credits. As prices drop, many credits will revert from being of prime quality to sub-prime quality, thus requiring CMHC insurance to renew the loan. Even after a bunch of defaults, there won't be magically a bunch of CMHC 'room' available for people to buy with, because there's still the existing loan base that will be seeking out that insurance.
The MOI then goes up and prices come down. Since prices have gone up so much, this is more likely to happen because people who list their house for, say, $1,000,000 will be more likely to say "You know what, let's just lower it to $900,000 and sell it in 1 day" if they originally bought the house at, say, $500,000. It's a matter of $400,000 profit versus $500,000 profit. They don't want to risk losing it all if they are speculating, so they will sell.
Yes, plenty of people have relatively low cost basis' and won't hesitate to sell for less to make a transaction go through. Especially so if some other asset class (ie: gold stocks, banks, etc.) starts to appreciate rapidly -- taking a 10% discount on selling an asset quickly isn't a big deal if you're buying stocks that are perceived to be increasing at 20-30%/year (for example!). Just like people snicker at my suggestion that now is the time to buy stocks (when they're in a deep sale), people will eventually snicker at the suggestion of buying houses, when stocks are going up rapidly and making everyone around them rich.
The banks were standing there with bags full of money, all backed by the government, ready to give it out to anyone with a pulse. This time that won't happen. So the question is, how can prices rebound in the Spring if there's no financing available for buyers?
The banks will still be standing there, but as loan sharks with bags full of money this time around. Banks can smell the blood in the water when a particular asset class starts dropping and significant numbers of people are in distress. Remember, banks are in business only to make their shareholders (and employees) rich. They're not there to better the public good, or to help "innocent" families. Nobody is "richer than they think". The banker is never your friend over the long run.
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licenced wrote: Adamtheman, It’s not a fact only if one closes their eyes and pretends those of us who say a correction will happen aren’t saying a correction will happen.

Because none of you understand the brilliance behind the manoeuvres by OSFI and Flaherty regarding the new mortgage rules and the CMHC. Reading these posts leaves the distinct impression that you crash proponents expect that all insured owners will suddenly and all at once default on their loans thereby enriching the mortgage cos vaults with $600 billion in cash – no subrogation, no mitigation of losses, nothing. That is absurd! That’s akin to expecting every car owner to suddenly crash and demolish their cars wherein the finance cos then bankrupt the insurance cos.
This is where you are underestimating what it takes to cause a crash. Not every homeowner needs to default at once. Not even close. In fact, it's not even about defaults it's about people taking their profits once this ship starts to sink. Look at AAPL stocks today as an example. they went up over 100% in a year. Now, the latest earnings report came out and it was actually pretty good. But the stock is dropping, fast. Why? Because it's so overvalued, and there's been so much profit made, that investors and institutions are taking profits. Vancouver real estate has tripled in 10 years. So no defaults required, just fear. Lots and lots of fear. That being said, there will be defaults, and they will be mostly speculators. You seem to have this picture in your head of every home in Canada being owned by a nice family, with good jobs and a few kids, maybe a dog. News flash... there's a ton of condos owned by speculators who aren't prepared for anything other than 10-12% gains year after year.
I do not write it off as insignificant you prefer to think I do. That you won’t recognize the truth to my statements that those mortgage renewals started coming up for renewal 16 months ago means that you would rather dismiss the fact that only 12 months remain until the vast majority of all 40 year mortgages issued have run off. None could have been issued after November 2008. That 40 year terms taken over 16 months worth of the 29 months have long been removed from the books eludes you.
The 40 year mortgages only successfully renewed because of all the liquidity being pumped into the housing market and prices going UP. Had prices plunged, those people would have bailed, declared bankrupty and moved on. No need for them to hang around, they have nothing invested in the property. And those people aren't even close to being out of the woods yet. First of all, those people with the 40 year CMHC mortgages can continue their amoritzation, so they now have 35 year mortgages. In those first 5 years they hardly paid anything towards principal, it mostly went to interest. So 35 years left, and now housing is about to crash. Let's see how they do over the next 5 years when the CMHC ceiling isn't increased at all, and doesn't go up 107% in 6 years. The last 6 years made anyone who invested in housing look like a genius, just like in the 90's anyone who invested in stocks was all of a sudden a guru who was to become the next Warren Buffet.
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adamtheman wrote: That being said, there will be defaults, and they will be mostly speculators. You seem to have this picture in your head of every home in Canada being owned by a nice family, with good jobs and a few kids, maybe a dog. News flash... there's a ton of condos owned by speculators who aren't prepared for anything other than 10-12% gains year after year.
I guess the veracity of this comment highly depends on what you define as a 'speculator', but there are enormous amounts of Canadians who are in way over their heads, in jobs that are highly dependant on the performance of the RE industry (or continued high levels of transactions in the financial industry). While we don't really define those people as 'speculators', they, too, will be caught up in such. As will many public servants who bought under the assumption that their overpaid jobs would remain high-paying for a long time to come, even though a significant period of government cutbacks is in our near future.

