Canada Housing Market: Prolonged correction coming

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One simple message right now: Pull the Boomer Trigger... before it's too late.

So for the past two days we have focused on Richmond real estate agent James Wong and his stunning assessment of where the real estate market is going.

Whether or not you question if the graph he originally posted (showing average prices cascading down 70%) was an accurate assessment of where he thinks the market will end up, his assessment on the state of the market is clear and precise:

If home sales and prices continue to slide, it could take many years before the market stabilizes. 

Judging from the huge run up in home prices, the drop in prices on the way down could be just as severe. A market correction will take many years to reach a level when home buyers feel comfortable again to enter the market. 

We are now witnessing the unwinding of the housing market. The severity and pace of price decline are dependant on the interaction of buyers and sellers perception of the market. At current price point, getting financing for a family earning $65,000 a year with 5% down payment will allow the buyer to afford a home valued at $294,000. 

It will take many years before owning a home makes sense again. Home prices are not going up now or holding. Instead, the housing market is coming down in value. The rush to exit the market will take its toll on sellers who bought their homes recently.

One thing we didn't cover in the past two posts is his October market report that outlined the end of September sales statistics for Richmond.

Wong's conclusion at the end of it all is clear: if you want to sell, you need to cut your asking price significantly below current assessed value:

September home sales in Richmond did not reverse the low sales the preceding months in July and August. 

With total sales of 173 homes, September home sales in Richmond turned out to be worst than the previous month sales of 179 homes. 

Active listings for detached homes, townhomes and condos/apartments in Richmond at the end of September, 2012 totalled 2,663 units, was at about the same level in August, 2012. 

The lack of buying interest was the main cause for slumping home sales in Richmond. In spite of some aggressive discounting by home sellers, buyers were not motivated to make their purchases. 

The supply and demand for homes in Richmond deteriorated further in September, reaching 14.09 months compared to the previous month’s ratio of 12.51 months of supply. 

Richmond real estate market outlook 

Market sentiment has deteriorated further... The only way out for sellers who are determined to sell was to price their home more aggressively. Sellers who are taking deep cuts in reducing their selling prices are likely to sell their homes. Many homes that were priced according to the market, failed to generate much interest from buyers. 

In the next 3 months, home sellers are likely to either pull their listings or allow them to go expired. Richmond detached homes are expected to suffer the most in price erosion. 

Richmond detached homes over $1,000,000 are not seeing much buying interest. With total active listings of 686 and average sale around 28 homes the past 3 months, there are 24.5 months supply of homes in the market. 

For detached homes over $1,500,000, there are currently 353 homes for sale. With an average past 3 months sale of 12 homes, this translates into 29 months supply of homes. 

The decline in housing sales and home prices in Richmond will take many years to play out.

You get the feeling Wong will be the hit of the Christmas holiday house party circuit this year.

But it's not just James Wong who is bringing us the hard uncomfortable truth of the current real estate market. Vancouver West Side real estate agent Sam Wyatt is out with his October market report as well,

And judging from the title (October Real Estate Update: Attached and Condos Feel the Chill), you get the impression Wyatt isn't gunning for the Tony Robbins R/E Positivism Award either.

In fact Wyatt's message is remarkably similar to Wong's... if you want to sell, cut your asking price and make it a DEEP cut:

For the first time in over 6 months, the Months of Inventory (MOI) metric for Westside Vancouver houses dropped slightly. It had risen from 4.39 in February to 13.27 in August and in September sat at 12.14. 

The big news for September is that both attached homes and apartments rose again, now to over 10 months of inventory. It might be that Months of Inventory has crested for detached homes but my sense is that it is still likely to get worse. 

There were 86 houses sold on the Westside in September which is up from 75 in August but such a paltry number of sales can hardly be considered an improvement. 

Even as sales improved, active listings increased from 995 in August to 1044 in September. 

The average price of detached homes fell to $2,259,214. 

Apartments and attached homes are now really beginning to feel the chill of this falling market. With MOI over 10 months for each of these home types, we can expect to see prices fall. 

In fact, the average price of an attached westside home has fallen to its lowest point since June of 2009 to $749,668. 

