How bad could it be?

he numbers are becoming increasingly clear; the bloom is off of the Canadian real estate bubble and boom.

Among a variety of indicators, sales of condos in the second quarter of this year in Toronto have fallen by half and a record number of units were left unsold. In Vancouver July residential sales were the lowest for any July in ten years and fell 11.2% from the month of June.

While prices are not dropping yet, the fact that commentators from the business and real estate communities themselves believe a 15% downward adjustment in prices is imminent means that we can likely expect a greater decrease. These are, after all, people whose best interests are served by minimizing any potential housing market panic.

The increasingly interventionist actions being taken by the Conservative government and Finance Minister Jim Flaherty to dampen the market, counter-intuitively if one does not really understand what is behind the real estate market boom of the past few years in the first place, also shows that the powers that be are worried. Very worried.

And they are worried for good reason. It was the government itself that facilitated the creation of the overheated market and it is the government that is ultimately on the hook for the tab should an American style meltdown occur. Which means that, in the end, you are on the hook.

Many of us have, from grade school on, been inculcated with the notion that we live in a "free market" society where prices reflect the interplays between supply and demand that fluctuate due to the rational economic decisions of buyers and sellers. For those who truly enjoy simplistic fantasies our own publicly owned broadcaster, the CBC, has programs with imbecilic "commentators" like Kevin O'Leary or that are cheerleaders for a world that exists only in the demented dreams of libertarians, such as the hilariously summer school economic "thinking" that the radio show "The Invisible Hand" soothes those who might doubt neo-conservative ideas with. Both on, ironically, a "tax-payer" funded network.

But the actual economy is much more of a planned Pyramid Scheme where the greater a company or sector's economic clout and the higher up they are in the pyramid in terms of importance to the fundamental soundness of the country's economy in the eyes of the government, the less they face the vagaries of actual market forces. The nearer to the pinnacle, the more the government intervenes, directly and indirectly. This has been true for decades, but was made most obvious during the 2008-2009 bailouts.

In the case of housing, Canadian society has raised the concept of personal home ownership to near fetishistic levels. It is part of the "Canadian Dream" that you will own your own little plot of land (or sky, in the case of condos). It is a logical extension of what originally brought many to the so-called "New World" in the first place a hundred or more years ago; only now the land is far from free for those who wish to settle it. A staggering number of citizens buy into the notion that owning a home represents some kind of freedom, despite the reality that "their" home is actually usually owned, for at least the first twenty-five years, by whoever provided them with a mortgage. Missing a few mortgage payments will make this abundantly clear.

Given the centrality that personal home ownership holds to the sense of self-actualization of much of the electorate, it is hardly surprising that, especially if it felt that the economy might be stalling, a government might chose to make sure that the "free market" worked in such a way that it would continue to facilitate this dream as a highly dangerous form of "stimulus".

And this is precisely what the Canadian government did in the period after 2008.

Under the auspices of the Canada Mortgage and Housing Corporation (CMHC) the Canadian government has insured the mortgages that Canada's banks have provided to Canadians to the tune of a projected $558 billion this year. This figure, one might note, represents over one-third of Canada's total GDP! This is up dramatically since 2007-2008, directly due to the fact that the government raised the limit on mortgages that CMHC could insure from $450 billion to $600 billion and loosened the rules on what types of mortgage would qualify.

Insured means exactly what you think it does. In the event that Canadians begin to default on their mortgages, and in the event that this default level were to reach the point where the CMHC could no longer cover defaults, the government of Canada, and, therefore, you will be on the hook for the bank's "losses". As Chris Horlacher of the free market, right-wing think-tank, the Ludwig-von-Mises Instistute of Canada shows, the inability of the CMHC to cover defaults in the event of a real bubble burst is highly likely. This is due to the fact that the CMHC's "assets" are largely identical to what it is insuring, namely mortgages! "In the event of a severe downturn in the mortgage market, claims will start pouring in. The CMHC (nor any kind of insurance company) never possesses enough cash to cover all of these potential liabilities, they invest it. The problem here is that the CMHC has bought the very same assets they are insuring against. If the mortgage market collapses, so too will the value of the assets of the CMHC, making them extraordinarily difficult to liquidate in order to raise the cash necessary to pay out their claimants. It’s a catch-22 that spells potential disaster and deeply impairs their ability to actually insure against this particular type of credit risk."

Given this, Horlacher goes on to conclude that "The CMHC remains highly susceptible to even a slight increase in the rate of mortgage defaults, or a rise in interest rates. With the federal government, and ultimately the Canadian taxpayer, on the hook for all of the CMHC’s liabilities we could soon find ourselves in an extremely difficult financial position."

In other words, to facilitate the accessibility of easy credit the federal government took the risk to the banks out of potentially risky mortgages and laid them at our doorsteps.

