Has the Boomer Trigger now been pulled in Vancouver?

Faithful readers know we have often talked about the Boomer Trigger.

The majority of the self-indulgent Boomer generation have failed to prepare for their senior years.

Seven out of 10 Boomers do not have enough money set aside for retirement. And since 2011 marked the beginning of the great Boomer transition into retirement, this financial planning statistic is significant.

Starting in 1946, the demographic Post-World War II baby boom began. And the Boomers at the front of this wave have benefitted most from seemingly everything.

After having been raised in the post-war affluence of the 1950s and 1960s, the first wave of boomers entered their mid 20's starting in 1971. As they settled down between 1971 and 1976, these first Boomers bought homes which sold for between $40,000 and $60,000 in suburb communities like Richmond.

Now, as these Boomers head into retirement without adequate funding to carry them through their golden years, the vast majority have a very simple retirement plan: sell their bubble inflated asset of a house, downsize and live off the proceeds.

A average house on a large lot bought in 1971-1976 in for between $40,000 - $60,000 is now 'worth' between $1.5 - $2.5 million dollars.

Thus the Boomer Trigger... trigger the sale of the one significant asset they have to fund their retirement. At the same time, if the market slows, Boomers can use their original purchase price advantage to under cut other sellers in a collapsing market - a maneuver which has the potential to crash the market if done by a large number of Boomers at the same time.

Have we seen another example of this trend in the Vancouver neighbourhood of Quilchena?

This is 2681 McBain (hat tip to ZRH2YVR): 

This 3 bedroom bungalow (advertised as having 4 bedrooms and 2 bathrooms) near Prince of Wales School has had the same owner since it was purchased in 1955.

I shudder to think what they paid for it then.

It has been languishing on the market and the desperate Boomer has cut the asking price to $1,599,000.  Here is a screenshot of the listing:

The key element is in the listings description:

Priced $566,300 under assessed value.

Word is 2681 McBain has now sold... and for less than the most recent asking price.

Now you should know that on the r/e chat boards, Real Estate bulls have been quick to point out that it wasn't a massive amount of inventory on the west side combined with a dearth of sales that resulted in a sale so dramatically below assessed value.

The neighbourhood speculative builders and many Asians wouldn’t purchase it because it was at the end of a T-steet. Apparently this is a big no-no for the all important Asian 'Feng Shui'.

According to VCI contributor 'West Coast Woman'

About two weeks ago I was viewing a new build in the area and started talking to a Caucasian couple at the open house. I told them about the McBain house and their first reaction was “yeah, but it’s at the end of a T-street so it has little resale potential”. I was shocked at that comment and replied that it was a much superior location with much less traffic (probably less than 20 cars a day drive down that street) than the one we were viewing. Regardless of whether the T-street thing makes any sense, it WAS the reason for the reduced price as the long-time older owner simply couldn’t take care of the house anymore and was motivated to sell.

Two houses in the 2400 block McBain sold a couple of months ago in a crazy bidding war. One was purchased as an “investment” by an Asian man living across the street. It is the one now being rented out. The one next door to it (which wasn’t even listed) was purchased by someone who “lost” the bidding war; it is now back on the market for about $2,670,000 – about 150,000 more than they paid for it. Another house across the street at 2408 McBain is another slightly renovated flip – purchased last year for about $2.2 million, it’s now back on the market for about $2.6 million!

Any truth to this? Perhaps.

The one part I do agree with is that the reduced price was because the long-time older owner simply couldn’t take care of the house anymore and was motivated to sell... which is the whole essence of the Boomer Trigger. She had the ability to move significantly on the price, she wanted to sell the property, and she pulled the Trigger.

So now we have a Vancouver west side property that has sold for about $600,000 BELOW assessed value as a result.

The Boomer Trigger at work. I expect to see more like this if sales continue to stagnate.

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Like sand through the hourglass... the fall listings watch begins.

Besides the dismal sales numbers from August (and the debate over whether or not the trend will continue into Fall) the hot topic du jour is inventory.

July and August are typical months where inventory drops off sharply. This summer there was a drop but it was no where near as large as the typical summer.

Total inventory dropped -110 on August 1st (as July's numbers came in) and -606 on September 4th (as August numbers came in)

Normally, after the summer lull,  listings really start to pick up in September and sales remain constant through September with what they were in July/August.

But will the a new pattern play out in Autumn as it did in Summer?

Since there wasn't a huge drop off in listings over July/August... does that mean there won't be a typeical listings surge in Fall because all those listings are already on the market?

Yesterday we brought you the latest musing from realtor Andrew Hasman. Hasman had the following thoughts on the Fall listings question:

August was stable compared to July in that the supply of houses relative the the actual sales remained fairly stable... Another interesting statistic is the drop in supply from Aug 31st to Sept 1st of approximately 60 houses. For the first time in several months we have under 1000 houses for sale but I predict this number to quickly move up as more homes enter the market in time for the Fall.

