Horseshoe Bay Property Assessment: A preview of what's to come?

As everyone spends the day talking about the big news that Bank of Canada Governor Mark Carney is leaving the BOC to assume the top spot at the Bank of England, let's turn our attention to property assessments for a moment.

As faithful readers know, we have spent a considerable amount of time profiling local properties which are falling in value below their 2011 assessed levels. In Richmond virtually all properties that are selling, are doing so below assessed value - and significantly at that.

And shortly the new assessments will come out for 2012.

Since they will be based on the HPI and calculated based on values in July 2012, the expectation is that assesments will not change very much - certainly they won't reflect the drops we have seen since summer.

But what about 2013?

Certainly if trends continue, the drops will be significant.  How will that impact municipalities dependant on property tax income?

Perhaps we are seeing a preview of that in West Vancouver right now.

In a news item that didn't get much attention, the Vancouver Sun recently had a piece about how the assessed value of Horseshoe Bay Ferry terminal has been slashed from $47 million to $20.

The District of West Vancouver is heading to court to fight a recent decision that slashed the assessed value of BC Ferries’ Horseshoe Bay ferry terminal to just $20 from more than $47 million.

The decision, made after BC Ferries argued the property was worthless because it’s restricted to use as a ferry terminal, could set a precedent for other assessing terminals such as Tsawwassen, Swartz Bay or Departure Bay.

The Horseshoe Bay dispute revolves around two parcels of land at the ferry terminal leased from the province, which had been valued at a total of $47.7 million.

Prior assessments had put the land value at about $44.15 million in 2011 and $45.6 million in 2010.

But this year, BC Ferries decided to appeal its assessment.

The BC Assessment Board's ruling to change the assessed value was largely based on a Newfoundland Supreme Court Case that pitted the town of Gander against the Gander International Airport. In that case, a parcel of land was found to have no value except as part of the airport. In that case, the appeal board ruled the port property could only be valued according to the restricted use imposed by the lease from the federal government.

Hence the change at Horseshoe Bay.

The take away that is important here (beyond the impact that the decision could have at other limited use facilities) is on realizing the amount of revenue loss faced by the City of West Vancouver in property taxes by just one property that has dropped significantly in 'assessed value.'

The decision essentially strips the municipality of about $250,000 of anticipated property taxes in 2013, meaning a possible two-per-cent increase in property taxes for homeowners.

“It’s a significant loss of revenue,” said Smith. The board’s decision is retroactive, meaning the district will be required to repay approximately $750,000 in property taxes it collected on the parcels going back to 2010.

Think about that. One single property in West Vancouver drops in value and it costs the municipality $250,000 in property taxes next year. While no one is suggesting all properties would drop 99% in value, imagine if the entire City sees every single property drop 10%, 20%, 30% or more in value?

According to BC Assessment, $6.2 billion in property taxes is collected across the entire province of British Columbia based on these valuations.

Any drop will impact municipalities profoundly.

Right now in Richmond, virtually every single property is selling below assessed value.  Some real estate agents are advising sellers to list a minimum of 10-15% below assessed value if they expect anyone to even look at their house.  We have profiled a number of homes that have sold for between 25%-34% below assessed value.

The impact has the potential to cost municipalities hundreds of millions of dollars.

For those that think a collapse in the housing bubble won't effect every single one of us, think again.

There are some very rocky times ahead.

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It's the Government's fault

Everywhere you turn right now, the federal government is getting the blame for the decline in housing sales.

The latest is an article in the Vancouver Observer:

“Things have actually been getting tough for almost a year, now. The folks who have been affected are primarily first time buyers and the self employed—even those with a good credit (FICO) score and a decent-sized down payment.” 

This could create a bit of a problem in Vancouver, where a significant percentage of young professionals are unincorporated sole proprietors who are financially responsible but who may still need someone like a parent with home equity to co-sign a loan. 

Even if you do own a home, the amount of money that a bank might lend to you on your home equity lines-of-credit (HELOC) has also dropped from 100 percent to 65 percent of the appraised value of your property. 

There are alternatives out there. There are what’s known as “B-lenders” or private lenders, who will charge a one to two percent fee along with a mortgage rate that can be as high as 10 percent. “So, right away you’re paying $1000 - $2000 on every $100,000 you borrow, and higher monthly mortgage payments.” 

So, perhaps there is a grain of truth to the recent comments from BC Real Estate Association Cameron Muir that new mortgage rules choked home sales in the Lower Mainland over the summer.

It's all the government's fault.

This will be the PR battleground over the course of the Winter and Spring months ahead because it's only going to get worse.

As many of you know, beginning this month (November 1) new regulations from the OSFI (Canada's banking regulator) have come into effect requiring most federally-regulated lenders to comply with its B-20 mortgage guidelines.

Banks have now brought in stricter rules on conventional mortgage qualification, self-employed income verification, borrowed down payments and cash-back mortgages.

All of which has some sectors of the real estate industry freaking out, guaranteeing more media stories attempting to blame the government for what's going on.

That's why it's great to see articles like this one in the Huffington Post. Titled, Canada Housing Slump: Flaherty's New Mortgage Rules A Scapegoat For A Much Bigger Problem, the Post right from the get-go identify what the issue really is:

This summer, Prime Minister Stephen Harper and Finance Minister Jim Flaherty took a regulatory hammer to Canada’s housing markets, causing condo sales to plummet in Toronto, and sinking Vancouver house prices by jaw-dropping margins. 

Or so the finance and real estate industries would have you believe. 

To hear Canada’s banks, industry groups and even the Conference Board tell it, the slowdown that descended on many Canadian housing markets over the summer is the fault of the strict new mortgage rules Flaherty put into place this past June. 