In addition, for several years, in response to the economic crisis that began in 2008, the government allowed the CMHC to insure mortgages with amortization periods above 25 years, with lower down-payment requirements and with unsustainable, artificially low interest rates courtesy of the Bank of Canada.

This had a direct and intended consequence. It allowed the banks to offer mortgages to people who, in reality, could not really afford to enter the market and this, in turn, allowed those people to, in fact, enter the market. The reality of how this plays out can be seen from the fact that housing prices have risen far more rapidly than income. (These figures also lay to the rest the myth that the Canadian housing market is only experiencing a bubble in two of its major centres. The bubble is far more widespread than that.)

Taking these steps did stimulate growth in the construction industry and helped to dig the banks out of their recently uncovered, and previously denied, liquidity crisis. But it also had the effect of creating what amounts to artificial "demand" for houses and condos in many urban markets, most notably, but far from exclusively, in Vancouver and Toronto. This, in turn, drove prices up in dramatic ways, leading the banks to extend riskier credit to citizens desperate to get in on the action who, in turn were encouraged by the government created environment to buy properties that, by any objective standards, are out of their price range.

The CMHC, an organization that was originally formed, in part, to help to put home ownership within the reach of the average Canadian has recently done so by placing them into dangerous debt situations in an artificially created price bubble where even relatively minor downturns in the economy or drops in housing prices can create an economic disturbance whose ripple effects could lead to economic consequences akin to what is happening in Spain.

The basic facts of this situation have been acknowledged by Flaherty himself who has clearly and repeatedly stated that household debt in Canada has reached levels that threaten economic stability. He has made these cautionary comments in ways that make it seem that he is warning citizens for their own benefit and against their own behaviour.

But there is more to it than that.

The real worry, enough to keep finance ministers awake at night and to get them to try to manage the burst of a bubble, is what will occur should the markets in Toronto, Vancouver and elsewhere experience a rapid downward market adjustment in both prices and demand, especially if people who bought residential units for speculative purposes (and there are more of these than is commonly understood) or at the height of their value suddenly find themselves holding on to mortgages that face higher interest rates down the road and making payments on properties whose values have declined by 15-20% or more (should a runaway effect occur). Given that, in many cases, these people may actually have far less equity invested in their properties than one might suppose, there is a point where default makes a lot more "rational" economic sense then the decision to buy in the first place did.

The worry of financial analysts, and our finance minister no doubt, is compounded, as Finn Poschmann a vice-president at the C.D. Howe Institute noted, by the fact that "Since 2007, Canadian banks have increasingly come to the covered bond market with bonds backed, in whole or in part, by mortgages individually insured by the Canada Mortgage and Housing Corporation. This insurance cover boosts the surety of the bond pool, and marginally lowers the banks’ cost of capital and, arguably, perhaps lowers the cost of homebuyers’ mortgages. But an otherwise functioning financial market also gains government and taxpayer participation, and risk exposure, to uncertain net benefit."

While he, of course, is looking at it from the perspective of the bankers, as he makes clear there are dangerous historical antecedents for this situation, and the government and taxpayers are, as Poshmann puts it "exposed".

This is an understatement.

In the end, this is a direct lesson in how governments help to create the conditions in which the present European style austerity regime becomes "necessary". The Canadian government, to aid with bank liquidity in 2008, to generate a kind of short-term, politically popular, but relatively high risk form of stimulus by loosening the reigns on personal credit accessibility and aiding very directly in the rise of the highly overheated Canadian housing market, and to help to sustain a middle-class fantasy that everyone should be able to afford a home even when we live in a system where this is not possible unless and until the government gets into the business of building and regulating housing as opposed to being the agent that props up the riskiest end of the entire housing sector, that of credit, has put us all at risk by underwriting the "exposure" of the banks themselves.

The government has chosen the most bank friendly model of "intervention" in the housing market; they don't build affordable housing for all, rather they allow the banks, at no risk to themselves, to put citizens into unsustainable levels of personal debt to own what is completely unaffordable housing.

If a real housing correction occurs, and if it results in an entirely predictable and at least somewhat likely wave of foreclosures and defaults, and if the government is forced to cover even a relatively small proportion of the near $600 billion in insured mortgages, the cuts of recent federal budgets will look like happy times with hindsight. The economic "side-effects" will also be devastating.

Even if this is a bullet that we do manage to dodge, Canadians need to ask themselves if the role of their government and their taxes is to fund social programs, health care, direct housing and infrastructure expenditures, or if it is to put all of these necessities at risk by removing actual market and risk factors from the mortgage business for the big banks by insuring and taking on liability for their loans and the lifestyle of a certain segment of the population, potentially on the backs of all Canadians.

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BIV: A Closer Look at Olympic Village Property Values

Business in Vancouver Magazine is out today with a shocking series of slides taking a closer loop at Olympic Village property values.