Hasman may be proved right when he predicts listings will "quickly move up as more homes enter the market in time for the Fall." Since the big month-end drop we saw on the first sales day of September (-606), total inventory has surged a stunning 414 in just four days.

If we were to maintain this pace all month, the market would add another 1,552 listings to the total and the month would end +1,967 making September the 2nd biggest gain of the year after January.

But not everyone shares Hasman's optimistic appraisal of the inventory situation.

Realtor Rob Chipman has a different prognostication. He predicts that inventory has peaked in the Lower Mainland and that an inventory decline has begun.

Inventory in the Lower Mainland real estate market has decisively peaked, and the decline has begun... 2012 inventory took off in January, and eventually exceeded the levels seen in 2010, and almost eclipsed the swollen inventory numbers of 2008.

Both years led to drops in prices, with 2008 being the worse of the two. There were fears/hopes among some that this year’s ballooning inventory would spell the end of our decade plus trend of climbing prices and result in a marked price decrease and a prolonged period of falling prices.

I was of the opinion that this would not occur. in fact, I suspected that the new trend would be a more or less stagnant market with prices moving with a 10%-15% trading band for the foreseeable future.

Chipman's contribution abruptly ends there but he is clear in his belief that Inventory will now decline and prices will stagnate without dropping significantly.

Interestingly we continue to sit on an all time record streak of 18 consecutive days with daily sales totalling less than 100 per day - despite the fact this is the week after a three day long weekend when normally we see a bump in sales from the longer non-reporting weekend sales.

Are all the potential listings that would have come on the market, already listed?

Will others pull their listings as some sellers prepare to ride out this period of stagnation?

Or will this week's listings surge continue?

The developing saga is better than any soap opera.

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Westside Realtor's report on the dismal August 2012 numbers

On July 29th we introduced you to Andrew Hasman, another realtor from the west side of Vancouver who has been calling the market for what it is... a bubble.

A year ago, when prices were going crazy on the west side, he wasn't one of the cheerleaders for what was going on. Quite the contrary, he was calling the market 'unhealthy' and warning about the consequences:

"The local person is completely out of this market," he said. While skyrocketing prices have made business good, Hasman said that the current market, with housing prices rising 10-15 per cent each year, is unhealthy.

"Anytime you have extremes in markets, it's never healthy," he said. "You end up with a bubble. If the local economic base can't support these levels, then at some point you're going to have a lot of people burned big time. It's not sustainable."

In July he told us that:

This feels like the first Normal Real Estate market in many years. That is if you can even define or remember what 'Normal' really feels like.  Gone are the bidding wars and gone (for now) are the days when homes were selling in mere days. For buyers there is now good selection and no pressure to make that big commitment... Sales of homes across the Greater area of Vancouver are at levels not seen since 2000!

Overall, prices still seem to be holding with some price softening in specific markets only. Vancouver’s Westside looks to be one of those markets.  Fewer buyers from China, tougher mortgage regulations and concerns over the global economy are all weighing on consumer confidence. I predict these market conditions will continue through the balance of 2012 with further price softening.

Hasman is out with his September market report. Here are some of the hilights of the results from last month:

August was stable compared to July in that the supply of houses relative the the actual sales remained fairly stable. The one notable statistic was the Average sale price of a house. In August the average was pulled higher by 14% over the 2011 average sale price. This increase is due to two very large sales on the Westside during the month. Of the 75 houses sold, there were two sales over $12 million which have brought the average sale price up.

Another interesting statistic is the drop in supply from Aug 31st to Sept 1st of approximately 60 houses. For the first time in several months we have under 1000 houses for sale but I predict this number to quickly move up as more homes enter the market in time for the Fall.

In the past three weeks I personally noticed a pick-up in the number of buyers looking at houses and the number of offers received. So far we have not seen this translate into increased house sales. With September upon us it will be a matter of time before we see if our market will see increased sales activity or not. Stay tuned!

Here’s how the numbers stack up for Westside Real Estate Activity in August:

Single Family Homes

• During the month of August there were 75 homes sold compared to 130 last August and 83 one month ago. Year to date house sales are down 41%

• Average selling price of a house was up 14% from last August to $ 2,859,945. I believe this increase is due to two homes sold over $ 12 million during the month. This has no doubt pulled up the average. Year to date the average sale price is up 2% to $ 2,451,044.

• There were 995 homes listed for sale at Aug 31st this year compared to 643 one year ago. An increase of 54%

• At August 31st we have 13 month’s supply versus 5 month’s 1 year ago.

Sales of all Single Family Houses in all Vancouver areas was down 39% from this August compared to last August.

Year to date sales are down 28%.

Average sale price year to date is down 5% to $ 1,120,411 with 12.6 month’s supply of houses available compared to 6 month’s supply 1 year ago.