The real trouble with Canada's economy in much of the past decade is that most of the job gains have gone to people in government/FIRE, and these are the same people who have been buying the houses. Its certainly not the past decades worth of grads or workers in manufacturing that have been the drivers of the market.
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licenced wrote: I do not write it off as insignificant you prefer to think I do. That you won’t recognize the truth to my statements that those mortgage renewals started coming up for renewal 16 months ago means that you would rather dismiss the fact that only 12 months remain until the vast majority of all 40 year mortgages issued have run off. None could have been issued after November 2008. That 40 year terms taken over 16 months worth of the 29 months have long been removed from the books eludes you. So your following statement is irrelevant:
I tend to disagree a bit. You know that in the last year or two CMHC posted huge claims - hundred of millions of $$$, even over a $ Billion. (the real numbers exceeding many time their projections).
You know - as a solid government institution with not much work to do CMHC do have nice 5 years plans - if you have time to kill - just download their plans and then compare to the real numbers.

One thing is for sure - the data regarding these monstrous claims will be kept government secret. (were they FTB with 0% down, their locations, amount of each claim, fraud...)
And the actual losses on claims appear to be accelerating in the latest available update.

But you, your governing body and perhaps the public can claim that this transition was "harmless".
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Adamtheman, this is where you underestimate what it takes to drive a crash. Most people do not look at housing as a stock to trade. When you understand it is not considered a commodity you’ll begin to understand that fact. I don’t know how old you are but I doubt very much you witnessed the crash of the ‘90’s. I did. On my street just a few people who bought houses at the high sold at a loss. The rest like myself stayed put and I bought just 2 years before at 18.5% interest with a 17 year amortization. That is what underlines the fallacy of your argument for you look at it as though everyone is in your shoes.

That crash was precipitated by the most rapid increase in average house prices – 186.6% from 1982 to 1989 exacerbated by the unsustainable interests neither homeowners nor businesses could sustain along with massive losses within the emerging tech industries and the ensuing layoffs. Whereas from its low in 1996 to end of September 2012 the average GTA house price has risen 152% and as already demonstrated, the 40 year term you wish to target as the bane of the crash has no more than 12 months left to run off where the majority have already been rolled over at low rates. The 35 year terms start to become due next year at low terms and massive gains in equity. Only the deadwood will cash out and Harper would have weighed this.

It doesn’t matter what reason you want to pull out now as to why they renewed, they did and that destroys your argument.

The other incorrect presumption is the extent by which investors might want to take their profits. When you sell property as I do you get to see who is buying and for what reason. The majority of these are not what you and others like to claim – HAM and flipper investors. The truth in that statement lies in the fact that 70% of all household residences are owner occupied. In other words Adamtheman, they’re not occupied by some rich dude with an address in Hong Kong.

