Tuesday, November 6, 2012

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."


Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. Here it comes...
    Dead on the money...
    cheap credit all used up...
    Guess the broke Entitled Hoard will have to cum up with a government job to back up their failing finances,
    You know the ones with the built in raises at Taxpayer expense.
    What are we at now... is it some 63%+- direct or indirect gov. financed employment here now...

    And Government Employees actually pay no useful taxes... they only recycle real taxpayer's taxes.

    of course if you tell them this they go ballistic...
    try it... it's a lot of fun... you should listen to some of the explanations they give for how valuable and important their work is, how we can't survive without them...

    But I wonder ... more importantly, how large a part of the housing market they are?

    If 63% of Canadians work for the government in one way or another, does that not mean that 63% of the housing purchases are dependent on tax-payer funded government jobs...?

    ...and it looks like the agreement on my place is now signed..., due dil. finalization for 15. dec
    $1,025,000.00 . am I really out of here...?
    paid $315,000.00. owe $165,000.00.
    And am pushing up the price for residential/business in my hood.
    Let's improve and increase and fuck up the level of property taxes for the neighborhood and leave...
    I know for a actual fact (can prove and provide proof) a every single property sale in the neighborhood has cost me an extra $600.00 physical dollars a year in new and property taxes.

    Aside from the profit I am also taking ten years of research and a $million in investment from Vancouver. Oh did I forget to mention its green technology... uses 1/3 the energy of the current system's... No one here will invest without tax breaks/kickbacks, or public welfare money...

    Weeeeeeeee.... going going, and looking to be gone...


    1. This is a good point Silver, and one that the City of Vancouver has neglected, or decided not to factor into their house price explosion orgasm.

      What businesses would want to stay in Vancouver paying up the wazoo for property taxes/rent?

      Once real estate implodes here, there will be nothing left because the city sold it's soul to the property market.

  2. In Victoria people are convinced that only Victoria will prices continue to go up.


    It is an Island so we are protected from everything;
    Everyone in the Whole World wants to live here.

    1. Haven't prices in Victoria been falling for a couple of years already? Are people really that divorced from reality?

    2. Agree with Jet Pack. Victoria is very interesting. As a renter here (prior home owner - sold elsewhere when moving into this city for work) it is amazing that people believe that the island is protected from price changes. The general thought I hear is that people are here to retire and they purchase their homes with cash so there is no reason to worry about people selling off their homes due to a large debt load. I just smile when I hear this. I looked at buying but there were so many empty homes it is ripe for people dropping prices to offload their 'investment' burden. These were not estate sales as many might anticipate. The quality of homes in Victoria at the $500-600K price range is not very good - too much maintenance on these older homes. I never anticipated becoming a renter at this stage of my life with a family but there are times when it isn't sensible to own. This is one of those times.

    3. It has been said the justification for the housing prices in Victoria is due to it being the warmest part of Canada, and it's a desirable place to live for retired Alberta oil guys wanting warmer weather. What they neglecting to realize is the fact that Canadians can buy a home in parts of Arizona for $65k and spend up to 6 months living there. Needless to say it is much warmer there!

      Interesting, a similar justification has been used for Victoria having the highest STD rate in Canada. Being the warmest part of Canada, many homeless find their way there, spreading STD through IV drug use and prostitution. This is in fact true, I'm not making this up.

    4. Both stories are true. But don't take everything you read on the internet so seriously ;)

    5. Like your comment, for example, JR? Where did you ever come up with homeless drug addicts swarming Vancouver from other cold parts of the country and spreading STDs to retired Alberta oil guys?

    6. Get some reading comprehension. Not Vancouver, Victoria. And not spreading STDs to retired Alberta guys, just to guys sleeping with prostitutes who then gave it to their wives. I was told this by one of the countries leading STD researchers who is a friend of mine.

  3. What the Post neglects to point out is that Harper and Flaherty were the ones to open the barn doors.

    That said, a lot of people made the conscious decision to take advantage of easy credit to buy homes and granite kitchen countertops and stainless steel appliances they couldn't afford.

    The next few years are going to be very painful, but in the long run I think it's going to be good for prices to fall back in line with household income.

  4. Funny stuff, like the previous three changes to mortgage insurance had no effect then, suddenly, this latest one did. The straw that broke the camel's back they will say.

    If you want to know my opinion the CMHC rule changes were only one part of a broader reining in of credit that has been in place for almost a year now. 25 year ams is only a component of the changes in the borrowing landscape over the past year.

  5. Yes i completely agree with the post that it's government who should blamed for decline in homes for sale vancouver bc