The industry spins, but did pigs just fly? Somerville concedes prices could drop significantly!

February real estate sales statistics are out and the news is now hitting the media.

"Greater Vancouver home sales, prices plummet," says the 24 Hours newspaper.

This one catches the eye because it is devoid of any of the P/R spin from the regular players. In fact the opening sentence is almost like a cheap-shot directed towards industry rationalization of the last few months:

While Vancouver’s housing market has remained relatively strong since the 2008 financial crisis compared to most of North America, home sales took a dramatic dip last month compared to the same time last year. 

You can almost feel the word 'zing' brush past your face.

The basic numbers for February:

Residential property sales plummeted 29.4% in February versus the year before, reaching their second lowest total in more than a decade, according to figures released Monday by the Real Estate Board of Greater Vancouver.

The 1,797 homes sold represented a 30.9% decrease for the month’s 10-year sales average.

Home prices dropped noticeably last month compared to a year before.

Apartment prices in Greater Vancouver decreased 3% to a benchmark $360,400, while detached properties fell 4.5% to $901,500. Attached properties were least affected by this latest downward trend, dropping 0.7% to a benchmark price of $455,500.

Industry spin isn't completely absent, however. As noted in Business in Vancouver, "Vancouver home sales drop 29% but turnaround in sight: REBGV"

The 'turnaround' that the Real Estate Board of Greater Vancouver (REBGV) is hanging their hopes on is their belief that a few indicators hint the trend toward recent weakness is subsiding.

The hints lie in what the REBGV believes are positive signs from a much higher sales-to-listings ratio and slightly higher prices.

So amidst the highest listings totals for this time of year ever and an average price that was skewed higher because of low sales impacted with three large sales , this is a sign of a turnaround?

LOL... I think they call this 'hopium'?

Meanwhile the spin from other quarters is that 'traction' is emerging as the masses grow tired of waiting for the bubble to pop. 

As noted in the Globe and Mail: "Home sales slip further, but signs of traction emerge."

This time it's CIBC's Benny Tal:

Canada’s housing market may still be cooling, but there are fears in some quarters that “bubble fatigue” will pump it back up heading into the spring season.

What economist Benjamin Tal means when he uses that phrase is that home buyers are skeptical about whether the residential real estate market is heading for a sharp price and sales drop. At the same time, mortgage rates are declining, not rising.

Just this weekend, Bank of Montreal cut the price on its five-year, fixed-rate mortgage to 2.99 per cent from 3.09 per cent. That’s the lowest advertised rate among Canada’s big banks, and lower rates are available in the market.

“I think the spring will surprise on the upside,” the CIBC World Markets economist said on Monday.

Indeed, “bubble fatigue” may well prove wrong the forecast for dismal sales this spring, he added.

“People have been talking about a collapse for two years, so many are becoming a bit skeptical about that,” he said. “As well, rates are in fact going down, not up.”

What for 'bubble fatigue' to catch on as the latest way to rationalize a turnaround is coming.

But perhaps the most telling comment comes from our old friend Tsur Somerville.

Faithful readers know Somerville as the one you keeps telling us "prices are flat" and that holding our breath for prices to fall is pointless because it ain't going to happen.

But in this News1130 report,  Somerville appears to utter heresy:

A new report says homes in Metro Vancouver are overpriced by about 26 per cent...

“One thing that I find striking, though is that [with] current interest rates prices, make some sense, when compared to rents,” says Tsur Sommerville (sic) with UBC’s Sauder School of Business...

Relief might be on the way; the Fitch report says Vancouver’s overvalued real estate could correct by up to 15 per cent “over the next several years.”

“A lot depends on where interest rates go over the next few years,” explains Sommerville. “[If] interest rates three, four, five years from now are substantially higher than what they are now then housing prices will correct.”

Sommerville adds local home values could drop even more than the 15 per cent predicted by Fitch.

“If there was to be a correction, you might expect to see a bigger correction in house prices than in condos,” he explains.