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Did the REBGV misrepresent the HPI decline for August?

In our last post we talked about the media coverage of the August 2012 real estate statistics in our little hamlet on the Edge of the Rainforest.

In their effort to manage the bad news, the Real Estate Board of Greater Vancouver (REBGV) put on a brave face and did their best to spin the dreadful results. The REBGV President said:

"Home sales this summer have been lower than we’ve seen for most of the past 10 years, yet we continue to see relative stability when it comes to prices."

Sales were abysmal but the REBGV desperately grasped at 'the price straw' as their last hope.

They call it "price stability."

And by price stability, the REBGV means their precious Home Price Index. The group’s composite benchmark price for all residential properties in Greater Vancouver is $609,500 which they tell us is down 0.5% from a year ago and 1.1% from July.

But faithful reader, P.C., takes issue with this claim.

I really enjoy reading your blog and I read it every week.

This is a note about that the Real Estate Board of Greater Vancouver incorrectly stating that the MLSLink Housing Price Index DROPPED 0.5%. THIS IS INCORRECT, IT SHOULD BE A 2.5% decline. Media outlets have followed the REBGV's "party line" of a 0.5% price drop.

I am basing the MLSLink® Housing Price Index (HPI) benchmark prices from pages published by the REBGV's own website in 2011 and 2012.

These websites mention that the August 2012 MLSLink® Housing Price Index (HPI) benchmark price was $609,500 while the Aug. 2011 MLSLink® Housing Price Index (HPI) benchmark price was $625,578.

So a simple calculation of $609,500 divided by $625,578 yields 0.9743 or a price decline of 2.5% NOT 0.5%.

I have contacted the REBGV people to ask them to issue a correction about this incorrect fact. I hope you and your readers will press them to correct their figures and pressure them to issue a news correction. Housing price numbers should be published correctly.

Thank you for your interesting articles, and keep up the good work!

So what do you think gang? 

Is P.C correct?

 Has the REBGV misrepresented the HPI decline in prices for August?

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The media discusses the August 2012 real estate numbers... lipstick anyone?

It seems there's no way to put lipstick on the horrid real estate statistics for the month of August.

If you didn't catch it, the lead story on CTV Vancouver news tonight is the slumping Vancouver real estate market. Unfortunately I can't embed the clip here but you can click on the link to see – CTV profiles how experts are beginning to wonder if Vancouver’s real estate bubble is going to burst"

Meanwhile the Financial Post headlines Vancouver home sales plunge, posting second-worst August since 1998.

How bad are the numbers?

As VanPro over on the blog Real Estate Talks notes the overall Months of Inventory (MOI) is approaching 11 months.

• August 2012 has now posted the second lowest sales totals in the last 15 years.
• When it comes to sales of Single Family Houses (SFH), there were only 75 sales on the West side of Vancouver in August 2012 (there were 995 available for sale). That's down a shocking 42.3% year-over-year!
• On the east side of Vancouver there were only 79 sales, down an even more shocking 46.6% year-over-year!!

As we said at the start of summer, the numbers from July and August were going to be fascinating to watch... and they were.

Normally listings drop of dramatically and sales slow. What we got was only a slight pull back in listings and sales plummeted. 

Prices in areas like Richmond, with homes that are actually selling, have begun dropping below assessed value. We are seeing sales activity pick up a bit as the price point has been reached for a few that are hovering (one of the signposts we look for as the market begins it's collapse).

A larger number of high end sales were completed last month (another of those signposts). But even here prices are dropping. A few days ago we provided you with stats of the high end sales in August up to August 22nd - one of them for just over $12 million. As the month came to a close, we now know there was a second $12 million sale. But these two properties started off with asking prices of $16 million and $14 million.

They say on the way down, prices are very, very sticky. But they are starting to move.

Normally listings really start to pick up in September and sales remain constant through September. With the current steady diet of bearish real estate news, the September surge in listings will be met with more dismal sales as the negative feedback loop picks up momentum.

We are currently sitting on an all time record streak of 16 consecutive days with daily sales totalling less than 100 per day - despite the fact that we just passed a three day weekend (when normally we see a bump in sales from the longer non-reporting weekend sales.

But the streak remains unbroken.

The real estate propaganda machine has been forced to finally declare our's a 'buyer's market'.

Problem is... no one wants to buy.

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As expected, large number of high end sales causes average price to jump while overall sales continue to lag

If you follow the comments section of the website Vancouver Condo Info, the chatter the past two weeks has been about the dichotomy in real estate sales for August.

While total sales for the month was very low, there were a large number of high end sales.

As ZRH2YVR noted on August 22nd, there had only been 5 real estate transactions in July over $5M (9,948,000 - 6,850,000 - 6,300,000 - 5,830,000 - and 5,000,000).

In August, as of the 22nd, there had already been 8... and one of them for $12,200,000.

