A 'Softening' Market

It's the second Sunday of December and time to trim the Christmas Tree.

But before I settle down for some steamed eggnog and an evening of holiday memories, I'll quickly type out a Sunday missive for you.

Did you get a change to see yesterday's post about the West Van home that was originally listed for $4.2 million, was assessed at $3.4 million and  just sold for $2.5 million - 27% below assessed value ($912,000 below) and $400,000 less than what the seller paid for the property in 2009?

Keep that in mind as you check out this treatise from real estate agent Mike Stewart, posted in the Vancouver Observer on Friday:

Vancouver real estate market crash? Not so much...

by Mike Stewart Posted: Dec 6th, 2012

For quite some time, many in the media have been predicting doom and gloom for Vancouver’s real estate market. The predictions are for a flood of new listings and falling demand; the reality, though, is it’s just not that bad.

The November 2012 REBGV statistics confirm that supply is contracting and Sellers are actually pulling out of the market, as illustrated by the large drop in the amount of properties listed for sale across the region.

A common assumption among more alarmist and less informed commentators is that recent softness in the Vancouver market is the beginning of a huge drop in prices. They contend that deeply indebted sellers will be forced to sell and buyers will not be able to buy. Many predict or allude to Canada experiencing a housing crash, not unlike what happened in the United States.

Thankfully the data is proving these theories wrong. Sellers in Vancouver are sitting on a significant amount of equity (value in the home after subtracting the mortgage balance). Many property owners who have been trying to sell have decided to take their properties off the market to wait for better market conditions. They are doing this because they can. This suggests we are not seeing panic in our current market.

Unemployment remains relatively low in Vancouver, interest rates are at all time lows, mortgages are easy to get, and the economy in BC is performing quite well.

This all means that buyers can and are able to buy property. Many are waiting to buy, but Vancouver is not in a situation where buyers cannot buy.

What all this means for buyers and sellers is that the Vancouver real estate market is softening gradually. Buyers are able to negotiate a far better deal than they could have 6-18 months ago. Sellers are able to get their property sold, though it may take longer and they may have to concede a bit more in negotiations than in previous markets.

Sorry doom and gloomers, the market is just not crashing.

Mike Stewart is a Vancouver realtor

Don't be too hard on Mike, he's actually bang on with that assessment.

The market is softening gradually.

This time last year pundits were adamant that the market 'might' go down 5% - 10% at best.

Now listings with asking prices below assessed value are commonplace.  In Richmond real estate agents tell us you must 10% - 15% below assessed value if you even want to have people look at your house.  Many Richmond single family houses are selling 25% below assessed value.

Listings 30% below assessed value are popping up.  Sales 30% below assessed value are not surprising anymore.

When all is said and done, people will look back and say that those lucky enough to have gotten out now (at 30% below assessed value); they were getting out just as the market was 'softening'.

Stewart is right, the market is not crashing.

The real crash is yet to pick up steam.

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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
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.