The Million Dollar Crack Shack

2.5%

That's the latest rate that one faithful reader advises can be had for a one year fixed term mortgage.

Critics have dubbed these rates the crack cocaine of the housing market enabling local addicts to re-inflate Vancouver's status as the most bubbly real estate city in North America.

As Scotiabank economists Derek Holt and Karen Cordes have warned, lenders have been providing "excessively generous financing terms" which has had the effect of "putting people into homes at an earlier stage than would have otherwise been the case." The net effect? "Two or three years from now - once short and long interest rates are probably higher ... a lot of those mortgages will not be as easy to carry as they are right now."

On that note, come with us now as we take a tour of the high life in Vancouver. Let's see what a million dollar home looks like in this bubble inflated world of ours.

First up, this house on West 5th Avenue in Kitsilano.

This 1926 home features hardwood floors, a large renovated kitchen, a bright two-bedroom basement suite, a white picket fence and a tree swing.

Sure, the yard is small, the view out the back is of a giant condo complex, the bedrooms are tiny - the master is only slightly more than 100 square feet - and it is just half a block off one of the city's busiest thoroughfares. But those shortcomings were quickly forgiven by the dozens of prospective buyers who streamed through the first open house saying, "Honey, I love it" while trying to imagine life without closets.

Think you'd be interested? Too late.

Five days after that open house, seven agents lined up to make their offers. The asking price was $959,000, but because of the competition, the bidding war pushed the price higher. Only two bids came in at less than $1 million. In the end, the home sold for a staggering $1.142 million - more than $180,000 over the original price tag.

Earlier this week on the Eastside, we were advised about a partly updated Commercial Drive bungalow with a two-bedroom suite and a new garage and studio. That dump drew 10 offers - most of them with no inspections, despite the fact that the 1920's era house needed a new roof, electrical upgrades and drain tile work, and had an old oil tank buried in the back yard.

The first showing was Thursday last week, and on Sunday it sold for $113,000 over the asking price.

Let's cruise up to North Vancouver now. Deep Cove to be exact. Here's a beauty for you.

This beautiful one bedroom palace was described as 'liveable' and in a "fabulous location nestled in the middle of Panorama Park. You can almost touch the cove waters... in the heart of the action, yet surprisingly private."

'Surprisingly private' because you're probably too embarrased to have anyone visit you... or your friends don't want any photographic evidence proving they did.

Selling price? Just over a million (I am told the land is assessed for $775K and the house for $35K.)

So mortgage rates remain at an all time low despite bank economists warning that the cheap money is encouraging reckless behaviour... reckless behaviour that is manifested in prices that continue to rage and by buyers who bid them even higher with low-cost mortgages.

How can this possibly end badly?

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Email: village_whisperer@live.ca
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The Looming Mortgage Concern

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In yesterdays post about the Anatomy of a Bubble, we mentioned that a crucial component to a return to rising real estate prices would be the availability of cheap, plentiful debt. And since debt loads are at historic extremes, what conditions will enable trillions more in debt to be issued to buy inflated housing?

The answer, of course, is that those conditions won't occur. Real estate values will continue their decline as the current wave of bottom fishers discouvers that these current prices (almost 15% down from peak) aren't the bottom of the market.

That's when the next domino in the collapse will fall: mortgage defaults by current property owners.

Sounding the alarm on this is the Canadian Association of Accredited Mortgage Professionals who released a report today that warns "Canadian mortgage holders are facing significant challenges, with an uncertain job market increasing the risk of mortgage defaults in the months ahead."

In a survey down by the Association, eight per cent of Canadian mortgage holders, representing some 425,000 home owners, indicated that being able to make a mortgage payment is currently an issue or concern. Meanwhile, another 18 per cent of respondents – "a surprisingly large share" – reported that either they themselves or a primary earner in their household had lost a job in the past six months.

And rising unemployment is the chief concern of the Association. "The greatest risk facing the Canadian mortgage market is job loss," says Will Dunning, chief economist for the association and author of the report.

While Dunning stresses that Canadians are in much better shape than their U.S. counterparts (U.S. households have less equity in their homes than Canadians, at 43 per cent versus 72 per cent), there are still about 2% of Canadians report negative equity in their homes (where the value of the mortgage is greater than the value of the home).

Another 8 per cent have less than 10 per cent equity, says the report.

"Negative equity becomes a more risky factor when households have difficulty making current payments or lose a job," says Dunning. "Without equity, households are unable to raise funds by borrowing against the home or selling the property, and they have reduced options for refinancing."

