Sat Post #2: The battle for public support: the real estate industry vs the Federal Government

Two days ago we talked about the latest offensive by CAAMP against the changes made this year by the Federal Government to the rules around mortgages.

One of the first impacts can be seen here in the Vancouver Sun as reporter Shelley Fralic regurgitates the CAAMP news release and asks: "What, exactly, is wrong with a 35-year mortgage?: Government as babysitter is pricing many, especially first-time buyers, out of the market"

Besides the excellent response from the Huffington Post we profiled in the post two days ago, we simply refer back to the excellent article the Post came out with back in the first week of November: "Canada Housing Slump: Flaherty's New Mortgage Rules A Scapegoat For A Much Bigger Problem"

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.

"To the surprise of no one, following the introduction of the most recent rule changes, sales activity ratcheted down," said Gregory Klump, chief economist at the Canadian Real Estate Association, in announcing a 15.1-per-cent year-on-year decline in home sales for September.

The Toronto Real Estate Board chimed in: “Some households have put their home purchase plans on hold in response to the higher cost of home ownership brought about by the recent changes to mortgage lending guidelines.”

The industry has good reason to maintain this narrative. For one, it makes it seem like falling sales volumes and prices are all "part of the plan," nothing to worry about. (Not true.) And it also deflects uncomfortable questions about the role of real estate developers, agents, banks and industry groups in creating the inflated house prices Canada has seen in recent years.

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.

Hmmm... someone get these guys a blog, they'd fit right in with us.

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 industry would argue that the last changes were the straw that broke the camel's back and the cumulative effect is at fault, but do go on:

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.

And of course this is what the battle is all about: the real estate industry wants the government to endlessly feed the ponzi with cheap, easy credit backstopped by the taxpayer's of Canada. As we have noted numerous times, the amount CMHC insures has gone from under $100 Billion in 2006 to almost $600 Billion today.  Right there is the source of the housing bubble in Canada.

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.

Some economists argue this is an excessively expansionary policy that has overheated Canada’s housing market. (Plenty of others would say that, given the damage taking place in other parts of the economy, those low rates were necessary.)

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.

Add to that the phenomenon of foreign investors bailing on condos, at least in Toronto, and you have a pretty perfect storm for a housing slowdown.

And, if anything, the adjustments to the mortgage rules were too little, too late.

What should happen in a market like this 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.

Our finance minister agrees with this.

“It’s better to have some softening in the market rather than have sudden movement,” Flaherty said this summer, talking about the new mortgage rules.

But can “softening” be achieved at this point? Or has the housing market become so out of balance that there’s simply no way to avoid a hard landing? That, of course, is the big question these days.

Interestingly, as CAAMP argues how the mortgage changes are harming the economy - and by extension jobs - there is an article out in the United States that is taking the data and showing us: "How Too Much Household Debt Buried The Job Market."

One of the most interesting side shows is in watching the frustration that is now clearly being felt by the real estate industry when it comes to their growing inability to manage their message in the media.

For the past 10 years they have had free reign to massage public perception.

They still have some pull, as the Fralic column in the Vancouver Sun demonstrates.  But they are being overwhelmed on the whole.

More on this tomorrow.

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Email: village_whisperer@live.ca
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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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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.

It's different here... we have a culture of Real Estate you cannot rip apart with logic

On Monday, as you will recall, we told you how the Huffington Post: British Columbia picked up on US Housing Guru Robert Shiller's interview on the Business News Network (BNN) last week in which Shiller said

"Vancouver’s housing bubble is more extreme today than California’s was a few years ago."

Robert Shiller, co-creator of the Case-Shiller Index, which measures U.S. house prices, told BNN that "Vancouver looks like part of California" when it comes to its housing market.

“Canada didn’t have the crash we had in the U.S. It’s just continuing to grow and it’s accumulating into some big price increases. So it’s looking like the bubble is — or at least has been, until recently — still alive in Canada.”

Shiller displayed a chart showing Vancouver house prices, adjusted for inflation, exceeding growth rates seen in San Francisco at the height of its bubble.

“San Francisco is a bubble city that’s talked about as one of the major boom and bust cities in the U.S. They’re no different in Vancouver, in fact it’s worse in Vancouver.”

The Yale University economist said that “Vancouver is San Francisco, lagging by a few years.”He added: “I have Vancouver doubling (house prices) in 22 years. So that’s even bigger than San Francisco['s bubble]. I’ll tell you one thing, I’m not investing in Vancouver real estate.”

Of course those that live her in the Village on the Edge of Denial see things differently.

We told you how economists like Tsur Sommerville argue the slowdown does not mean the market was ever in a bubble. Somerville, director of UBC’s Centre for Urban Economics, said the Vancouver market hasn’t had the kind of irrational exuberance that bubble market exhibit. His argument: we're not in a bubble therefore:

“You can’t burst a bubble that wasn’t there.”

This is the same Tsur Sommerville who, on June 29th, was interviewed by Global TV and insisted that Vancouver is different... the fundamentals of the market simply don't apply here:

Sommerville: Now we have a situation where prices aren't rising, they're flat. We have a situation were listing are rising, sales are falling and there isn't any of the kind of angst or anxiety out there in the marketplace. Instead what it's replaced with is less worries about people driving prices up and more worries about Greece blowing up the world economy.


Global Reporter: Vancouver is that market that is way different than any other kind of market.