(For the record they were 5,800,000 - 8,950,000 - 12,200,000 - 6,250,000 - 6,180,000 - 9,180,000 and 6,800,000)

Meanwhile in Richmond, sales were picking up. Virtually all were below assessed value, but we seem to be seeing a price point were the pent-up demand has started to rush in.

The daily total of sales hit a record streak on Friday of 12 consecutive days where the total was less than 100.

This combination of low sales and an increase in high end sales means the average was sure to spike... and spike it has.

Prices never go up in a straight line and they don't go down in a straight line either.

And the bump in the average price will be a significant factor in keeping pressure off the Federal Government from backing off on it's recent changes and upcoming OFSI changes.

As realtor Larry Yatkowsky noted:

Vancouver’s detached average home prices ricocheted off the cross bar to score an average price goal of $1,142,237 – a price not seen since January and March of this year.

The great thing is that the real estate industry, desperate to hilight positive news, will promote these figures as a sign the market is not dropping.

It will be done to calm fears that it is... and it will also hamstring attempts to pressure the Federal Government to back off.

As Yatkowsky notes in another post, the statistics paint the Vancouver market as "being different."

But a handful of high end sales cannot hide the fact overall sales are abysmal.

Market forces continue to play out and the spinning of the news can only encourage those who have allowed listings to lapse to now quickly jump back in.

It should be interesting to watch September listings numbers to see what comes next.

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Labour Day Weekend

Taking some time off for the long weekend.

See you Monday evening.

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Tidbits in the news...

A couple of interesting tidbits for you today.

Interesting quote from TD analyst Jason Bilodeau who was quoted in the Globe and Mail as saying:

“We have not had a single investor meeting in the past three months that has not focused significantly, if not exclusively, on the outlook for Canada’s housing market. We believe that the evidence is building that the sector is now in the early onset of what will ultimately prove to be a material deceleration in housing activity in this country.”

Speaking of deceleration, the Globe and Mail also had a story telling us who a "Jump in claims pinches CMHC's insurance business":

“Canada Mortgage and Housing Corp. saw profits at its mortgage insurance business fall sharply in the second quarter largely due to a jump in losses from claims. The rise in claims losses suggests that an increasing number of borrowers whose mortgages were insured by CMHC have been unable to make their payments and have lost their homes. Mortgage insurance pays the bank back when a borrower defaults.

In its second-quarter results, released Wednesday, CMHC said that its losses on mortgage insurance claims rose to $168-million for the three months ended in June, up from $144-million in the same period of 2011 and $154-million in the first quarter of this year.

That’s part of the reason why profits from CMHC’s core mortgage insurance business fell to $255-million, down from $341-million. The earnings were also hurt by paper losses on a mutual fund investment that suffered when international stock markets fell.

Part of the reason for the growing claims losses of late has been the dramatic increase in the amount of insurance that the Crown corporation has in force.”

CMHC claims against insurance jump and TD says we may be in early stages of material deceleration... how could this possibly end badly?

Well... how about this?

Vancouver is the second least affordable housing market according to the 8th Annual Demographia International Housing Affordability Survey, with a multiple of (10.6) times average household income, which means that Vancouver is approximately 253% overvalued.

Vancouver house prices would need to correct in excess of 70%, to bring house prices close to the 3 times average household income level considered affordable by the survey.

That's in excess of 70%.

Now where have you heard that before?

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Local Realtor says: "Make an impact with your price reductions"

You know the market has shifted when the major thread of a realtor's spiel is urging you to reduce your listing price significantly.

The latest from cam car realtor on the go... Ian Watt.

“A lot of people don’t understand that prices have started to come down and they’re still trying to get those huge numbers.”

“When you’re doing a price reduction make sure you go way below what you think it is in a declining market because you want to catch those numbers.”

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Sub-prime mortgage crisis explodes in Australia?

(hat tip PM)

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Canada Is Walking Right Into A Subprime Mortgage Crisis

The website blog Business Insider published an analysis of the Canadian Housing Market yesterday.

Titled "Canada Is Walking Right Into A Subprime Mortgage Crisis", the article is reposted here for your convenience.

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Canada Is Walking Right Into A Subprime Mortgage Crisis

Joelle Fricot and Chris Callahan, Euro Pacific Capital

It is almost four years after the global financial meltdown of 2008 and many parts of the world are still trying to recover. Given the impact of the crisis, which rocked financial markets across the globe, it is shocking to many that Canada seems to be following many of the same lending trends as we saw in the United States in 2006. These trends were at the core of the subprime mortgage crisis, which led to the global recession of 2008.

In the year and a half leading up to the crash, housing prices rapidly increased in the United States, with a corresponding increase in subprime lending. We are now seeing the same trends in Canada. When analyzing the Canadian housing market, housing prices increased almost 100 percent since 2000, with the average home in Canada costing roughly $348,000. 