So today becomes a historic day as even Somerville publicly concedes home prices could actually drop.

If one of the Province's chief bubble deniers is beginning to hedge his rhetoric, you know things are looking bad.

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The Evolution of Rationalization

We seem to have entered an interesting phase in the media coverage of our housing collapse.

Instead of denying there is even a bubble to burst in the first place, now the media is filled with economists and 'experts' who predict that prices will fall but by a moderate level that does not resemble the U.S. crash.

The latest to join the chorus (after Muir and Somerville yesterday) is CIBC deputy-chief economist Benjamin Tal.

Tal, however, takes it beyond accepting there will be some price declines and minimizing them. For Tal it's about ensuring slipping prices don't trigger a collapse in buyer/seller confidence.

"There is nothing to fear but fear itself... Panic is the worst thing that could happen because when that mentality sets in and people become irrational, it’s hard to forecast how low prices will go."

Tal, Muir and Somerville have one central worry: that Canadians are starting to talk themselves into a housing crash by creating a scenario in which every new statistic is interpreted in the most negative way with an eye on trying to constantly compare the Canadian housing market with what Americans experienced just before their housing prices plummeted by as much as 50% in some markets.

Which is why each and everyone of them keeps insisting/re-assuring that there will be no U.S. style crash in Canada.

Says Tal:

"When you see headlines screaming that Canadian household debt has reached a record level, an eerily similar spot to where Americans were before the market crashed there, it adds to concern. But the similarity ends with the headline-grabbing number. The quality of the debt is much different here."

Err... quality?

Tal maintains the people who have taken on more debt have a much higher credit score than the Americans who did the same prior to their market crash.

Ummm... But if Canadians are such a better risk than what do you make of a Bank of Montreal report that BMO came out with on Monday that noted that almost three-quarters of Canadian homeowners would feel a significant squeeze from even a small rise in interest rates?

The report basically says 73% of the people surveyed can’t afford their own homes. And a lot of them are already feeling the pinch.

A third of these people have already cut back on other spending so they can make the mortgage payment.

One in six has been forced to raid their savings to pay current costs.

This is at a time when interest rates are at historic lows, which means they can only go up. That they will rise, eventually, is inevitable. Yet 16% of the people in the survey said they might not be able to make their payments if rates rose by even a tenth.

So much for Canadian debt being of a higher quality.

Another key factor that Tal insists is ignored in the current housing bubble discussion is how much of our Canadian mortgage debt is locked in for longer terms and not subject to the vagaries of rising rates.

Tal says 70% to 80% of Americans were in variable products at the peak while the Canadian figure is 29% (Tal cites the latest survey from the Canadian Association of Mortgage Professionals for this statistic).

Umm... just a quick question here.  When you say only 29% of Canadians are in variable products... does that mean we don't count a mortgage that resets to a different interest rate after five years?

I mean, aren't ALL Canadians in variable products when you consider this factor?  How many Canadians have 30 year locked in mortgages like in the United States?

Blink... blink.

Sorry Tal... I know I'm afraid.

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Mon Post #3: Newsflash... it's "a stagnating housing market and in Vancouver prices are already falling from sky high levels a year ago"

On Sunday we told you that it's not the news per se that's important... it's how you spin it.

The GVREB had been hard at work MOPE'ing the news (Management of Perspective Economics) and had downplayed the third worst February in real estate sales on record (a decline of -17.8% from February of 2011) into a "pre-spring hike" in sales.

This was achieved when the GVREB compared those very same abysmal February 2012 numbers to that of the absolutely horrendous January 2012 numbers... instead of comparing them to the results of February 2011.

As a result February's abysmal numbers were promoted as being 61.4% higher than the horrid January numbers... thus a "pre-spring hike".

So how embarrassing is it for the GVREB, after heralding an awesome February in real estate sales, to open up today's edition of Canadian Business Magazine?

Generally the article painted a rosy outlook for Canadian Real Estate nationally by the CREA...