Then comes the kicker from the report.

If house prices were to fall further, there would be an increase in the number of home owners with negative equity, a situation many U.S. consumers now find themselves in. And if mortgage holders with negative equity were to lose jobs, "There would be a more substantial rise in the extent of mortgage affordability problems and possibly defaults," warns Dunning.

As we have already reported on this blog, BC has been hammered by the biggest wave of unemployment in the country. The prospect for the spring and summer is for the trend to intesify. The forestry industry has a lot of pain still to come, the tourism industry is going to be smacked hard this summer, the construction industry is in a steep downward spiral and the 'Olympic Bounce' will not materialize without a dramatic turn in the world economy.

The report says optomistically that the debt loads are largely sustainable, as long as Canadians don't continue to see substantial job losses and as long as house prices don't continue to decline.

But if they do, you can see how conditions are aligning themselves to intensify and accelerate the collapse.


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Email: village_whisperer@live.ca

The significance of the alternate lenders failing

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Yesterday we talked about how 12 alternate mortgage lenders were unable to secure funding with the credit collapse. Now they were unable to renew over 25,000 Canadian mortgages as they came due.

The 12 alternate lenders have gone to Ottawa to ask for financial assistance warning that - despite the fact all 25,000 Canadian homeowners have never missed a mortgage payment - the companies would have to begin initiating foreclosure proceedings against homeowners because the company was unable to find new money to lend to them.

These 25,000 Canadian homeowners were lenders who had been unable to secure loans through the traditional banks due to income or credit histories.

This story is just the start of what is coming. The fact of the matter is that Canada hasn't begun to feel the impact of housing crisis yet. This has lead many to smugly believe that Canada will not feel the same effects as the United States.

They are wrong.

The process in Canada is just getting underway. The depreciation in Canadian Real Estate didn't get started until one year ago, March 2008.

In the United States, the process has been playing out for several years. It started in 2005 and, contary to popular opinion, it didn't start with the subprime crisis. What started the problems was a MINOR collapse of about 10-15% in the value of real estate in several of the bubbly cities in Florida and California.

When mortgages came up for renewal in those cities in 2006, a calvalcade of foreclosures was triggered because those with subprime arrangements couldn't renew their mortgages in their underwater condition (the market value of their house was worth significantly less than the remaining mortgage amount).

This put even more downward pressure on real estate values. When regular homeowners with non-subprime mortgages went to renew, they couldn't. They were also too far underwater with the market value of their property.

This forced even more foreclosures and a massive domino process then devestated property values.

But it took a year before the problem even surfaced and another two years to play out after that. That same process is now starting in Canada.

Prices started to slide in March 2008. It takes about a year for risky mortgages to start to reveal themselves as they come up for renewal. Yesterday's post outlined that, not only do similar risky mortgages exist in Canada, but they are about to be placed in a foreclosure position.

It's playing out here exactly as it did in the United States.

The current price drops we have experienced from March 2008 until March 2009 have been caused by the collapse of the worldwide economy - not mortgage problems.

That collapse took away the wealthy Americans, Europeans and Asians and forced them to liquidate their Vancouver properties. This caused a drop in real estate values which, in turn, took the ever rising market out from underneath the local speculators... further exacerbating the price drops.

Until now the only mortgage-related stories we have seen are speculators unable to secure mortages for pre-sales contracts, placing them in defaut of their pre-sale contracts.

Only later this year will we really begin to see the real impact of mortgage issues on our real estate scene.

It won't become visible until later this summer/fall as the absence of these alternative mortgage suppliers leads to a further drop in real estate prices of another 5-10%.

Then the next mortgage domino will fall.

The 0/40 crowd and the 5% down group of home buyers who bought in 2004, 2005 and 2006 will surface. Most took out five year mortgages with the traditional banks. Those mortgages are coming up for renewal starting later this year.

Unless real estate values start re-inflating dramatically, these people will be in a serious underwater position of 15%-25% with their outstanding mortgage compared to the market value of their home.

TD, Royal, Scotia, BMO and CIBC will not renew their mortgages while they are in that kind of underwater state.

You simply cannot walk into a bank and receive a $600,000 mortgage on a property with a market value today of $480,000 (20% less). It doesn't matter that you have a spotless five year mortgage history of never missing a payment - it's just not going to happen.

And with the evaporation of the alternate mortgage lenders, it means Canadians won't have another avenue of securing a mortgage renewal after being denied by the regular Canadian banks.

This is exactly the way it played out in the United States between 2005 - 2009.

And now it is starting to play out here.