Wednesday, November 21, 2012

1997... how far removed are we?

The reaction to yesterdays post was interesting. A flood of contributions to the comment section (by this blog's standards) and a flood of email comments.

The attraction?  A single family house on the westside of Vancouver has sold for more than 30% below assessed value.

Is this continuing evidence that the housing bubble here is finally bursting?

Let's remember how we got here:
  • Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years.  CMHC also had limits on how much you could buy with their insurance.
  • Just after 1999 CMHC lowered the down payment to 5% with price limits on how much they would insure depending on the area. Amortizations were still 25 years. There would be no price limit on what they would insure if 10% or more was put down.
  • By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased. 
  • In March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured.
  • In March 2006 you had  0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year.  Interest only payments were allowed for 10 years.
  • In November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years. 
  • Canadian banks ramped this up by allowing up to 7% cash back offers is you would take on a mortgage with them.  You could basically get paid if you bought a house.
  • Not only were the rules surrounding the granting of money loosened, but CMHC's cap for granting mortgages grew from $100 Billion in 2006 to almost $600 Billion today.
Right there, in all those details, is where all the money originated to fund our housing bubble.

Incomes haven't grown to permit the rise in housing prices, debt has.

How much has changed since 1999?

Yesterday our friends over at VREAA offered us this intriguing reminder:

The house pictured above is 4549 West 12th Avenue on the westside of Vancouver.

In March of 1997 this house sold for $457,500.

Yep... $457,500.

Today the assessed 'value' of that house is $1,782,000.

Debt, and the crack cocaine of easy money is what has inflated it's value. 

Throughout history, all booms created by excessive credit have burst and returned to the the levels from which they started (and often have overshot those levels as the bubble collapses).

From 10% down and 25 year amortizations (with limitations of what they would insure) to 0% down and 40 year amortizations with no limits... it isn't rocket science to trace how this bubble was blown.

As the credit taps are turned off, who is genuinely caught off guard as the bubble contracts? Perhaps only the ignorant and the wilfully blind.

It doesn't take the incredible vision of a prescient oracle to see where we are or what is coming. It's common sense.  It's history replicating itself: all booms created by excess credit bust when that credit is withdrawn.

How long before we return to 10% down and 25 year amortizations?  We're almost there now. And with the $600 Billion CMHC cap looming, are greater restrictions so hard to foresee? Particularly with the Federal Government committed to a "soft deflating" of the bubble?

For those who objectively view our housing bubble, it isn't hard to see where we are going.

As the bubble unwinds, as credit is withdrawn, values will return to where they were before this bubble began (accounting for inflation).

Make no mistake... one example is not proof of the collapse.  But it wasn't that long ago people were insisting we would only ever see prices come down 10%, 15% TOPS.

Now we see regular examples of 25% off and evidence of 30%+ drops are appearing.

As incredible as it seems to eyes conditioned to 2011 prices,  4549 West 12th's 'value' is really around $600,000.  And it will return to that level, and most likely lower.

$600,000 would be a drop of about 67%.

When you consider that the unwinding is only just starting, and that we are already seeing examples of 30%+ drops, is a 67% drop still so hard to believe?

More significantly, if you can now appreciate that it might happen, is selling now and getting 35% off assessed value so bad when you consider what is coming?

We do live in interesting times.


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  1. So how far are we from 1997? Well if you listen to a guy named Jeremy Grantham you might come away thinking this global housing bubble burst will send us into a new Dark Ages.

    Biggest Housing Bubble Since 807 A.D. Has Burst

    From Zerohedge today is a short article suggesting that the US housing bubble is the worst bust in over a 1200 years.

    Lord help us all if he is right. That bust devastated Italy of the day. The article is fascinating really as it also worries over the derivatives bubbles and those in CDO's and Commercial Real Estate. You need to follow some of the links to catch the whole thing but it is sure to give you sleepless nights.

    Bottom line takeaway message.....sell everything of value that is exposed and raise cash any way you can because the world is about to get a whole lot rockier.

    Guess this makes collecting Rookie cards a big fat waste of time.

  2. Another interesting point to add to your list of how we got here is the fact that interest rates in 1999 were also a lot higher and are still considered emergency levels today.

    in 1999, the 5 year fixed rate was 7.39% compared to 2.84% today and the prime rate was 6.44% compared to 3.0% today. Those rates make a big difference to that monthly payment. People better hope today's rates don't also go back to 1999 rates.

  3. The Problem is the gov will do everything in their power o keep prices high. Low Interest rates, no price ceilings on CMHC, high temp immigration, etc.

    If that doesn't work, then all bets are off.

    1. If "the gov" cared about "prices" they would not have tightened CMHC standards and bank lending regulations. The government does not care about the price of real estate, they care about debt levels and inflation (or worse, deflation).

  4. Damn your facts and statistics. This is the BPOE

  5. Let's party like it's 1999!