"Risks to the Canadian economic outlook remain elevated owing to the European sovereign debt quagmire, but the continuation of low interest rates is the silver lining. So long as the European debt crisis is contained and a global economic recession avoided, low interest rates will support Canadian home sales and prices - CREA chief economist Gregory Klump"

But buried in the article were a couple of real gems.

First off our old friend, CIBC economist Benjamin Tal, tells us the new CREA forecast is "if anything a best case scenario forecast."

Ouch!

Then Tal goes on to say his bias leans more "toward an expectation of more significant price declines."

Oh really?

Tal expects further price declines and that these declines will MORE SIGNIFICANT than what we have already seen?

Pass the popcorn and tell us more!

"This is basically a stagnating housing market," Tal said. "This is not a housing market that is going to be on fire. This is a housing market that you'll see activity moderating and prices actually going down."

Seems Benny is reading from a different script than the GVREB this month. What about Vancouver?

"In Vancouver, prices are already falling from sky high levels a year ago, especially in the once bustling condominium market."

Now I ask you... when you read the GVREB's take on February's numbers, did you come away with the message that Vancouver's prices are already falling from sky high levels a year ago? Or that more, significant price declines are in our future?

Hmmm... didn't think so.

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Our housing bubble "bound to burst"

One of the greatest complaints in the local blogosphere is that our mainstream media seems so beholden to the Real Estate industry because of the tremendous revenue stream they deliver via advertising.

That's why an article on Friday in the Vancouver daily newspaper, The Province, is such a pleasant surprise.

Saying what the blogosphere has known now for several years, The Province headlined "Housing Bubble Bound to Burst: When it does, the result isn't going to be pretty, economist says"

• With fresh signs from the Bank of Canada that interest rates will stay lower for longer, Canada's still-hot housing market has many of the hallmarks of the U.S. situation just a few years ago.
  
  House prices dipped during the recession, but bounced straight back and have kept climbing since. And homebuyers are taking on record debt to buy houses at historically high prices.
  
  When interest rates eventually rise, some forecasters warn the result isn't going to be pretty. "Our view is that we are in a housing bubble, that housing prices have risen very sharply over the last 10 years, and that there is a big disconnect between housing prices and fundamentals, including interest rates," said David Madani, an economist at Capital Economics in Toronto.
  
  "It really does look like a housing bubble that will have a very unhappy ending."

Now the economist making this prediction is David Madani of Capital Economics.  We have profiled Madani before and these statements are consistent with comments made earlier this year.

What is so surprising is to see one of Vancouver's two main daily newspapers headlining the news is such dramatic fashion.

The article notes what I believe will become a crucial point in the coming years when the collapse is well underway:

• "The government, fretting about high debt levels, is working to engineer [a]  soft landing with tighter rules for government-backed insured mortgages that took effect in March. The changes cap mortgage terms at 30 years rather than 35 and cut the amount homeowners could borrow against their homes to 85%  from 90%."

The Government is aware.  We have seen that in the comments of both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty.

Benjamin Tal, senior economist at CIBC World Markets says what is becoming the accepted wisdom on our current housing bubble:

• "In order to crash you need two preconditions: a huge increase in rates as in 1991, which is unlikely, and a subprime type situation, namely very low-quality mortgages."

The faith in low interest rates is tied to the worsening economic climate and level of sovereign debt. For 20 years now we have enjoyed artificially low interest rates to support the economy.

Faith in this going forward is folly but not as much folly as what Tal the Province article closed with:

• "Canada's national banks are more conservative lenders than America's fractured regional banks were, and there is virtually no sub-prime market, where riskier borrowers end up paying higher rates. Mortgage interest is not tax-deductible, so the incentive to buy a home is less. And a large slice of the mortgage market is insured by the government."

We have covered the folly of this extensively.  CMHC has enabled the lending through our banks and there most certainly sub prime borrowers out there... and in numbers that we believe will be proven to be far greater than in America.

So while it is pleasing to see the media cover the fact that this bubble will burst, it is disappointing to see the primary cause of the collapse continue to be justified.

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