The media are happy to go along with it, because it offers a neat and simple explanation for why Canada's decade-long housing boom is coming to a halt. The only problem is, this isn’t what’s happening.

This isn't what's happening?

Oh really... do tell.

First the background: Flaherty tightened the rules for mortgages for the fourth time in as many years this past June, reducing the maximum length of a mortgage insured by the CMHC to 25 years from 30, effectively making that the maximum amortization period for most Canadians who take out mortgages. He also reduced the maximum amount you can borrow against the value of your house to 80 per cent from 85 per cent. These changes, like the previous ones, were aimed at ensuring that Canada's rising home prices weren't due to irresponsible lending and borrowing. 

The be sure, this will have a cooling effect on the housing market. There are prospective home buyers who just can’t afford the extra $140 per month, on average, that the shorter mortgage periods represent. Some homebuyers have just been priced out of the market. But can that alone explain the 70-per-cent drop in condo sales in Toronto, or the nine-per-cent drop in house prices in Vancouver? 

Highly unlikely. TD Bank forecast the impact of the mortgage rule changes on the housing market and found it would amount to a three per cent decrease in house prices -- far less than what Vancouver, for one, has already seen. Not to mention, we’ve had three previous rounds of mortgage rule tightening since 2008, and none of them tipped the market downward. Clearly, something else is happening here. 

The housing market’s fundamentals aren’t looking good. Standing in the way is that pesky basic law of economics — supply and demand. In some Canadian markets, those two things have become entirely detached from one another. 

As the CEOs of both BMO and RBC have attested, Canada’s real estate market is simply overbuilt -- particularly in Toronto, where condo construction has grown so thoroughly out of hand that there are now twice as many high-rises going up there as there are in New York City. 

And more, much more, construction is being planned. 

In Vancouver, where residential construction has been somewhat more restrained than in Toronto in recent years, the supply-demand disconnect is reflected in prices, which have flown so high that Vancouver has nearly as many houses listed for sale over $1 million as sell in the entire United States in a month. The city's housing costs ranked as the second least affordable in the world, after Hong Kong, in a recent survey. 

Across the country, house prices are now 35 per cent higher relative to income than has been the long-term trend through history, Bank of Canada Governor Mark Carney noted earlier this year. 

Simply put, prices are too high. Canadians aren't earning enough to justify these price levels. 

And closely linked to this is the elephant in the room: debt. It has never been cheaper to take on debt in Canada. With a global financial crisis busting out all around, the Bank of Canada dropped its base interest rate to one per cent in January, 2009, and it has stayed at or below that level for nearly four years now. 

All this has had an alarming effect on household balance sheets. StatsCan recently revised its measurement of household debt to make it more in line with international norms, and found the debt-to-income ratio hovering at a record 163.4 per cent, higher than the level the U.S. had when its housing market began a years-long decline half a decade ago. 

That offers more of a clue to why Canada’s housing market has peaked and appears to be on a downward trajectory. It’s basic mathematics writ small in the finances of households across the country — there’s just no more breathing room to borrow more money.

The Huffington Post concludes what all non-biased observers have concluded.  That adjustments to the mortgage rules were too little, too late.

The Post notes that what needs to happen is a re-balancing — or a correction, if you prefer.

Whatever the terminology, house prices have to come down relative to incomes. Then and only then can they return to healthy, stable levels of growth.

Federal Finance Minister Jim Flaherty sees it.

Bank of Canada Governor Mark Carney sees it.

And bloggers like this one see it.

The changes that were made had to be done.  And the result will be a continuing decline in housing prices.

As the Post says, "don't blame it on Harper and Flaherty. All they did was close the barn doors after the horses had fled, and help the chickens come home to roost."

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Will the Real Estate market recover like it did in 2009?

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Last night I was having a discussion with a co-worker about the current real estate market downturn.

He wanted my opinion on whether or not we might see a market rebound like we saw in 2009? Naturally I told him I don't believe the market will rebound this time.  

I took him through the logic.

Between August 2008 and March 2009, the average home price fell by 8.5% according to the Teranet-National Bank House Price Index. The decline was sparked by the 2008 financial crisis. But by November 2009, the market had already recovered.

What allowed things to recover?

A large part of the reason for the quick rebound was massive government intervention.

The Bank of Canada moved fast to slash interest rates to unprecedented lows, allowing banks to continue lending to businesses and consumers.

The federal government established a $125-billion program to buy mortgages it had already insured from banks and financial institutions, providing even more liquidity. Ultimately the Fed's bought mortgages worth a stunning $69.4 billion.

The Bank of Canada and the Federal Government did this because they were gambling that what was happening was your garden variety severe recession.

Normally these recessions last 3-5 years.

But this isn't a normal recession.  We still do not fully appreciate the breadth and depth of what is going on. What we are experiencing is a one-in a multigenerational crisis, one that will probably last up to 15 years.

The Federal Government and the Bank of Canada have started to recognize this.  Mark Carney has sounded warnings and alarms so often over the past year that some have begun to tune him out as you would the infamous little boy who alway cried wolf.

But the time has come for more than just warnings. And the government is scrambling to de-engineer what they started.

Demographia, an urban planning research firm and consultancy in the U.S., argues that prices become unaffordable when they exceed three times income. Canadians seized on the government intervention from 2008 and have managed to increase the country’s household debt to personal disposable income ratio to a record high of 163%.

Carney and Flaherty know this cannot continue.  The economy is not about to recover adequately anytime soon which means incomes cannot rise to deal with the record high debt.

And that debt is of massive concern.  Because of that concern, there will be no intervention by the federal government this time around.