This is almost double our U.S. counterparts.

Big banks have become stricter with lending policies, and have upped the stakes for those looking for mortgage financing. This has created a huge market for sub-prime lenders in the marketplace that didn’t exist before because more and more people who would have been approved five years ago are now being turned away. There is now a huge shift in the lending marketplace. Once small, Canada`s subprime mortgage industry is now booming. More and more Canadians with highly questionable credit are highly benefiting from the available financing.

The Canadian Government has been moving quite aggressively in attempts to cool down the Canadian housing market. As home prices are soaring there are fears that there is a bubble in the making. This is evident through the recent actions of Finance Minister Jim Flaherty who is now acting for a fourth time, reducing the maximum amortization period for government issued mortgages from 30 to 25 years. On top of this he is also lowering the amount of equity that can be borrowed against a property to 80 percent down from 85 percent.

More than $500B of Canada's estimated $1.1T housing market are considered to be high-risk mortgages. Recently Ottawa began increasing its scrutiny of the CMHC for allowing this level of high-risk mortgages to rise to the level that it’s at now.

The Conservative Government has started putting stops to banks using mortgages insured by the CHMC as collateral on covered bonds. In addition new legislation will be implemented to ensure that corporations will have to give more consideration to the broader implications of their decisions. Essentially the CHMC is being told that, for every mortgage they insure, they will have to put consideration into the potential risk that mortgage put on the full Canadian economy.

The CMHC has dramatically expanded use of insurance by banks for covered bonds. These securities are made up of a package of mortgages, which is partly due to the steep rise in CMHC`s mortgage portfolio according to Jim Flaherty, Canada's Finance Minister. CMHC has a legal limit of 600B for mortgage insurance which it is fast approaching. The $600B limit has already been raised twice since the end of 2007.

Another significant type of lending in Canada is Home Equity Lines of Credit (HELOCs). HELOCs are loans which are secured by the equity of a borrower’s home. These types of loans in Canada have increased almost 170 percent since 2001 (which is double the rate of increase on Canadian mortgages). In 2011 they accounted for approximately half of total Canadian consumer credit.

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How excessive are the number of properties for sale on Vancouver's West Side and Richmond right now?

Yesterday I came across the above chart (click on image to enlarge) courtesy of Makaya on VCI.

The chart is produced by Canadian Watchdog and puts the growth of listings for newly/recently built Single Family Houses in Richmond and Vancouver West in astonishing perspective.

Never before in history have so many properties been on the market for sale.

Should the housing correction pick up speed, the rush for the exits may truly become epic.

(Hat tip Makaya)

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Peter Schiff on Gold and Silver

I haven't written about Gold or Silver in quite a while... largely because the market has been in a state of basic equilibrium.

That may be about to change.

Peter Schiff offers an excellent analysis on why those who believe in Gold and Silver believe the market may be about to move dramatically.

For your consideration. Although real short term I personally I believe Friday will bring a significant raid to try and drive the price down.

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Media urges first time buyers to rent right now, not buy

Two days ago we told you have BC Real Estate Association Chief Apologist, err... Economist, Cameron Muir was insisting that there was no need to worry about real estate sales because one-third of our real estate market is first-time buyers.

Muir is adamant there is no shortage of those 'first time buyers' to keep greasing the wheels of our Lower Mainland property ladder:

“As long as we have first-time buyers that can get into the market to buy the homes from the people who are moving up, moving over, moving down, then the market should remain healthy.” 

With that in mind, you have to imagine that Muir is less than enthralled with the latest offering from the Globe and Mail Newspaper.

In an article titled, 'What’s the rush, first-time buyers? Now's the time to rent' the G and M proposes that the working title for the next phase of the housing market might just be titled: Revenge of the first-time buyer.

Rookie home buyers have been whip-sawed in recent years. They’ve been fed a line that renting is disastrous behaviour, and they’ve been witness to steep price increases that suggest they need to immediately buy a house, any house, before they’re priced out of the market. Last month, the federal government piled on with new rules that will result in higher mortgage payments for many first-time buyers.

But first-timers are about to get some leverage. Housing markets in a few cities are cooling, and some forecasters see national prices falling 10 to 25 per cent. Meantime, interest rates are expected to more or less remain at today’s fantastically low levels for a while longer.

Prudent first-time buyers will exploit this. They’ll build up their down payments, they’ll prepare themselves by researching the costs of owning a house and they’ll venture into the market with firm limits on what they’re willing to spend. First-timers account for just over one-third of the housing market, which means they have quite a bit of clout. If they were to take a buying hiatus, it could really slow the market down.

The obvious benefit of waiting to buy a home is that you have a chance to save a bigger down payment.

Listen closely... hear it?

That's the sound of Muir choking on his morning wheaties as he reads that.