Sommerville: Vancouver is very hard to figure out because so much of the purchases are done by wealth. Either people immigrating with wealth or people receiving wealth from parents or relatives so the normal 'what are incomes doing and what are prices doing', that just doesn't work out here well.


Global Reporter: And that may explain that while there are price reductions, average selling prices just aren't going down. Unlike other depressed markets in the world, there's no pressure to sell. And with our geography, the mountains and the ocean, it's not likely to change.

Denial and insisting It's different here.  That appears to be the theme.

Even Bob Rennie jumped into the act. On Rennie's Facebook page, the Condo King posted a rebuttal to the Huffington Post article (click on image to enlarge):

Said Rennie:

"The soundbites outweigh logic right now, and we're all looking for every reason we can to say the sky is falling. But I think that real estate in Vancouver is looked at as a treasured asset. There's a culture of that here you cannot rip apart."

So there you have it doubters... now don't you let logic... err... soundbites... get in the way of things.

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Email: village_whisperer@live.ca
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Mon Post #2: Robert Shiller, U.S. House Price Guru, Says He's ‘Not Investing In Vancouver Real Estate'

The Huffington Post: British Columbia picked up on US Housing Guru Robert Shiller's invterview on the Business News Network (BNN) last week in which Shiller said "Vancouver’s housing bubble is more extreme today than California’s was a few years ago."

Robert Shiller, co-creator of the Case-Shiller Index, which measures U.S. house prices, told BNN late last week that "Vancouver looks like part of California" when it comes to its housing market.

“Canada didn’t have the crash we had in the U.S. It’s just continuing to grow and it’s accumulating into some big price increases. So it’s looking like the bubble is — or at least has been, until recently — still alive in Canada.”

Shiller displayed a chart showing Vancouver house prices, adjusted for inflation, exceeding growth rates seen in San Francisco at the height of its bubble.

“San Francisco is a bubble city that’s talked about as one of the major boom and bust cities in the U.S. They’re no different in Vancouver, in fact it’s worse in Vancouver.”

The Yale University economist said that “Vancouver is San Francisco, lagging by a few years.”He added: “I have Vancouver doubling (house prices) in 22 years. So that’s even bigger than San Francisco['s bubble]. I’ll tell you one thing, I’m not investing in Vancouver real estate.”

Of course those that live her in the Village on the Edge of Denial see things differently.

Local economists like Tsur Sommerville argue the slowdown does not mean the market was ever in a bubble. Said Somerville, director of UBC’s Centre for Urban Economics, the Vancouver market hasn’t had the kind of irrational exuberance that bubble market exhibit.

“You can’t burst a bubble that wasn’t there.”

Denial is such a wonderful thing.

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.

Royal Bank says our real estate market is "vulnerable to a marked correction"

Well I think you can definitely say the alarm bells are ringing everywhere you turn now.

Royal Bank is the latest with warnings.  And this is no tiny warning.

No only does RBC tell us the Village on the Edge of the Rainforest may experience a correction.  Canada's biggest bank is now afraid we are vulnerable to a "marked correction."

Says the Huffington Post:

If you haven’t heard yet that Canada’s housing market is facing potentially serious problems, you’ve probably been hiding under a rock, but a recent study and comments from Canada’s top banker are bringing the point home once again.

A report from RBC released Thursday says Vancouver’s housing market is 'vulnerable to a marked correction.' For a market analysis from a major bank, those are pretty strong words.

Strong indeed.

Even scarier than the rhetoric about a looming catastrophe are the hard core statistics from the report:

“Typical Vancouver-area homebuyers would need to allocate 92 per cent of their income to carry the costs of a two-storey home (based on market price) and almost 45 per cent for a condominium apartment.”

RBC says they expect house prices in Vancouver to fall between 7 and 12%.

When you consider the average price is already down 20% from last May, this forecast from RBC is devastating news for a city whose economy is reported to be over 30% dependant on real estate.

Perhaps even more disturbing is that the numbers quote by RBC are very conservative compared to what Bank of Canada Governor Mark Carney hinted Wednesday might be the actual scale of a Canadian housing correction.

As the Huffington Post article noted:

In comments to the House of Commons finance committee, Carney said Canada’s housing market is overvalued by 35%! While house prices historically in Canada have hovered around 3.5 times average income, they are now at 4.75 times average income.

In some markets that ratio is worse.

Vancouver housing is estimated to cost 9.2 times the average income.

The tension between Canada’s booming housing market and the weakness in the global economy is at the heart of Carney’s dilemma: Whether to raise interest rates to halt a growing real estate bubble, risking an economic slowdown, or to keep them low, and risk blowing up even larger bubbles in Canada’s economy.

Carney has hinted in recent interest rate decisions that the day is nearing when Canadians will no longer be able to count on historically low interest rates.

The RBC report makes it clear that interest rates will be a major factor in determining the dierction of house prices in the months to come, but highlights a wild card in the equation: Foreign real estate investors who have been snapping up residential properties and driving up house prices.

“Risks will be further heightened by Vancouver-area valuation’s dependence on a strong and steady flow of wealthy foreign buyers and recent immigrants — a phenomenon that is both poorly documented and potentially vulnerable to adverse external shocks."

And that's the kicker.

If the market starts plummeting, not only will the "strong and steady flow of wealthy foreign buyers" further evaporate... you could see those same foreign buyers start dumping properties to cut their losses.

At which point calling it a "marked correction" will be a generous understatement.

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Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.