So what will happen?

First off, you have to understand house prices are at the level they are because of government policy - not because they are 'worth' these values.

The housing market in a precarious position: we have a massive gap between prices and incomes, worsening affordability, and an indebted nation of homeowners unable to withstand economic shocks.

The federal government has no choice but to continue undoing  the mortgage changes that facilitated the boom. To avoid it would be extremely irresponsible... and they won't change course.

Most Canadians simply do not appreciate just how artificial our housing boom is and what this change in thinking by the government means for house values.

This is a boom that has been created by the artificial stimulus of excess credit. And the altering of the access to that artificial stimulus is going to have profound effects.

Consider how we got here:

• Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years.  CMHC also had limits on how much you could buy with their insurance.
• CMHC then lowered the down payment to 5% down with price limits depending on the area. Amortizations were 25 years. There would be no price limit on what they would insure if 10% or more was put down.
• By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased. 
• March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured.
• March 2006 you had  0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year.  Interest only payments were allowed for 10 years.
• November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years. 
• Canadian banks ramped this up by allowing up to 7% cash back offers is you would take on a mortgage with them.  You could basically get paid if you bought a house.

All of these were exacerbated by the emergency actions taken during the financial crisis.

As we mentioned earlier, the Bank of Canada moved fast to slash interest rates to unprecedented lows, allowing banks to continue lending to businesses and consumers. The federal government established a $125-billion program to buy mortgages it had already insured from banks and financial institutions, providing even more liquidity. Ultimately the Fed's bought mortgages worth a stunning $69.4 billion.

CMHC had their lending cap increased.  CMHC went from $100 Billion in insured mortgages in 2006 to $600 Billion in 2012.

We have reached the upper limits on how current incomes can be levered into higher and higher debt loads. Worse... the limits are being reversed denying many access to the ability to take on those upper level debt loads.

More significantly... there is less room to manoeuvre on other policy tools.

The overnight rate is now 1% compared to 3% in August 2008. Cutting rates to stimulate the market is hardly an option. Banks have less flexibility, too. A five-year fixed rate mortgage is roughly 3.8% today, down from 5.7% in late 2008.

Finally the argument that that foreign investors, predominantly wealthy Chinese citizens, are buying property here because Canada is a safe haven in a turbulent global economy and that this will defend the strength of the housing market is being shown not to be the salvation many once thought it was.

The credit spigot that has allowed so many Canadians to buy homes at boom levels is being turned off. 

Sales activity has slowed down and prices responded by initially plateauing and now they are beginning to fall.

There will be no intervention this time around.  This isn't 2008/2009 all over again.

The fact of the matter is that all booms created by excess credit go bust. Ours is a classic excess credit boom.

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Did the Greater Vancouver Home Builders’ Association just have the rug pulled out from under their media offensive?

On Wednesday we told you how Peter Simpson, president and CEO of the Greater Vancouver Home Builders’ Association, had launched a bit of a media campaign to try and apply some public pressure on Federal Finance Minister Jim Flaherty.

Simpson was hoping to play the 'economic' card and frame the recent mortgage issue as an economic threat for the government:

"The real threat to the economy is if a real-estate slowdown leads to a sharp reduction in housing starts. That’s because new-home construction stimulates the sale of appliances, carpets, and other products. For every housing start, there are 2.8 person years of employment that are create.That’s direct and indirect jobs. If it continues to fall, they’re going to have to take a good hard look at what their actions have caused — and be prepared to make some adjustments. I don’t know what those adjustments are.”

Even the headline tried to create the impression Flaherty's resolve on the issue was not that strong:

"Finance Minister Jim Flaherty may intervene in amortization period for home mortgages"

Somehow it only seems fitting that, only a day later, Bank of Canada Governor Mark Carney comes out with a strong statement on the topic of real estate and advises Canadians to "invest in 'productive capital,' not houses or condos."

How's that for a kick in the gonad's, Peter? Apparently your entire industry has been written off as the centre of massive Canadian mal-investment.

You could see the footprints of the spin machine in high gear in the Globe and Mail article:

Canada Mortgage and Housing Corp. reported that construction starts slipped in July to an annual pace of 208,500 from June's 222,100. That was largely due to a decline in multiple units, such as condominiums and apartments, in British Columbia.

"Canadian housing starts, particularly the multi-unit sector, have ebbed from extremely robust spring levels," said Robert Kavcic of BMO Nesbitt Burns.

"With stricter mortgage rules likely to cool demand in the remainder of the year, construction activity should moderate further to a more sustainable pace."

Seems Simpson's challenge to government that "if housing starts continue to fall in a declining real estate market, then government is going to have to take a good hard look at what their actions have caused", has been met and rebuffed.

The message: construction activity should reduce to a more 'sustainable' pace.

If Simpson thought he had Flaherty's ear on this topic, then Carney just played the role of Lucy to Simpson's Charlie Brown.

And just like in the Peanuts classic, you just knew what the outcome was going to be... and it still made you smile.

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Tues Post #1: Part of the Plan

Yesterday we posted that when the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

Cheap credit, artificially suppressed interest rates and government policy were used to fuel and protect the real estate boom in the hopes that the Great Global Recession would pass before the impact him home in the Land of the Maple Leaf.

How important has Real Estate been to the Canadian economy?

In 2010 the Canada Mortgage and Housing Corporation widely discussed the importance of the housing market for the Canadian economy in the CHMC publication 'Canadian Housing Observer'.

The CMHC’s numbers show that real-estate-related economic activity in 2009 contributed more than $300 billion to the Canadian economy.

That accounts for more than 20% per cent of Canada’s total gross domestic product.