The article continues:

TD’s forecast on prices reinforces the argument for first-time buyers to take their time. One of the prime motivators for rookie buyers in the past couple of years has been the fear that price increases would eventually make a house unaffordable. Market conditions across the country differ, but some of the hottest markets are now slowing. Nationally, TD has been forecasting an average decline of 10 to 15 per cent over the next three years. Mr. Alexander calls it a “steady cooling.”

Forecasts of more severe declines are out there. For example, the firm Capital Economics has said we have a housing bubble in Canada that will take housing prices down 25 per cent when it bursts over the next couple of years.

The logic is inescapable.

Buying right now, especially for first time buyers, is the wrong thing to do.

And the Globe finishes with the best piece of advice you can get right now:

Renting is not a waste of money. It’s what you sensibly do while waiting for the right time to buy a house. Right now, it makes sense to wait longer.

Amen to that!

(Hat tip: @YVRHousing tweet)

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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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Canadian price declines called the "Vancouver Manouevre" - Royal Bank declares Vancouver market in a correction

Well it certainly appears the concern about what is going to happen in the Real Estate market this Autumn is ramping up.

After an abysmal summer and all the negative press, the fall market usually see a resurgence in listings... but will there be buyers?

Judging by the comments of Bank Economists, it appears everyone is bracing for dismal times.

The Financial Post tells us that Canadian home prices are falling steadily.

Much of the decline in the national Canadian average is being blamed on Vancouver.

An economist at BMO Financial Group called it the “Vancouver Manouevre”. Our city's price drops have brought down the national average despite 19 of 26 cities experiencing year-over-year increases.

As we have mentioned here before, Vancouver's average sale price dropped more than 12% year over year and 20% since May 2012.

RBC economist Robert Hogue said:

"We still believe that Vancouver is probably the most stressed market right now because of extremely poor affordability. Plot the resale figures over the last year or so and you see a fairly significant decline in resales, so I think that this does the fit the definition of correction.”

Of course it does. When you have prices collapsing 20%, what other conclusion could you come to?

Naturally the British Columbia Real Estate Association (BCREA) disagrees.

(Surprise!)

BCREA chief economist Cameron Muir says:

“Typically to see a price correction you need to see a macroeconomic shock — recession, very high unemployment, for example — or you need to see interest rates go up very dramatically in a short period of time. Both of those we don’t see on the horizon.”

Cameron claims one-third of our market is first-time buyers and he insists there is no shortage of those 'first time buyers' to keep greasing the wheels of the property ladder:

“As long as we have first-time buyers that can get into the market to buy the homes from the people who are moving up, moving over, moving down, then the market should remain healthy.”

But if tighter mortgage regulations are making more difficult for potential first time buyers - and buyers are watching the market prices fall - when enter the market right now?

Watch for an unprecedented full out media campaign this fall promoting young first time buyers to do the 'smart' thing and get into the market.

In the absence of 'Hot Asian Money', what else will keep the ponzi going?

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The Media gets bolder in describing market conditions - now it's "Vancouver Sales PLUMMETING"

You can only imagine that media image focused types like Bob Rennie must be pulling what little hair they have out of the scalp with the on-going headlines that keep appearing.

Yesterday we told you how ScotiaBank had not only declared that Vancouver was in a housing correction, but that it was ongoing with a definite risk of a "difficult adjustment."

On the same day Scotia was declaring an on-going housing correction here, the Vancouver Province screamed:Vancouver home resales plummeting

Can the psychology of the current media stories be any worse? And it's the way they are saying it.

Vancouver's resale housing market plunged sharply in July compared with July 2011... The bigger drops in dollar volumes are owed in part to falling home prices: The average price of a home in Greater Vancouver in July was $667,462 - down 12.4 per cent from $761,673 in July 2011.

Kinda kicks the whole "but the HPI is rising" crap right in the teeth, doesn't it?

Greater Vancouver's declines were among the most dramatic and dragged down national statistics. But home prices also continued to decline across the rest of the country in July and the pace of the depreciation is picking up, according to the CREA.

The pace of depreciation is picking up?

Nah... did they really just say that?

I think Rennie might actually be bald by Spring if this nonsense keeps up.

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Scotia Bank comes out and declares Vancouver's in a full blown "Continuing Housing Market Correction"

Everything you have read from the Real Estate Industry for the past 3 months has talked about the market shifting towards becoming "balance" or that what we are experiencing is a typical summer 'slowdown' as buyer's take a 'break' during the hot summer months.

Some have even dared to suggest the market is 'softening'.

But few have dared to characterize what's going on for what it is - the start of a correction.

Well that all changed yesterday as ScotiaBank came out with a report that calls a spade a spade - that Vancouver is not only caught up in s market correction... but has been in that correction for a while and it is "continuing."

On page 5/6 of their August 17th, 2012 weekly commentary on economic and financial market developments, ScotiaBank has the following...

