You will recall back on June 1st, we posted the May 2012 detached average home price in Vancouver. May's total was $1,037,331, down from February’s high of $1,235,244. It means the average single family home price has now dropped 12% Year Over Year (YOY).
Some concluded that this means we are a mere 3% away from the TD prediction of a 15% drop.
But is that what TD said?
TD Economists Derek Burleton and Leslie Preston said that they expect:
"house prices in Toronto and Vancouver to sink by at least 15% over the next two to three years."
They are saying prices could sink 15% over the next 2-3 years. That suggests its in ADDITION to the 12% drop we have already experienced.
That would take the Vancouver slide to almost 30%.
More significantly:
"Mr. Burleton and Ms. Preston expect a price decline of that size over the next two to three years... having said that, a "severe shock" from overseas could speed that up."
Oh?
Is TD telling us we could see a 30% collapse in Vancouver housing prices within the next year?
Seems to be a pretty stunning forecast to me.
Wasn't it just the other day we were discussing how some thought a 30% drop was unimaginable?
It seems TD doesn't have a problem conjuring that vision.
Our most recent Canadian QEF builds in mild recession in Europe and continued financial market volatility due to European sovereign debt concerns. However, in recent weeks, risks of a disorderly Greek exit from the Euro zone have increased. In this report, we highlight what the worst case sce- nario would look like for the Canadian economy.
Canada has little direct exposure to Europe and the real economy would be hit more significantly through indirect channels. The event would lead to financial market turmoil and commodity prices would tumble.
High household debt and an overvaluation in the existing home market leave the economy more vulnerable to a negative external shock than it has been in the past.
In a worse case scenario, where there is a systemic crisis in Europe, Canada’s economy would endure a severe recession, with the decline being substantially worse than that experienced during the 2008/2009 recession.
TD focuses on a theme all to familiar to those following the housing bubble and concludes by saying:
What separates Canada from other major advanced economies, however, is its high and rising vulnerability to domestic financial excesses that have formed in recent years. While corporate balance sheets remain strong, household debt has become excessive and the housing market is in our view 10-15% overvalued, leaving households more vulnerable to a negative economic event. A global financial crisis could be a major catalyst for a sharp housing market correction and household deleveraging – albeit to a lesser extent than was evident in the U.S. during the past recession. Moreover, Canadian governments would have less room to stimulate compared to the first crisis in 2008-2009... In a worse case scenario, the Canadian economy would likely endure a severe recession, with the decline being substantially worse than that experienced during the recent recession as both exports and domestic spending contract heavily.
Now if you were a Chinese investor who had parked money in some Canadian real estate... do you consider bailing right about now to protect your financial assets?
It's fascinating to watch the media as the housing bubble enters the public consciousness.
In addition, one wonders how the recent 'fire sale' of low interest offerings from the mortgage divisions of the big banks will counter counter the growing public concern about the state of real estate.
On a personal level I have many friends and associates who have bombarded me with queries at the uber low 3.99% 10 year mortgage offerings and ask "why not?"
You have to believe sales will see a boost in the last half of March as housing lust pulls in the remaining holdouts to buy at the top of the market. But the media warning signs still shout 'DANGER' to all who wish to see them.
"Overvalued housing markets in several Canadian cities and high household debt poses a clear and present danger... The report flags Vancouver as the market with the greatest risk of a housing price correction."
And yet how many selectively block out these messages?
More significantly, how bizarre is it to watch one arm of TD bank actively encourage Canadians to plunge themselves into what could become one of the worst financial decision of their lifetimes while another cries out about the danger of doing that very thing?
Says the TD economist:
"all cities are at risk when interest rates eventually rise from their present 'exceedingly' low levels. Household debt growth over the past decade has been fuelled not as much by credit card borrowing but largely by loans secured by real estate, in particular home equity lines of credit. The ratio of debt-to-personal disposable income, which is now above 150% is likely to reach by late next year the 160% peak experienced in the U.S. and the U.K. before their real estate corrections occurred."
When rates do return to more normal levels, higher by two to three percentage points than they are now, TD estimates more than one million Canadian households, or about 10% of those that currently have debt, will have to devote 40% or more of their income to making their monthly debt payments.
The Bank of Canada calls that a level that puts households in a financially vulnerable position.