Not only did new residential constructions and sales of current houses positively stimulate the economy by creating jobs, creating higher wages, creating investment, and creating government revenues but far more important to the government was the wealth effect motivated by increasing housing prices.

The housing bubble strengthened consumer confidence and, as a result, consumers spent more.

This was crucial for the Canadian economy. While the world was going through the Great Global Recession, this 'wealth effect' allowed Canada to get by without experiencing any real pain.

In an average recession, the economy starts to rebound after 3-5 years.

So the hope has been to get us through the worst of the recession and then allow growth in our resource based economy to mitigate the debt overhand.

The problem is that this was no ordinary recession.

As many in the blogosphere have noted, this economic crisis began with its financial system and as Bank of Canada Governor Mark Carney noted last week, “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

And that's the problem... the recovery is not going to come in time.

Our nation's plan of "channelling cheap and easy capital into unsustainable increases in consumption" is just that... unsustainable.

It's forced Carney to publically address what, until now, has been a topic confined to the realm of the blogosphere. To wit that the “debt super cycle” in which debt fuels consumer spending as a driver of the economy is an era which“is now decisively over.”

This public admission is stunning for those who have spent any amout of time watching the statements of public officials.

It's your best evidence that the time of reckoning is rapidly approaching.

Which begs the question... how will it all play out? 

As we posted back in 2009 in 'The Anatomy of a Bubble', no model can predict the timing, highs or lows of any bubble.

But all bubbles - be they real estate, stock market or whatever - tend to follow a pattern traced in human psychology.

And when any given bubble 'unwinds', it usually takes as long to wind down as it took to wind up.

Vancouver's real estate market has taken over 15 years to blow up into it's current state.  As a result one could logically expect that the decline will take years, not months, to play out.

Ideally officials like Carney want to see a gradual unwind. That's the plan.

But can you engineer an orderly unwind?

Things don't always go 'according to plan.' The variable is the unknown... events that upset the plan.

I mean let's face it. If things went according to plan, the Recession would be over by now, wouldn't it?

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Do you hear what I hear?

It's Christmas time in the city and the scarcity of posts from your dutiful scribe is a direct consequence of imbibing in the holiday spirit prevalent at this time of the year.

There's a lot going on and time simply doesn't permit delving into all the topics I would like to cover.

But I would be remiss if I didn't take a moment to reference an incredible speech given recently by Mark Carney, Governor of the Bank of Canada.

As the Globe and Mail noted, "Mr. Carney delivered a discourse so intelligent in its analysis and perceptive in its recommendations that it stands as the best speech delivered by any public figure in Ottawa in a very, very long time."

Carney says that he believes that the Western world stands at a point of “rupture.” For decades, countries borrowed beyond their means – leveraged themselves with accumulations of debt. “That era,” Mr. Carney proclaims, “is now decisively over.”

For many faithful readers, this is not news. However hearing such candor from the likes of Carney is... and it gives you a glimpse of the seriousness and gravity of the situation we are in.

As this blog says ad nauseum, the 2008 Financial Crisis was a severe financial earthquake whose depth and breadth we still do not fully appreciate.

Now... three years later, it is only becoming apparent.

Debt, particularly Sovereign Debt, is the issue of the coming decade.

Carney talks about the “debt super cycle” which occurred all around the world. It's that debt which fuelled consumer spending, not productive investments.

Excessive private debt wound up on the public ledger. The more households and governments borrowed for consumption, the less productive the economy became, which, in turn, means the overall debt burden was less sustainable.

Everywhere in the Western world, a long period of deleveraging – that is, reducing debts – has begun, or must begin.

The global economy, Mr. Carney predicts, risks entering a “prolonged period of deficient demand.” In Europe, there’ll be fiscal austerity, high unemployment and tight credit; in the U.S., personal and government debt will hang over the economy for years. The U.S. economic crisis began with its financial system, and Mr. Carney (agreeing with many others) notes that “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

When countries do what Western ones have done and borrow abroad to fund internal consumption, their situations become unsustainable.

Canada, Mr. Carney warns, is falling into that very trap, because “channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.”

Canadians have been running a net financial deficit for more that a decade, borrowing more than they’ve earned. Canadians’ household debt ratio is now worse than the Americans or the British, Mr. Carney says.

“Our demographics have turned, our productivity has slowed, and the world is undergoing a competitive deleveraging. We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.”

I would suggest that Carney has identified exactly what has been happening for the past five years.

When the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And CMHC increasing loan value on their books from just over $100 million to well over $700 million while assuming all lender risk.

Cheap credit, artificially suppressed interest rates and government policy have attempted to fuel and protect the real estate boom in the hopes the Great Global Recession would pass before the impacts him home in the Land of the Maple Leaf. In short our government gambled... much like the Trudeau government gambled on oil in the 1970s.

This isn't to excuse Carney's role in all of this, as the blogosphere constantly points out.

But the fact the at the Governor of the Bank of Canada is now completely dispensing with the malarkey about how splendidly Canada has done during the recession - on a regular basis - is a significant development.

Regrettably the average Canadian isn't hearing him.

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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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Yet another warning from Carney

Ahhh.... our own central banker is issuing warnings again. 

Dropping by the Village on the Edge of the Rainforest on Wednesday, Mark Carney chose Vancouver for a speech on housing.

How appropriate.

And what did he have to say?

The latest blatherings were a sharp warning that the housing market may be overheating. Seems his ultra-low interest rates, combined with too much optimism on the part of buyers, has been jacking up prices in places like Vancouver. 

With investment in residential properties nationwide now near peak levels, Carney left little doubt that he is concerned.