Vancouver’s Continuing Housing Market Correction

Strained affordability, a continuing high level of new construction and rising unsold inventory suggest there are further downside risks to the Vancouver housing market, notwithstanding the notable cooling in both sales and pricing over the past year.

The turnaround in Vancouver’s housing market performance over the past year has been dramatic. Existing home sales over the first seven months of 2012 have fallen 20% from a year ago, to their lowest level in over a decade outside of the 2008-2009 recession. Given a smaller decline in new listings relative to sales, overall market conditions have shifted modestly into buyers’ territory, in turn putting downward pressure on home prices. The benchmark resale price for both single-family homes and apartments has essentially levelled out over the past 12 months.

Growing affordability pressures are likely the main contributor to the slowdown, with the falloff in demand most pronounced at the high-end of market and/or for expensive detached homes.

Vancouver is by far Canada’s most expensive housing market, and has seen larger price increases over the past decade relative to the majority of major centres, including Toronto. Tighter mortgage rules and the eventual rise in interest rates will worsen affordability constraints over the next several years.

However, there appear additional factors behind the decline in sales, including reduced population inflows. Net interprovincial migration to the province has been negative for the past five consecutive quarters, reversing an almost decade-long trend of steady population inflows from other parts of the country. Meanwhile, international immigration, the primary source of the province’s population growth, too has slowed sharply. While ‘hard’ data on investor and/or foreign purchases are limited, weakening sales may also be indicative of reduced interest from offshore buyers, including from China.

Despite softening resale market conditions, new homebuilding has yet to show any discernible sign of slowing. Housing starts have accelerated over the past year, led by new high-rise projects, and are currently tracking over 19,000 annualized units. This compares to an estimated underlying annual demographic requirement of around 16,000-17,000. Completions remain relatively low at just over 15,000 annualized units in the first half of 2012, but will climb higher over the coming year based on the level of units under construction.

The Vancouver new home market is not significantly oversupplied. Over the 2006-2011 period, annual housing starts and completions averaged about 16,500 units, consistent with annual household formation trends. The total number of completed and unoccupied units has moved above its long-term average, but remains well below prior peaks of the mid- to late-1990s (chart 5). The increase is primarily in multi-unit developments, while the unsold inventory of single- and semi-detached homes remains low.

The current level of unsold inventory appears manageable. Relative affordability will continue to support demand for condominiums over single-family homes. Vancouver’s rental market, which absorbs a large share of new condominium units, remains tight: the apartment vacancy rate was 2.6% in April 2012, down from 2.8% April 2011. The vacancy rate for rented condos was just 0.9% (as of October 2011). Just over 25% of condominium units in the Vancouver CMA are rented, among the highest share in Canada. However, the risk of a more difficult adjustment will increase if builders do not soon begin to slow the pace of new construction.

If you read the whole article it tries to paint a pretty balanced picture, but you can't escape the headline.

It's almost as if Scotia, in the pit of their stomach, knows the looming risk of a "more difficult adjustment" is far greater than they are willing to publicly acknowledge at this point.

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How deep will the 'softening' of the market be? Deep enough that the Industry has begun shifting from 'training' the buyers to 'educating' the sellers.

Last Wednesday we introduced you to Shaun Kimmins, the latest realtor who has taken to telling you about the way the market is truly suffering as opposed to the standard industry spin.

Kimmins went a step further, venting his frustration at the misleading statistics being put out by the REBGV and how a much rosier picture is painted for his downtown condo market that is in complete contrast with reality.

Kimmins message to his customers right now?

"Sales volume is down considerably. Sharpen your prices if you want to sell."

Now that's a message many of his clients probably don't want to hear from him. Kimmins, no doubt, must spend considerable time and effort justifying that message.

And it's doubtful he's alone.

Perhaps that's why BC Magazine was moved last week to come out with an article headlined: Realty Check: B.C. Realtors Not to Blame For Softening Market.

Despite rumours to the contrary, real estate agents are just the messengers when it comes to Vancouver’s volatile home prices.

Agents do not drive the price of the real estate market.... There is no collusion or price fixing. There is no “propping up” of price points. The reality is Realtors will help sellers decide a price threshold for a property, but the seller approves it. In many cases, the seller will dictate the price.

When a home doesn't sell, the seller, if actually motivated, will drop the price to the point where the market finds it attractive. Seller's thoughts on prices vary greatly from the buyer's perspective. The cumulative mass of buyers and sellers create the market. Agents don't set the market — the consumer does. An increase in product (listings) with few buyers creates a buyer's market.

When sellers don’t lower their price to meet the market’s perception of value, those houses sit unsold and are joined by other listings, creating a build up that result in softening prices as those sellers all lower their prices to meet the market’s expectations. 

Now we have the question of the day: How deep will the market soften?

Hmmm... sounds to me like realtors are taking a lot of flack from prospective property sellers and the 'education' of sellers has begun.