In Vancouver, the situation will be far, far more dire.
Thus I content myself with reminding those who will listen... don't be seduced.
Meanwhile the banks look for a mea non-culpa. TD says an acceptable way to manage the current situation is not for banks to agree to lend less.
“To do so would be collusion, and it is illegal.”
Instead TD is calling for several options to head off further growth in household debt.
The first is to ask the federal government to shorten the maximum amortization on mortgages from 30 years to 25. TD also believes the feds should also raise the minimum down payment for a mortgage from 5% to 7%.
Both moves are long overdue but clearly the Conservatives have been waiting until public consensus is on their side before making such a move.
The fact of the matter, though, is that it is too late.
The damage has been done. Canadians have pigged out on debt and a giant segment of our society is going to get crushed when the tide turns.
Queen’s University prof Louis Gagnon says we could have a housing panic if the borrowing does not stop.
“It would be a classic case of everybody dropping their asset at the same time just to make ends meet.”
Meanwhile a new research paper from Pacifica Partners concludes.
“Our outlook on Canadian real-estate remains negative and we believe Canadian housing will begin an extended contraction phase.”
The above mentioned changes should be made to Canadian mortgage rules but this is closing the barn door after the horse has already run away.
Curiously TD is suggesting that banks be required to stress test credit applicants who apply for home equity lines of credit to demonstrate their ability to pay it off in 20 years.
They are also suggesting that banks should be required to impose a sort of stress test on borrowers in order to qualify for a mortgage, a test that would require borrowers to demonstrate to handle interest rates in the order of 5.5%.
How much do you want to bet the banks would be doing this already if CMHC weren't guaranteeing Canadian home mortgages?
This is your greatest indication of the 'clear and present danger' the housing bubble is about to force on our country.
Banks aren't properly vetting mortgage applicants. Banks HAVE been lending out money to people who can't pay it back.
TD Bank says that:
"Implementing all these measures gradually would be sensible for the long-term, and not just in the current environment.”
Agreed, but it doesn't defuse the ticking time bomb we currently face.
We do face a clear and present danger... and that danger looms larger than most people realize.
Yesterday we ruminated on the impact the plethora of mainstream media articles about the Canadian Housing Bubble was going to have on the real estate market.
How long before all the negative press convinces buyers (local and internationally) that now is NOT the time to buy?
In a note to clients, economists at TD said that a "housing correction will take hold in 2013." Prices are already down from their highs in May of 2011 and TD sees 2012 being a weak year... but the real 'correction' will start in 2013.
Ummm... okay.
So let me ask you a question. If you are looking to buy, prices have been dropping lately, everyone and their dog is talking about housing bubble, listings are booming, sales are dropping... and TD Bank comes out and says the real 'correction' won't ramp up until 2013 - would you buy this year?
More importantly, if you are one of those 70% of Boomers who don't have adequate funds set aside for retirement and whose entire plan for your golden years is selling your bubble inflated real estate and downsizing in the next 5 years... do you hit the panic button yet?
Thirty-five years ago you bought that Richmond, Burnaby or even Vancouver house for $65,000. It currently is valued at anywhere from $700,000 to $2,000,000... if local prices start to slide much more, do you undercut the market and still get out with a succulent profit (thereby creating even more downward pressure on prices) or do you stubbornly hold on because the house was valued at 15% more last May and it's "worth" at least that now?
Last week TD Bank came out and forecasta "larger-than-average price and sales correction" for the housing market in Vancouver next year projecting a sales drop of 15% and a home-price decrease of 12%.
The mere fact that they are making such a forecast is significant on it's own. Warnings of an overblown market have moved from the fringe of the blogosphere to the mainstream with only the staunchest of the bulls denying the inevitable.
The question now is... by how much will it correct?
When the US market collapsed in 2006, it was a small segment of the market - the subprime sector - that started the domino's falling.
But no one saw it coming because the subprime sector was considered such a small segment of the mortgage market that even if it did collapse, no one believed the repercussions would be felt let alone have a significant impact (see the portion of video below at the 5:12 mark where economist Ben Stein chastises Peter Schiff about the significance of the subprime market).
As it turned out, subprime was but the first of a number of domino's that fell... triggering a full scale collapse.