• “The risk is that expectations become extrapolative, prompting the classic market emotions of fear and greed – greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

Carney even singled out Vancouver saying that Asian wealth is fuelling valuations that in some cases are “extreme.”

Carney’s speech comes a day after a report from the Certified General Accountants Association of Canada showed household debt has hit $1.5-trillion.

If household debt were distributed evenly across all Canadians, the report said, a two-child household would owe an estimated $176,461, including mortgage costs.

Topping it all off was a report, that also came out on Wednesday, from Statistics Canada that showed Canadian families’ income from earnings, investments and private pensions fell 3.2% in 2009 to $63,000 – the first “significant” drop in market income since the early 1990s.

In the end it came down to Carney repeating the warnings he has been uttering for more than 18 months now as Canadian borrowers continue to binge on cheap credit,

Carney said the share of households “highly vulnerable to an adverse economic shock” has risen to its highest level in nine years.

He says borrowers and banks should "be careful."

Carney knows what the blogosphere has been saying for almost two years now: we are sitting on a powderkeg ready to implode.

In his speech Carney noted that real estate loans now make up more than 40% of Canadian banks’ assets, compared with 30%.

Our Nero-ish central banker called this “unprecedented exposure.”

• “The central position of housing assets and liabilities on the balance sheets of both households and financial institutions means that any housing excesses could generate important vulnerabilities in the financial system. Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks.”

Vancouver, of course,  is Ground Zero for this looming disaster with prices up an astounding 25.7% to $831,555 – more than 11 times the city’s average family income – from $661,745.

But there is no economic recovery and Carney can't raise interest rates yet.

He knows what's coming.  But after so many warnings, all the children in the Land of the Maple Leaf hear is the muffled "whaa, whaa, whaa" sound of the adults talking on the Peanuts cartoons and it becomes background noise to the oblivious.

The Financial Post had an interesting take on it, though.

• "With the Bank of Canada’s hands tied in so many ways when it comes to cooling off a housing bubble, the message for Canadians is simple: Homeowners you’re on your own on this one. Get sucked into the housing hype if you must, but be prepared for interest rates to rise — and with all that mortgage debt you’re carrying on your fancy new houses, be prepared for those rates hikes to bite."

Indeed. The Post even had this little tidbit:

• "Cut through the bankspeak and Mr. Carney also said some parts of the housing market may be acting like a classic financial bubble, with expectations of rising prices and ever higher returns driving dynamics rather than supply and demand."

No one knows when our bubble will burst, but Robert Kavcic, an economist at BMO Capital Markets, came out with an apt comparison given the events of this week in the NHL.

• “By pure coincidence of course, the last time the Canucks suffered a heartbreak game 7 of the Stanley Cup final (1994) was just before red-hot Vancouver house prices tumbled more than 26%.”

And just as the heartbreak of a Canucks loss this time around was more intense than in 1994 because the expectations were higher (we were the league's best team)... so the bursting of this bubble will be more intense than it was in 1994 because that bubble is so much bigger.

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Bank of Canada says many are underestimating what's happening

On Saturday Bank of Canada Governor Mark Carney was giving a speech to the annual meeting of the Inter-American Development Bank in Calgary.

He noted that commodity prices could continue to increase for decades (hello Gold and Silver) and encouraged central banks in emerging markets not to delay raising interest rates because inflation pressures will only worsen.

And you know what that means for interest rates, right?

"Everything else being equal, higher commodity prices usually necessitate higher policy rates. Even though history teaches us that all booms are finite, this one could go on for a long time," Carney said.

More warnings, but many want to know WHEN!

"Bringing that message back to Canada — even if the US Federal Reserve stays on hold through 2011, look for the Bank to start responding to rising commodity price pressures before long." BMO economist Douglas Porter said in a commentary.

Many figure it will come after the Federal electiion on May 2nd.

But by far the most significant comment came when Carney said, "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening."

There are those who will pooh-pooh Carney's comments as more empty warnings.

They ignore at their own peril.

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Thin Ice

As Arctic outflow winds sweep down across Western Canada, the Village on the Edge of the Rainforest has been plunged into winter's icy grip.

A rare snowfall blanketed the region on the weekend and since then nighttime temperatures have dramatically dropped to -10 Celsius (14 degrees Fahrenheit for our American friends).

Snow and icy cold temperatures? Things keep up like this and we might even consider hosting a winter event like the Olympics.

But I digress. Lots has been going on locally over the last week and as I have touched base with a number of the local blogs there seems to be a whirlwind brewing about the status of 'our bubble'.

After almost half a year of declining real estate sales, our local market is best described as stagnant. The bubble has yet to burst.

The result is a growing sense of fatigue.

Some buyers, tired of waiting for a crash that isn't forthcoming, are jumping into the housing market. Against better judgement they are taking on massive levels of debt as house lust consumes them.

Meanwhile on the west side of Vancouver, sales gallop along at a pace and with prices that have some suggesting Vancouver is - in fact - different.

It makes me smile.

Perhaps it is because I am not sitting on the sidelines - eagerly waiting for a housing collapse - so that I can make a move and purchase a house in the city.

'A watched pot doesn't boil', goes the famous saying and because prices aren't dropping dramatically, many find themselves doubting what logic and common sense tells them is all too obvious.

As I repeat ad nausam, in 2008 the world suffered a financial earthquake the depth and breadth of which we still do not fully understand, appreciate or comprehend.

Canada enacted a number of emergency measures which shielded real estate in our county from the Great Credit Contraction that is sweeping the rest of the globe.

After experiencing a minor contraction in 2009, real estate appears to have recovered. In reality all we have done is forestall the Great Reckoning.