Is a shift in the R/E propaganda machine underway?

For years now, media stories have been 'training' buyers that they have to get on the property ladder, they have to find ways to scrimp and save, have to take on that excessive debt or "be priced out forever."

Is this the first sign of a teutonic shift in tactics?

Has the offensive begun in an effort to now 'educate' sellers to be receptive to realtor suggestions to lower expectations and asking prices?

It seems they have. Note how BC Business answer's their rhetorical question about how deep will the market soften:

Apparently, pretty deep.

David Madani, economist with Capital Economics, has forecasted a 25-per-cent price drop in the next two years. Chinese investment dollars are gone. U.S. agents are seeing record numbers of Chinese buyers who are enjoying the rock-bottom prices of new construction in Miami, Los Angeles and New York. We still have consistent immigration to B.C., low inflation and high employment to celebrate, but the lack of interest rate increase and the new borrowing thresholds for insured mortgages will not jumpstart price increases (or sales) anytime soon.

The softening of the market is a harbinger of what is to come.

This isn’t the fault of organized real estate.

Thus the lesson ends for today: Don't blame the real estate agent for a market where properties don't move... lower your asking price.

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Flaherty: People getting mortgages that would be unaffordable when rates go up!

Interesting comment from Federal Finance Minister Jim Flaherty on Tuesday.

In an interview, Flaherty said that sources in the financial industry, as well as developers, had been telling him that:

“the situation was evolving where expectations by purchasers were excessive with respect to single family dwellings, and ultimately unaffordable when mortgage rates go up.”

This little revelation should drive a stake through the hearts of groups who are hoping that Flaherty will look at the declining sales in the Vancouver and Toronto markets and loosen up on the recent changes to mortgage regulations.

Flaherty even went so far as to say:

“I’d rather see some softening in the markets, particularly in Toronto and Vancouver, than have a rapid decline."

You may recall the post we made a week ago about Peter Simpson, president and CEO of the Greater Vancouver Home Builders’ Association.

Simpson was optimistic that "Finance Minister Jim Flaherty may intervene in amortization period for home mortgages"

Simpson said:

“I hope he looks at markets where affordability is already an issue, like Vancouver."

Simpson was deeply troubled by the dreadful summer real estate market. And while builders are trying to rationalize that during the summer months home sales traditionally slow down - the reality is that this summer's sales have been horrendous.

There is valid concern that if the monthly sales volume continues to tank after the Labour Day weekend, the situation will become dire for home builders.

Enter Simpson's attempt to exert a little public pressure on Flaherty:

"The real threat to the economy is if a real-estate slowdown leads to a sharp reduction in housing starts. That’s because new-home construction stimulates the sale of appliances, carpets, and other products. For every housing start, there are 2.8 person years of employment that are create.That’s direct and indirect jobs. If it continues to fall, they’re going to have to take a good hard look at what their actions have caused — and be prepared to make some adjustments. ”

Unfortunately the statements made yesterday by Flaherty reinforce that the Conservative Government knows all too well that they cannot turn back from the recent mortgage rule changes that eliminated the 30-year mortgage and directed CHMC to stop offering insurance on mortgages for any house selling over $1 million.

Simpson will no doubt be quite dismayed that those changes are just the start... more changes are on the way.

The Office of the Superintendent of Financial Institutions (OSFI) are about to mandate far-reaching changes in how big banks make real estate loans.

Beginning October 31st,  home equity lines of credit will be trimmed again.

The amount you can borrow from the value of your homes will be reduced from 80% to 65%.

If you want to borrow more,  the amount between 65% and 80% will have to amortized like a mortgage. 

This will have a significant impact on groups like the Greater Vancouver Home Builders’ Association because the primary uses of HELOC money goes toward renovating houses and buying rental properties.

In addition to this, mortgages will be made harder to get. The OFSI will require borrowers to qualify to “the greater of the contractual mortgage rate or the five-year benchmark rate published by the Bank of Canada.” That's a huge change from qualifying for the Variable Mortgage Rate.

The OFSI will also eliminate cash-back mortgages, a kick-back cash-cow for new homeowners equal to the 5% downpayment required to get CMHC insurance.

And, finally, liar loans will be eliminated.

History tells us all booms created by excess credit will ultimately bust.

CMHC has grown from $100 Billion in mortgages in 2006 to an astounding $600 Billion in 2012. Excess credit... it is what created our housing boom.

And now that stimulus is being choked off.

Shorter mortgages, higher rates and tougher borrowing... all resulting in less credit.

It doesn't take a crystal ball to foresee the cumulative effect this will create.

The howls of complaint from developers and realtors have only just begun. But Flaherty knows the alternative is worse.

“I’d rather see some softening in the markets, particularly in Toronto and Vancouver, than have a rapid decline."

Rapid or not, a decline is coming.

All booms created by excess credit always bust... always,

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