Fast forward to today. TD is predicting a 12% correction in the Greater Vancouver market. But what will be the repercussions of that first domino falling?
As we have documented over and over, the biggest concern in Canada is the huge debt load being carried by Canadians. Many local blogs have long speculated on just how significant a factor the overextended homeowner will be when the market starts it's unwind.
A close acquaintance of mine lives in the Vancouver suburb of Surrey (an area that respected blogger Garth Turner recently predicted would see a 30% correction if the national market tanks 15%).
A staunch housing bear himself, my close acquaintance rents the house he is currently living in. The home was recently assessed at a value of $450,000 and the landlord is the quintessential poster child of the over-extended, amateur Vancouver landlord.
Owning her own home in Coquitlam (another Vancouver suburb) plus two rental homes in Surrey, she constantly struggles to make ends meet.
Recently a spat of repairs were required on the house my acquaintance lives in.
First, the garage door sustained damage. When arrangements were made for an assessment from a repairman, the landlord asked my friend to pay the $80 charge (which would be deducted from the next month's rent) because she no longer had a credit card.
Next, the dishwasher failed. A plumber was called and he replaced the garburator (a repair that had been put off since summer) as well as the dishwasher. And while the landlord arranged a cash payment for these (delivering the money to my friend to give to the plumber on the day the work was to be done), the plumber later confided the landlord had been in tears on the phone as they discussed the best place to secure the 'lowest' price on a new dishwasher.
I'm sure you won't be surprised to learn that all repairs seemed to be "under the table" with no apparent HST tax paid.
There are other repairs that are required at the house but are "on hold" because the landlord admits to cash flow problems.
The landlord has told my friend that the house was a gift she received from her parents over 13 years ago.
So does that mean the property is mortgage free?
In the 3 years my friend has been at this house, he has accommodated 3 requests to have the property assessed for HELOC applications. In the most recent visit (always by the same assessor), the assessor let slip that he had also been doing the same on her two other properties. She has maxed out the available equity on this house (about six years ago this money was used to purchase the second rental home), the second rental home and her own house.
Now, with TD Bank expecting a market correction of 12%, where will this landlord wind up?
This landlord (not unlike many others in the Lower Mainland) have been using their homes as personal ATM machines. And the money they have taken out against their properties is spent.
This particular landlord struggles to maintain basic repairs on the homes and is in a personal financial situation where she no longer has access to credit cards.
What will a 12% drop in property values mean to this landlord?
On the one Surrey home (assessed value $450,000), a 12% correction is a loss in $54,000 in mortgaged asset value. A 15% drop translates to a loss of $67,500. If we were to realize Garth Turner's prediction of a 30% drop - the loss on this house would be $135,000.
Without continued price appreciation, not only is the HELOC ATM most assuredly closed to her for future withdrawals but any major repair or incident will be devastating to family finances.
If the other two homes are of equal value, she is facing a total drop of $162,000/$202,500/$405,000 in asset value (based on drops of 12%/15%/30%), none of which is equity. Are the banks going to blindly renew mortgages on these three properties when she could be underwater by almost half a million dollars on all three combined?
At what point does the straw break the proverbial camel's back?
How many more are in similar circumstances?
Without a dramatic turnaround in the economy, how can these people avoid any other fate besides default, bankruptcy and foreclosure?
Anecdotal evidence suggests there is a strong likelihood that a higher percentage of Greater Vancouver homeowners are in this situation vis-a-vis the greater mortgage market than there were subprime mortgage holders in the US mortgage market.
A 12% or 15% correction does not sound like much, but given the dynamics of the Vancouver market it could be devastating.
At 146% of average after-tax personal income, Canadian household debt has become excessive.
Nowhere was the impact of lower borrowing costs and greater household confidence more clearly observed than in the housing market, where ownership rates increased steadily over the past two decades. A self-perpetuating cycle occurred. Strong increases in demand bid up housing prices, which together with equity market gains prior to the 2008/2009 recession, raised net wealth. This positive wealth effect encouraged households to increase their rate of investment and consumption, further driving up borrowing and debt levels.
Based on the new figures, a slightly higher 6.5% of households are currently financially vulnerable (or have a debt-service ratio of 40% or above).
More striking, the share of those on the verge of becoming vulnerable (those with a debt-service ratio of 30-40%) had risen from 7.2% in 2009 to 9.3% – up almost two percentage points.