And no one is better positioned to remind us about what is coming than Mark Carney, Governor of the Bank of Canada.

Over on the blog Housing Analysis, Jesse has transcribed parts of a 15 minute interview Carney did with CBC's Sunday Edition (hosted by Michael Enright).

You can listen to the entire interview here (it takes place in hour two, about 10 minutes in).

As transcribed by Jesse, the most significant comments are listed:

• Michael Enright: You expressed concern publicly for a long time I think from the moment you took the job about household debt in Canada. I think it was running somewhere around $40,000... and you're concerned about that. Interest rates are very low at the moment. Is there a correlation between the lower the interest rate [and] the more likely it is for people to take on more debt?
  
  Mark Carney: Well this is the concern. Interest rates in Canada are low, abnormally low, exceptionally low...
  
  Enright: Are they emergency rates do you think?
  
  Carney: Well we had them at emergency levels from April of last year, in April of 2009 after the crisis...
  
  Enright: Right.
  
  Carney: The Lehman crisis. We got them down to 25 basis points and we further increased our balance sheet beyond that. But we moved them up from emergency levels because the Canadian economy is back at the level we were before the crash, we recovered all the jobs we lost during the crash, and things have moved quite positively for Canada. But they're still at exceptionally low levels. And the risk is that Canadians, some Canadians, take on debt on the assumption that interest rates will always be this way.
  
  Enright: Or they're here now, they look pretty good and they'll probably stay that way for a while.
  
  Carney: Exactly. And particularly when one thinks about mortgage debt, thirty year mortgage debt, that is not a sensible assumption. And our concern is that people will get themselves into positions which will make it very difficult to service their debt.
  
  Enright: But you can't say, wait a minute folks, I wouldn't go and buy a summer cottage because something might happen in the next 6 or 8 months. I mean, that would send Bay Street spinning, wouldn't it?
  
  Carney: No. We're taking a longer term perspective on it and we're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.

As Carney says, interest rates are still at "exceptionally low levels." They are going to go up... way up.

And for those who have taken on debt on the assumption that interest rates will always be this way, Carney makes it expressly clear they are in for a rude awakening.

It does not matter if there are some people with vast amounts of money who can easily afford the multi-million dollar single family houses in our little hamlet on the Edge of the Rainforest.

When the reckoning comes, when interest rates normalize, there are so many who will affected by a crisis of debt in the Lower Mainland that the exact same chain of domino's that has brought down so many American R/E bubbles will repeat itself here.

It is unavoidable.

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Carney-Speak and Silver-Gate

Yesterday was an interesting day and I would be remiss not to touch on a couple of significant real estate developments.

First off there was a survey by the well respected Economist magazine which shows Canadian real estate overpriced by 23.9%. If that's the national average, how overpriced do you think real estate is in this town? To say at least 50% wouldn't be far off the mark.

Meanwhile, in Ottawa, Bank of Canada Governor Mark Carney was appearing before the Commons finance committee and was asked the following question:

"Do you think the housing market could collapse here, as it did in the States?"

Replied Carney:

"I am not predicting a significant drop in prices, but given how far prices have risen and the high level of Canadians’ household debt, an abrupt drop in the housing market cannot be ruled out."

An abrupt drop in the housing market cannot be ruled out!

Now... if you know anything about the Governor of the Bank of Canada, you know that markets can rise and fall on what this man says. Speeches and statements are very, very carefully worded for just that reason.

This was no slip of the tongue by Carney. It's significant and telling.

A few words on Silver

As you know, one of the topics I speak about regularly on this blog is Quantitative Easing, aka money printing.

I have stated in the past that, with all the money printing and currency devaluing going on, it is a no-brainer that the price of Gold and Silver is going to rise significantly in the years ahead. How far it will rise is a matter of debate.

And within that debate there is a sub debate that rages about price fixing that goes on in the paper Gold and Silver markets.

Now, I'm not going to delve into that debate, but an interesting development surfaced yesterday.

As reported by Reuters, a commissioner of the Commodity Futures Trading Commission made a stunning accusation.

Giving credence to the claims of critics, CFTC Commissioner Bart Chilton said, "there have been fraudulent efforts to persuade and deviously control that price (of silver)." Chilton's prepared remarks were made before a Commodity Futures Trading Commission meeting on Tuesday as events heat up for a full scale investigation into manipulation in the silver markets.

Critics has longed maintained the the metal has been suppressed. Historically silver has always floated at a 16:1 ratio with Gold.

Currently Silver fluctuates between $23 and $24 an ounce (US$). If the historic 16:1 ratio were at play, critics argue Silver should be at $82 an ounce today.

Many claim the dramatic gains Silver has made recently are due, in part, to the heightened scrutiny the manipulation claims have been getting.

Last month Garth Turner suggested Gold could go to $3,000 an ounce. If Silver were to float back to it's 16:1 ratio with Gold, at that level Silver would sit at almost $190 an ounce.

I know I'll be watching the investigation by the CFTC with keen interest.

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The Bank of Canada repeats its warning to you: Curb your enthusiasm for debt!

You will recall the other day that I commented on the fact that the finances of most Canadian households are in abysmal shape.

It is one of the key factors that will contribute to Vancouver's status as ground zero in a monumental housing collapse.

Last Friday I said that numerous economic reports have cited that debt is out of control in this country. Canadians have saddled themselves with record mortgage debt as household liabilities are now equal to 145% of earned income. Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.

As faithful readers know, my number one recommendation over the past two years has been that, if you are in debt, get out of it... now!

And today Mark Carney, the Governor of the Bank of Canada - and the man who plays a large role in influencing interest rates, issued yet another warning to Canadians on just this subject.

