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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Shooting the messenger

Yesterday we profiled a troll that has been posting on the VCI comments section the past few weeks.

It was given as an example of how some people are spending a considerable amount of time on the websites of those bearish about real estate and make bullish claims.

I think we are seeing more and more of this because

• (a) with the market starting to turn, more and more average people are reading these sites and 
• (b) there is growing anger from some in the industry about that increasing popularity.

Yesterday's example was from an angry individual spewing insults and childish invective (causing many to ask why I would even bring attention to his diatribe).

But not all attempt to denunciate in that fashion.

Today we profile another who takes a more rational approach.

As you know we posted this week about a Richmond home that sold for 33% below assessed value.

This follows posts about Richmond homes that have sold or are listed for 25% below assessed value.

All on heels of Richmond Realtor James Wong's repeated posts about Richmond homes selling below assessed value, his assertion that in order to sell you must list at least 10-15% under assessment and his view that the housing bubble is now unwinding.

But all these examples... they are just "propaganda" according to one contributor.

Here are the thoughts of 'IAMWILL' who had this to say in the comments section:

I appreciate the authors frustration with house prices; however, this is propaganda. 

There was 972 homes sold last year in Richmond (oct 11-Sept 2012). 

I took a random sample of 18 homes: 

Results    Sold    Tax Assessment    $ above TA % 

1) 520K 482,300 +$37,700 + 7.25% 

2) 640,000 633,000 +$7,000 +1.09% 

3) 678,000 648,000 + 30,000 + 4.4% 

4) 673,800 626,000 +47,800 + 7.09% 

5) 685,000 666,000 +19,000 + 2.78% 

6) 730,000 813,000 - 83,000 -11.37% 

7) 748,000 674,800 +73,200 +9.8% 

8) 733,000 718,900 + 14,100 +1.9% 

9) 747,000 779,000 - 32,000 -4.3% 

10) 775,000 793,300 -18,300 -2.4% 

11) 762,000 842,000 -80,000 -10.5% 

12) 757,683 727,800 +29,883 +3.9% 

13) 805,000 817,000 -12,000 -1.5% 

14) 780,000 759,000 +21,000 + 2.7% 

15) 810,000 740,800 +69,200 +8.5% 

16) 785,000 826,000 -41,000 +5.2% 

17) 798,000 858,000 -60,000 -7.5% 

18) 833,000 856,200 -23,200 -2.8% 

So take an average, and you can figure it out.  

Understand the argument the author is saying... House prices will fall because we all can't afford it. 

Problem with Argument 

• 1) Circumstantial evidence IE: 1 house You need to take a random sample of all houses or take all 972 homes and take an average. The results will differ. The higher number of the sample, the more accurate is the results 

• 2) The Author assumes that there is a correlation between Tax Assessment and market value. Wrong- It has to do with Mill-Rate (Money needed to be raised by the government. (Google it) 

• 3) Tax assessments are done by an assessor looking at the outside of the home. They do not take it account for renovations, even if it is done with a permit; therefore there is no correlation. 

• 4) Tax assessments cannot take in account for View, craftsmanship, or any unique features that are inside the house. 

• 5) Check your T.A.-Houses do not appreciate it. Land Appreciates 

• 6) The Author assumes that we are in a closed economy. - Wrong Check to see how many people are coming into BC vs going out. (There are many more people coming into BC, then leaving, and not just immigration statistics) 

• 7) Everything is a result of supply and demand. These two forces work dependently and interdependently. Let me give you an analogy: Very few local people can afford to ski with their family in Whistler. So my question is, has the prices of ski passes dropped? If not , why not? The demand is coming outside of Canada. ie Tourist So how does this correlate to housing? 

Just look at the immigration statistics for people coming to BC, both inside the country and from outside. If the population is rising then the demand will increase, if the supply cannot be maintained. 

The Author is correct about Condos. The supply does go out of balance sometimes, and this certainly affects the prices in the short-run, but they get adjusted in the long-run because of supply and demand. 

What the Author is doing is writing a story, then finding circumstantial evidence to support the story. 

No offence. An argument has to be supported with empirical data. It has to be evidence based and done prospectively, not retrospectively , (You can take any statistics and manipulate the information to support a story, if done after the fact- retrospectively) 

Should be double-blind ( In others words the author and the "study" should not know the outcome. In this case single blind study would be sufficient. 

What is the take home message? 

Be careful what you read, question the Author's motive for writing the story and challenge everything.

Oh my!

As more and more people are turn to blogs like VCI to get an accurate portrayal of what is going on,  I suspect we will see more and more critics attempt to counter the information we provide.

What you cannot deny is that properties are being listed (and selling for) more than 25% below assessed value.

What you cannot deny is that the housing bubble has been fuelled by excess credit and that the credit is now being withdrawn.

The process is only just starting.

What is the take home message?

In the Vancouver market, Global came out with this reality check yesterday. Reality checks going on everywhere right now, particularly Richmond.

People like IAMWILL do not like what that message is right now.

Trying to discredit the messenger won't make that message go away.

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Email: village_whisperer@live.ca
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