Given the change in the distribution of debt, we have estimated that as much as 10-11% of households may become financially vulnerable if the overnight rate rose to 3.5%.
Thus we have a situation whereby if the Bank of Canada rate rises to 3.5% from the current 1%, over 10% of all households will be diverting over 40% of their pay to debt servicing.
And I can guarantee you that in the Village on the Edge of the Rainforest this will apply to more than 10% of all households.
As I have said over and over, it is going to be rising interest rates that will trigger an implosion of our housing market, with Vancouver as ground zero of a massive correction.
Those who wring their hands in frustration at the stubborn persistance of the housing bubble here only have to look at interest rates to find the reason why.
The Bank of Canada has issued endless warnings about the levels of our debt and the threat of rising interest rates. Bank after bank has come out with similar warnings.
Interest rates are at emergency levels. They will not stay there.
If you own, now is the time to cash in on your equity. Well invested it will multiply exponentially in the coming years as we are hit with the ravages of currency induced cost push inflation.
If you're afflicted with housing lust, DON'T BUY! Rent and force yourself to invest the difference between what you pay in rent and what you would be paying on a mortgage. When inflation and cost push inflation strikes, and the housing market collapses under rising interest rates, you will be in a position to buy a house outright - double digit interest rates be damned.
The warning signs are everywhere. I do not yearn for the carnage they portent, but neither do I deny the ominous calamity they give warning to.
Recognize those warning signs... and position yourself to take advantage of what's coming.
In an April 7th, 2009 special report the TD Bank declares that Canada has been in a real estate boom from 2002 - 2008.
TD says that this boom was "a time of unsustainable price increases."
During this boom "affordability eroded severely over the last two years demonstrating an unsustainable disconect between house prices and incomes that was due for a correction."
"The steep erosion of affordability and the persistance of increases in house prices signal that speculation fueled this inflation. In a self-fueling spiral, expectation of higher prices were in turn driving prices even higher... The excess was most exagerated in the past three years."
The report goes on to make a foreboding statement which has particular relevance for Vancouver and echos what we have already said on this blog. The report notes, "over the long term, housing cannot exceed what households are able and willing to pay to live somewhere. House prices are necessarily tied to incomes. As well house prices are anchored by rental rates."
The Vancouver housing market has been in violation of those basic fundamentals for several years now. It means Vancouver is still severely overpriced and headed for a massive crash.
The report suggests an outlook for real estate that forcasts a potential of "seven years of hardship".
Looking at each province in Canada we read that "affordability in British Columbia has generally been the worst in the country and deteriorated even further during the past two years. Some of this deterioration in affordability can be explained by the settlement of retiree or immigrant households who have substantial wealth but not necessarily high current incomes. Nonetheless, during 2007 and 2008, resale houses in B.C. were over-valued relative to long-run fundamentals by at least 7%."
The report paints a very negative future for the condo market saying, "similar to Toronto, the Vancouver condo market may face a deeper structural weakness. The resale market already having deteriorated sharply, and, given the historically high number of multiples under construction, a surge of unsold condos is likely yet-to-come."
The report predicts a looming glut of over 4,000 new condos on the market for sale.
Adding to the woes in Vancouver will be the absence of Asian buyers. "As Asian markets are walloped, offshore owners may choose to liquidate (their) assets."
The prospect for 2009 in BC? "We project that the average house price will fall by approximately 15% relative to its current level over the course of 2009."
There were moderating comments in the report. The authors (Grant Bishop, Economist & Pascal Gauthier, Economist) do not expect the Canadian market to crash as hard as the US market, at least not yet. Nothwithstanding it is an astonishing report from the Banking Industry which has, until recently, been very bullish on real estate.
With the comments of Bank of Montreal's chief economist yesterday and this report from the TD Bank... one thing is crystal clear. The Banking Industry is rapidly abandoning the R/E shill bandwagon.
And since the Banks have consistently under forecast the collapse of the economy and the collapse of the real estate industy in the past... I think it is a safe bet that thier latest assessments continue to fall short in predicting what is coming.
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_2.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/charts/metals/silver/t24_ag_en_usoz_2.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.weblinks247.com/indexes/idx24_usd_en_2.gif)