Using particularly strong language (for the head of a Central Bank), Carney warned Canadians today to curb their enthusiasm for debt. In a midday speech to the Windsor-Essex Regional Chamber of Commerce, Carney echoed my warning about the perils of the fact that the ratio of household debt to disposable income hit 146% in the first quarter of the year, a record and a level that is closing in on that of the U.S.

"This cannot continue," the central bank chief warned, adding that while the net worth of Canadians is about six times the level of average disposable income, asset prices rise and fall but "debt endures."

Carney can see what I see.

We're in a tenuous position. Real Estate doesn't always go up. And many believe real estate is set to go down. How much it will go down depends on your particular slant. And as many of you know, my slant is 50 - 70%, minimum. And I lean heavily to the 70% minimum end.

Any kind of decline in asset prices will amplify and exacerbate this precarious Canadian debt position.

• "House prices matter principally because of the “financial-accelerator effect.” When the value of a house rises, the owner can typically borrow against this increased equity to fund home renovations, a second house, or other goods and services. These expenditures can “accelerate” a rise in house prices, reinforcing the increase in collateral values, access to additional borrowing, and, thus, an increase in household spending. Of course, this accelerator effect can also work in reverse: a decrease in house price tends to reduce household borrowing capacity and amplify the decline in spending."

Carney also noted that,

• "With Canadians working, but not as much as they would like, they have been borrowing. Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."

This focus on plunging all our eggs into home mortgages is important. With more and more of our disposable income going to monthly mortgage payments, Carney observed that household balance sheets are growing "increasingly stretched."

But what about our economy? Isn't it growing? Aren't we out of the recession with everything getting better and our paycheques growing?

Carney noted that while Canada’s recovery has been the envy of the Group of 7, but that recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Translation: The economy has relied on the fact we have been borrowing our asses off and plunging ourselves into record debt - courtesy of Carney's emergency level, record low, interest rates.

Carney's warning was simple and straightforward and he reduced it to 3 simple words:

"This cannot continue."

You would be wise to take heed, if you haven't already.

What's coming won't be pretty.

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A trio of thoughts...

Three different thoughts for you today.

First off is the Bank of Canada rate increase today of a quarter point to 1%. This is the third consecutive increase in rates and the BOC rate is now quadruple what it was four months ago.

The focus today is on the language used by the Governor, Mark Carney. Everyone seems to think the message is that this will be the last rate hike for a while.

But as the Globe and Mail noted today, that may not be the case.

• The central bank said, the global bounce-back from the worst downturn since the Depression is "proceeding but remains uneven, balancing strong activity in emerging market economies" (such as China and India, though the central bank didn’t name them) against "weak growth in some advanced economies."
  
  At the same time, the central bank appeared to downplay the effect that the global turmoil is having on Canada, calling the country’s 2-per-cent annual growth rate in the second quarter "slightly softer" than what policy makers had expected, even though their latest forecast in July was for a 3-per-cent pace.
  
  The Canadian recovery will be "slightly more gradual" than the central bank expected in July, but consumer spending and investment have "evolved largely as anticipated," it said, reflecting the fact Mr. Carney’s forecasts have warned of a slowdown for several months because of factors such as the fading impact of government stimulus and the cooler real-estate market.
  
  In the future, consumption growth will "remain solid" and business investment - which had a surprisingly strong pickup in the second quarter, Statistics Canada data last week showed - will "rise strongly," the central bank said. For now, as the U.S. recovery proceeds in fits and starts, investor demand for safer investments such as bonds is pushing borrowing costs down and helping consumers and companies, the bank noted.
  
  "Financial conditions in Canada have tightened modestly but remain exceptionally stimulative," the central bank said. Policy makers also said dynamics affecting inflation in the country-- which has been tame for months - are "essentially unchanged" from their July forecast.

As the Globe notes, all this suggests that the Bank of Canada is still uncomfortable with an overnight lending rate so far away from what most economists consider "neutral," or about 3.5% to 4%.

Both the Globe and I took Carney’s comments on the Canadian economy as a sign the BOC still leans towards raising rates.

On another front, I attend a retirement luncheon today where one retiring colleague, age 60, was asked about several properties he owns and whether he intends to sell any of them (two houses in the Dunbar area and a vacation property).

Naturally I offered my opinion.

His response? "Every time I talked about buying, I was told I was making a mistake, that prices were going to be going down. They were the best moves I could have ever made. I'm content to sit on what I have, I can afford to wait out a 5 year recession"

A comment I think speaks volumes.

Despite the continuing coverage of a possible housing bubble in Canada, and the lessons of the United States, the general public is still completely oblivious to what is going on and the paradigm shift that is taking place.

Finally there is the North Delta condo for sale by a friend that I mentioned in yesterday's post.

Spoke with him today and he said he didn't mind if I gave some more information on this blog. Believing that any publicity is good publicity, he sent me the MLS listing link which you can see here.

Curiously the property is still listed at $144,000 on MLS, but on other sites the price has been reduced to $139,000.

Bought about 5 years ago for $54,000, my friend (who does read this blog) is firm in his belief that this almost 40 year old property (although completely renovated) is worth the price he is asking and he is hesitant to consider offers much below that price.

He dropped the asking price from $144,000 to $139,000 (the price which he feels is the lowest he is prepared to go) because the MLS listing has received zero hits in the past 3 weeks.

I told him that the vast majority of people who visit this site may boost traffic numbers to the listing, but I suspect few would be interested in meeting his price.

As he reiterated to me, any publicity is good publicity.

I'll let you know how he makes out.