Certainly some investors and flippers will lose. There is always a percentage who do regardless of whether or not the market tanks . But it is not enough in and of itself to crash the market.

It doesn’t matter if equity vanishes by 30 or even 40% for the majority of homeowners as long as they are able to carry the mortgage they’re not looking at it as a real loss or being underwater if their initial investment hasn’t evaporated. Because unlike stocks and commodities it will not become a worthless piece of paper with a nice looking medallion on it stuffed in a shoebox – it has a roof they can live under.

Many in here have told you this as did I, but you refuse to acknowledge that not everyone’s circumstances are like your own and your arguments are forever circular which is why I end this exchange with you here.

Bcgboy
The loss of $1b is not out of the ordinary. I well understand and thoroughly vet CMHC’s reports. I didn’t manage the Canadian financial operations of two major international insurance corporations without understanding what an IBNR is, how it is determined and how it impacts claims incurred which for all intents and purposes is a combination of actual (real) and projected losses that may never materialize. Their losses will not be kept secret, there is no conspiracy in OSFI taking over.
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licenced wrote: It doesn’t matter if equity vanishes by 30 or even 40% for the majority of homeowners as long as they are able to carry the mortgage they’re not looking at it as a real loss or being underwater if their initial investment hasn’t evaporated. Because unlike stocks and commodities it will not become a worthless piece of paper with a nice looking medallion on it stuffed in a shoebox – it has a roof they can live under.
Actually it does matter because no equity = much higher interest rates and lending spreads applicable to the debt. Currently adjustable rate loans are available at roughly 125-150bp above the BoC target for most borrowers. Historically this is quite low, leading to rather poor bank profitability.

As equity evaporates, lenders will review the housing market and question why they are giving the 'best' rates to house borrowers with increasingly shaky collateral. The revulsion to lending that ensues promises to suck a lot more money out of the pockets of homeowners each and every month. For many families who exist "at the margin" of housing affordability (ie: the folks who couldn't save up a proper downpayment to begin with and had to rely upon CMHC insurance, which is basically all of the buyers in the past few years) -- selling the house and filing for bankruptcy will be their only option.

Of course widening spreads are fantastic for the banks and will drive bank profitability to extreme heights on a go-forward basis. Meanwhile the BoC/GoC will have all the stops pulled out, including the maintenance of low policy rates, in a valiant attempt to revive the housing market and keep the CMHC insurance claims to a minimum. The end result is that bank shareholders and certain high-level bank employees (but not rank-and-file wage-earners at the bank) will see their value increase dramatically. The 1990s saw the Canadian banks triple and quadruple in their quoted share prices (BMO went up 500% IIRC), even in an environment where the technology bubble extracted almost every cent of new stock market investment.

Its not doom and gloom for the Canadian economy by any means -- the wealth in the hands, the dividends, etc., of the bank owners will be spent into the economy. Bank share ownership tends to be more concentrated than housing ownership, so the luxury goods market should do quite well in Canada. But I would hate to be a retailler selling "faux luxury" goods (the sort of stuff that suddenly "rich" trailer trash spends their money on, like 4x4 trucks, jet-skis, BMWs, motorhomes and camping trailers, etc.).
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if you guys have some time, read the following article it really gives a good perspective on housing bubbles in Canada
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gomyone wrote: Mark77 made an interesting point about bubbles being "relative". Then we get into this discussion about gold, gold companies and Vancouver real estate and are talking about which is the biggest bubble. So I thought, hey, why not actually do some analysis and see where the biggest "relative" bubble is - after all everybody's got an opinion but the data speaks the truth. So here's the plot indexed back to 1995 (a pretty neutral starting point) for Vancouver house prices, the raw Gold commodity price and TSX precious metals index. Based on the same starting point - which looks most overvalued (ie., most inflated) to you? To me, Vancouver house prices look way less undervalued than the other two very bubbly asset classese.
Pick some different dates, ummm, try going back to 1980 for instance instead of picking the bottom of a long-term decline in gold.

