Friday, March 9, 2012

I can see clearly now...

There is an old saying that goes "hope clouds observation."

A wise saying to remember as events heat up on the real estate front.

As the 2008 Financial Crisis took hold in early 2009, real estate watchers in Vancouver eagerly anticipated a housing implosion.

But ultra low interest rates and the on-going expansion of CMHC's balance sheet resuscitated a real estate dependant economy.

The anticipated collapse morphed into a small correction.

And it was not by chance.  Our government purposefully intervened to make it so.

It was a huge gamble for our federal government. The Conservatives gambled that if Canadians could be nursed through the worldwide recession (which normally last 4-5 years, at most), then economic growth would mitigate the huge surge in debt that the government stimulus would create.

One small problem.

Not only has this not been your garden variety recession.  It isn't contained to being a severe recession (on the world stage - the efforts have rendered the worldwide recession a curiosity in Canada).

The worldwide situation is turning out to be a once-in-a-multigenerational downturn that may well last 10-15 years (if not turn out to be something worse).

But this turn of worldwide events has transformed what had been an 'economic plan' into a quandary.

As bears sit on pins and needles waiting for a condition that defies economic sense to collapse upon itself, the Canadian federal government now shifts their focus from blowing up the housing bubble to now trying to engineer a 'soft landing' without triggering a housing crash.

From Carney (the Bank of Canada governor) and Flaherty (the Minister of Finance) we have endless jawboning about the hazards of the massive household debt they were responsible for creating.

Both men huff that the number one risk to the Canadian economy continues to be household debt  - which currently stands at a record 153% of disposable annual income.

The dilemma, of course, is that interest rates must be kept low to try and stimulate business spending and give businesses a break on their borrowing. But it's the consumer who continues to do all of the borrowing and the money is funnelled into the housing bubble - aided and abetted by a banking industry addicted and dependant on the revenue generated from these mortgages.

So jawboning moves to small steps to 'engineer' the soft landing.

The 0% down/40 year mortgage conditions were eliminated.

And it's replacement, the 5% down/35 year amortizations, were subsequently axed as well.

Now the 5% down/30 year amortizations are supposed to be doing the job.

But still no soft landing. Rumours now swirl that we will have 5% down/25 year amortizations at the end of the month... or perhaps even 10% down.

Meanwhile a tight rope is walked trying to prevent participants in the housing bubble from panicking.

Bank economists issue reports and forecasts attempting to ensure public confidence doesn't collapse and trigger a wave of sellers without buyers.

Each bank echo's statements like this one from Bank of Montreal's chief economist Sherry Cooper and senior economist Sal Guatieri who said last month that there is no housing crash coming, rather Canadians should......
Expect the housing boom to cool rather than crash… While the housing boom is unlikely to continue unless mortgage rates drop much further, neither is it likely to bust… In our view, the national housing market is more like a balloon than a bubble… While bubbles always burst, a balloon often deflates slowly in the absence of a pin.”
But a curious dynamic is developing,  the 'soft landing' is quickly morphing into signs of a collapse. It's difficult to see outright, because statistics skew what is happening.

 Sales are plummeting but what little sales that are occurring are at the high end of the market and the numbers distort the averages.

Witness what we are seeing in Greater Vancouver right now.

March sales throughout the Lower Mainland region are on track to collapsed 30% from March of 2011. Sales of detached homes in Richmond are off 55%. On the west side of Vancouver (HAM central) sales are down by 50%.

In Burnaby sales are on pace to be off by 40%.

In the midst of this carnage there have been 5 sales this week of properties which changed hands for over $7 million, including 2 for over $10 million.  This will trigger a record average price for a single week of real estate sales.

See what I mean... the statistics are going to be royally skewed.

But the mortgage divisions of the various banks are not fooled... they can clearly see through the aberrant  numbers... and they are concerned.

Bank of Montreal (BMO) has suddenly brought back its 2.99% special mortgage, a half point drop off it's five year term. 

BMO has also slashed their 10-year mortgage to just 3.99%.  This is the first time a major lender has ever offered such a low rate for a 10 year term.  What was it BMO's Sherry Cooper said about the "housing boom being unlikely to continue unless mortgage rates drop further?"

On Thursday afternoon TD Canada Trust matched BMO's 2.99%, but for a four-year loan. Other banks are sure to follow in a desperate attempt to stimulate the market and match the competition.

Which brings us back to where we started this post.

"Hope clouds observation."

Many bears are all hyped up in anticipation that the crash has started. As Sean Connery said in the movie, The Untouchables:
"Don't wait for it to happen. Don't even want it to happen. Just watch what does happen."
There are still many twists ahead. 

But if you are a bear, take heart by this recent quote from BMO chief economist Sherry Cooper. 

Cooper - who told us that unless rates dropped further, the housing market would deflate rather than burst - has suddenly had a change of heart (not too surprising since it is her own bank that has launched a new mortgage war with the lowest rates in Canadian history):
“We’ve always said the market remains vulnerable to a correction in the face of a shock. It could also 'pop' in the absence of a shock should current frothy trends persist.
The next few weeks will, no doubt, generate significant 'froth.' Watch what happens, don't be disappointed, don't be surprised.

Just watch what does happen... and allow events to play out.  Don't let hope cloud your vision.


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  1. From Carney (the Bank of Canada governor) and Flaherty (the Minister of Finance. If you think the position that we are in right now is not calculate to the T, i have a bridge to sell you. Those guy have the best brain in the buissniess. They creat the problem and they come as the Savior with the solution. ( solution that they what from long time ago) *Order out of chaos*

  2. I suspect some Real Estate agents are trying to manipulate the market too. I have been following houses in the Coquitlam area and most languish on the market for weeks or longer. But some seem to get an "offer" within a day of listing. This seems suspicious to me in light of the overall market slowness in that area.

  3. Another great post today..interesting to see the sales counts down by such huge percentages. Unfortunately for those it will impact, it seems the first sign of the real market turn doesn't it.

    Regarding the tightrope, if the market sentiment continues to turn en-masse, it seems that the soft landing won't be possible. The nature of the game for the politicos over the years will change from tightrope (aka risk management) to political salvation. Questions like, "what is the government doing to help these unfortunate homeowners selling at a loss.." will be demanded by some of the vocal public.. Yet to come, but come it will.

    Will history come to see BMO's 2.99% with negative sentiment as a symbol of bankers preying on those who can least afford at the height of the bubble and on risk insured the public purse? I think so, but this will take some time to play out.


  4. Whisperer, you're going to like the #s from today...

    New Listings 229
    Price Changes 76
    Sold Listings 69


  5. "Our government purposefully intervened to make it so."

    A link would be helpful. Doesn't have to be an explicit declaration of intent, just a breakdown of events.

    I think you're right, and the narrative is compelling (and often repeated on the RE bear blogs), but sometimes that is a good reason to be sceptical...

  6. Great post!!!

    And, yes, the banks are preying on the last surviving holdouts with the "limited edition" 3 week offer of extremely low rates. What people don't realize is that they will get wonderful high interest re-sets after five years and be debt slaves well into their retirements.