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No laws are more basic than the laws of arithmetic

So what is quickly developing as the central story in world finances right now?

Sovereign debt.

And yesterday there was a dramatic worsening of the eurozone sovereign debt crisis as Standard and Poor's downgraded Greece's credit rating by three notches to junk status, citing concerns about the country's ability to implement the reforms needed to slash its budget deficit.

The agency also cut Portugal's rating by two notches to A minus.

This, of course, led to heavy falls for European and US equities as investors sought sanctuary in German and US government debt, gold and the dollar.

The moves came towards the end of a European session that saw mounting uncertainty over whether Greece would secure financial aid in time to meet a refinancing deadline on May 19.

In view of the popular opposition in Germany to helping Greece, markets have grown increasingly concerned about just how Angela Merkel, Germany's chancellor, can push the country towards participating in a bail-out.

Jane Foley at Forex.com said: "If Germany doesn't come through with a loan for Greece, it would seem unreasonable to expect cash-strapped economies such as Spain, Ireland and Portugal to help make good the shortfall - meaning that an EU loan could yet fail. Even if Germany does present a loan to Greece, there would be no guarantee that there would be an end to Greece's problems. Until Greece can prove it can live within its means its bond yields will carry an inflated risk premium on the open market reflective of higher default risk."

Five-year credit default swaps on Greek government debt, a measure of insuring against debt default, hit a record yesterday of 800 basis points, up from 710bp on Monday. The spread of Greek 10-year government bond yields over Bunds - the premium demanded by investors to hold Greek rather than German debt - hit a record wide of 718bp.

"Risks are mounting and governments should move swiftly to take additional corrective measures to improve their outlook and bolster market confidence."

What is most interesting is the way investors are seeking sanctuary in the the US dollar and US Treasuries.

Mark my words... it will be a shortlived strategy.

As has been stated on this blog earlier this year, the UK and the US are not that far removed from Greece and Portugal.

In fact on the very day all this transpires, US Federal Reserve Chairman Ben Bernanke is warning the United States that America's debt is unsustainable.

And perhaps the most significant quote was this little gem: "Failure to cut the deficits would push interest rates higher - not only for Americans buying cars, homes and other things - but also for the government to service its debt payments," Bernanke said.

Which brings us to our insular little world in the Village on the Edge of the Rainforest.

So many of the R/E cheerleaders living in denial and delusion have clung to Bernanke's comments about keeping the Federal funds rate low for an extended period of time, even as the economy appears to be recovering.

But as I have cautioned time and time again, that does not mean interest rates for the common mortgage holder won't rise.

Today Bernanke came out and said so.

What is happening in Greece and Portugal today will - soon enough - play out in the UK and the United States.

Many of the individual States in America are in dire financial straights. And the federal balance sheet, as Bernanke notes, is unsustainable.

"No laws are more basic than the laws of arithmetic: For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run," Bernanke told President Barack Obama’s commission to tackle the soaring deficit yesterday.

The bond market is going to drive interest rates up.

And I don't think it's a stretch to imagine that if the Bank of Canada raises the BoC rate by 3% over the next six months that the bond market also won't drive up rates an additional 3% as well (we've already seen them boost rates 1% with no raises from the BoC).

That would be a rate increase of 6% added to the current five year rate of 6.25%; for a mortgage rate of 12.5%.

Perhaps that's why BoC Governor Mark Carney was telling a Parliamentary committee that Canadians should get ready for more expensive money and less expensive houses. “We see a marked weakening in housing over the course of our projection (into 2012), starting from the second quarter of this year and over the balance,” he said.

Central Bankers choose their words with extraordinary care.

And when Carney says he sees a "marked weakening in housing" between now and 2012, you should pay particular attention.

Perhaps he sees what a 12.5% mortgage rate will do to it.

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Don't be fooled...

"Don't be fooled by the quick recovery". That's Bank of Canada Governor's bit of sage advice to Canadians.

Carney went to great pains on this weekend to tell consumers, executives and investors that they would be wrong to conclude it is business as usual these days.

“Anyone who sits and looks at what happened and says, ‘Well, that wasn’t a Great Recession,’ hasn’t appreciated the scale of what was done to ensure an outcome that wasn’t as extreme as before,” Carney told reporters on Saturday. “Particularly on the fiscal side. Anyone who doesn’t appreciate the gravity of the last couple of years hasn’t thought through or appreciated the scale of what will be required to adjust fiscal back to normal.”

Think about that for a moment.

Carney is emphasising what we have been saying on this blog all year. And 'adjusting' back to 'normal' isn't going to be an easy process.

And what concerns Carney most of all?

Why... sovereign debt, of course.

“We’ve seen war-like spending in peacetime,” Mr. Carney said. And the fact of the matter is that the world economy still is being powered mostly by hundreds of billions in government spending and extraordinary monetary stimulus. The growing debt – mostly public, but also private, as consumers in countries such as Canada took advantage of record-low interest rates to borrow and spend – is fundamentally changing the makeup of the global economy.

“What we are seeing with Greece, and what we have been seeing over the last few weeks, are the indications of the limits of fiscal stimulus,” Mr. Carney said. “There are a number of countries that are having to make adjustments, or will have to make adjustments, to more sustainable fiscal paths and I think that is an increasingly shared realization.”

And two of the countries foremost on the list of those that are going to have to make adjustments are the UK and the United States.

“We have to look at that and think of how to rebalance our own economic activity,” he said, referring to the relative weakness of Canada’s primary trading markets in the U.S. and Europe.

Make no mistake... there are serious hard times ahead. We're in a false recovery, and no one is more acutely aware of that than is Mark Carney.

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