However, I do agree that physical gold is in quite a bubble relative to the prices on the mining companies. Which is why the mining companies have a considerable ways to rally.

[IMG]http://i883.photobucket.com/albums/ac37 ... prices.jpg[/IMG][/quote]
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adamtheman wrote: Why isn't the fact that real estate has tripled over 10 years enough for it to drop? What if real estate went up 1000% over 10 years. Or 10000%? Still, it would require some sort of outside force to drive it down? And if that is true, why won't the CMHC debt ceiling be enough to cause that? No one seems to address the CMHC debt ceiling issue here.
I address it all the time adamtheman. Alchemizing nearly $1T (ie: the $600B at the CMHC, and the $300B at Genworth) into risk-free government debt has obviously had an enormous distorting effect on the housing market in terms of prices, in terms of forming new capacity that otherwise isn't economically warranted.

The worst part of it is that CMHC, by definition, is financing the most marginal part of the market, the sub-prime segment. This isn't $1T of cheap money being given to the best credits possible (which ordinarily would be the course of a market with no interferance), to lower their financing costs -- its $1T of cheap money being given to people who have proven they have no ability to save or manage their money, because they were unable to save up for downpayments!

Normally sub-prime debt would cost between 8 and 10%. CMHC is allowing people to get loans for 3-4%. So essentially CMHC is creating a $40-$50B/year subsidy to the Canadian banking and RE industry. Its not a 'cash' liability or transfer right now, but is rather an off-balance sheet liability of the CMHC that continues to grow and will eventually be converted to a cash liability as the housing market reverts to more historically normal pricing.
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adamtheman wrote: This thread is sort of a catch-all for BC. I do post stats for Victoria and the rest of BC occasionally, but you are right, this is mosty for the GVR. The population in Victoria and central Vancouver Island just isn't large enough to really focus on. But it is definitely a bit mess over there. I used to live over there, so I know what's going on from friends and family who tell me. Parksville seems like a giant disaster, so does Nanaimo. I think these areas are really overinflated, Nanaimo especially. Surrey by the sea, as they call it... :lol:
The population isn't large enough as you say , but trust me , the bubble and speculation here is at least as big if not bigger than in GVR
Not only the bubble itself , but the the amount of delusion and arrogance of the people here is unbelievable , the people here are absolute clowns and the real estate agent here are the biggest , laziest bums you will ever see
Nanaimo , Parksville , Qualicum Beach , Port Alberni , Comox Valley (Comox & Courtenay) and Campbell River will get raped far worse than any other place in GVR when $hit hit the fan

As for Nanaimo , I don't like this city at all, it's probably the worst place to live in the central island , but comparing it to Surrey is a little bit too much
Surrey is an ABSOLUTE $hit hole , Nanaimo definitely got some very ugly areas but overall it still light year better than Surrey
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SH0GUNS wrote: The population isn't large enough as you say , but trust me , the bubble and speculation here is at least as big if not bigger than in GVR
Not only the bubble itself , but the the amount of delusion and arrogance of the people here is unbelievable , the people here are absolute clowns and the real estate agent here are the biggest , laziest bums you will ever see
Nanaimo , Parksville , Qualicum Beach , Port Alberni , Comox Valley (Comox & Courtenay) and Campbell River will get raped far worse than any other place in GVR when $hit hit the fan
And what sort of SFH price to average income ratio are we looking at in those communities? Its been my experience that smaller communities tend to have less leverage and less speculation associated with them, although additional (over)capacity is far more easily formed.
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http://www.globaltvbc.com/video/swf/Glo ... o+PreSales

One of the most bearish news segments I've seen on Global BC. They start off by saying the pre-sale market is dead. Then even Ian Watt (one of the top Vancouver condo realtors) comes on and basically describes the condo market as the bubble it is. Interesting.

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