Sales success ratios for the westside are still only about 30% which means that the vast majority of listings fail to sell. If you want to sell, you will need to price BELOW the most recent comparable sales prices and you need to do this from the very beginning of the listing. If you don't do this, your listing will almost certainly stagnate. I continue to succeed in making sales happen with this technique.

Wyatt's message to those rare real estate buyers who are actively searching the market right now?

More sellers are recognizing the change in this market and beginning to negotiate in earnest.

And negotiating in earnest is the only option right now.

Those hoping for Industry pressure to reverse federal government liquidity tightening measures are bound to be highly depressed at the latest news coming out about Canadian debt levels.

Canadian households are even more in debt than anyone imagined, according to a revised Statistics Canada calculation that gives a more accurate picture of family finances. 

The revisions place household credit market debt in the second quarter at 163 per cent of disposable income, well above the previously reported 152 per cent. 

The revision shows debt growth over the last decade that looks “eerily similar to the U.S. experience, just before their dramatic housing bust,” said David Madani, an analyst with Capital Economics. 

“Overall, this supports our bearish view that Canada’s housing boom is unsustainable and the eventual correction, which we think is already underway, is likely to have a material negative implications for growth,” he said. 

The revisions show a much steeper climb, with debt growing in each of the past six quarters.

The news has TD bank economist Diana Petramala saying that the overall results show Canadian households are more vulnerable to a housing correction than previously thought.

Although Canadians hold more assets than their counterparts in the U.S. and the U.K. did before the crash, most of those assets are locked into the value of their homes, which could take a tumble in a housing correction or if the economy tanks.

So if you are a Boomer at the front of the Boomer retirement wave (with tremendous unrealized capital gains sitting in a bubbled valued piece of real estate)... what is the crystal-clear message being conveyed right now?

If you bought your property more than 20 years ago, and you have the ability the move significantly on price... DO IT!

Can you say Boomer Trigger?

(We've profiled Vancouver houses with asking prices as much as 23% below official assessed value. Let's see who can find the first with an asking price 25% or greater below assessed value)

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Thurs Post #2: Canadian home prices to tumble 25% according to one economist. Buyers and sellers in a standoff.

As buyers and sellers in Vancouver remain locked in a standoff, Canadian Press tells us about an economic report by Capital Economics which counters suggestions by some Canadian Banks that the housing market is headed for a soft landing.

If the Canadian real estate market continues to cool, house prices could see substantial declines next year and could fall by as much as 25 per cent over the long term, according to an economics report released Wednesday.

Though some economists have suggested that a tepid slowdown so far in the market suggests it is headed for a "soft landing," Capital Economics economist David Madani said he continues to believe that a more drastic drop is on its way.

"We think a housing correction over the longer-term is inevitable and still stand by our earlier view of house prices declining by 25 per cent," he said in the report.

The flurry of opposing opinions has been triggered by the fact both national home sales and the average home price were down year-over-year last month.

The national average home price in June was $369,339, down 0.8 per cent from the same month last year.

This triggered some pro-real estate groups to claim that you shouldn't pay attention to the average price (as we noted yesterday).  These groups suggested you follow their 'formula' which cast the 13.3% decline in the average Vancouver price as a 1.7% increase.

Home sales have dropped four per cent in the past two months and Madani said the trend is likely to continue given Ottawa's recent move to further tighten mortgage rules, by capping the maximum amortization term at 25 years.

Capital Economics economist David Madani went so far as to assert that considering that there is usually a lag between a drop in home sales activity and prices, significant declines in home prices could come in five to nine months.

The Capital Economics report acknowledges that house prices haven't started to fall en masse, but dismisses theories that Canada's housing market is enjoying a soft landing.

"There is always a stand-off period at the end of a housing bubble, when prospective buyers refuse to meet the prices of sellers, who refuse to drop to the asking price," said Madani.

The report warns that any stagnation in prices can be misinterpreted as a successful soft landing.

Certainly there is no doubt that the local real estate market has entered that stand-off.

And with record low interest rates already in place, no sign the federal government is going to reverse direction on mortgage rules to flush the market with more easy money, and an world economy that is showing no immediate signs of significant improvement... the next move is clearly in the hands of the sellers to reduce prices.

The only question is... how long will they wait.

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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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Email: village_whisperer@live.ca
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