In the first one, the average change from assessed values in 2011 to 2014 is down almost a stunning 20%:

Breaking down the properties, the average price drop per unit is a whopping $221,546.  The largest price drop is $627,000 for one unit:

Based on floors, from units on the 10th floor and up, prices are down -33%. Mid floors (5th - 9th floor) are down 22% and Lower floors (4th and below) are also down 22%.

BIV also gives a breakdown of the smaller to bigger units:

It's a stunning look at property values in the former Olympic Village.

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Investors Group shakes up Canadian R/E market announcing the 1.99% Mortgage

Are these the effects of the Bank of Canada's recent declaration that low interest rates are here to stay?

Today Investors Group unveiled a 3-year mortgage at 1.99%, a move sure to reverberate through the real estate industry:

The Winnipeg-based financial services firm posted the rate on its website Tuesday, offering a 36-month term at a variable rate 101 basis points below IG's current prime rate of three per cent.

"It's probably something we may see more of," Toronto mortgage broker Marcus Tzaferis said. "They offer it up so they can cross-sell their investment products."

The offer comes with strings attached — namely that you can't break the mortgage for any fee during the three-year term, unless you sell your home. But the offer does come with the ability to double up monthly payments, or pay a 15 per cent lump sum once a year.

In real dollar terms, it could knock a lot of money off a mortgage payment, at least over the short term. A standard 25-year $500,000 mortgage at a five-year rate of 2.99 per cent works out to $2,364 a month. That mortgage under IG's new terms would be $2,115 a month — savings of $249 monthly, at least for the first three years, and as long as the variable rate doesn't increase.

Tzaferis speculates the company is willing to take a loss on the home loan temporarily in the hopes of making money elsewhere down the line.

"They get the opportunity to wrap you up and cross-sell their mutual funds and you'll probably renew and pay an extra half a per cent for a five-year then," he said.

Investors Group's five-year posted rate is currently at 3.4 per cent, slightly higher than what the market-leading big banks are offering.

Tzaferis says he recalls seeing five-year variable rate mortgages below two per cent several years ago, but it's believed this is the first such posted product since the recession that began in late 2008. Kelvin Mangaroo, president of mortgage comparison website RateSupermarket.ca, says it's the lowest rates he has seen in his company's six-year history.

"I think they were trying to break the psychological barrier of two per cent to generate some interest ... ahead of the peak spring buying season," Mangaroo said.

"Rates will go up over time, but it looks like it won't be any time soon," he said.

In 2012, a number of Canadian banks offered five-year mortgage rates below three per cent — something that earned them a stern rebuke at the time from then-finance minister Jim Flaherty. The banks quickly dropped the offer.

In March, Bank of Montreal again offered a five-year rate of 2.99 per cent, a deal that Flaherty's successor Joe Oliver was much more silent about.

Oliver released a statement Tuesday following news of the rate, noting the government has moved repeatedly in recent years to tighten lending rules and keep a lid on consumer debt and the housing market, but offering no hint it has any pressing intervention plans.

"I will continue to monitor the market closely," the statement read.

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Holy HELOC

HELOC, or Home Equity Line of Credit, is an access to funding that turns your home into a piggy bank.

As the Canadian real estate bubble has inflated, many Canadians have turned to the 'home piggy bank' and borrowed like… well… pigs.

How bad is it?

Macleans Magazine had a March 22, 2014 article titled Living Beyond Our Means: Extravagant, reckless, debt-ridden—Canadian consumers have maxed themselves out after a decade-long spending spree. When did we start to be like Americans?

Macleans notes:

At the end of 2013, according to the Office of the Superintendent of Financial Institutions, Canadians had borrowed $225 billion through home-equity lines of credit (HELOCs)—a figure that doesn’t even include loans from credit unions and other lenders. 

$225 Billion!!!

How significant is that figure?

That’s just less than half the US$500 billion Americans owe in HELOC debt. But America is a far larger economy. Down there, HELOCs amount to 2.9% of GDP, and only reached 5% at the peak of the U.S. housing bubble. In Canada, though, that figure is 14%, and is up from 12% in 2012, showing that even though Canada’s economy has grown, the pace at which homeowners tapped their properties for cash grew even faster.

The impact of these numbers can't be understated.

Had Canada's housing bubble been allowed to deflate when the financial crisis originally hit in 2008, the effects would have been very painful.  But all we have done is delay the pain. And in the meantime… the problem has compounded as Canadians have pigged out on debt at emergency level interest rates.

It is going to make the pain far worse when the inevitable happens.

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Bank of Canada: Low Interest Rates Here to Stay?

One of the major themes on this blog (and in real estate) has been interest rates.

Artificially low interest rates to stimulate the economy after the dot com crash of 1999 combined with  emergency level rates after the Great Financial Crisis have created a generation that knows nothing but low, low interest rates.

(Some, like uber Gold bull Jim Sinclair, have predicted interest rates can't be allowed to rise)

And now the new Bank of Canada Governor, Stephen Poloz, has come out and said low interest rates may be here to stay.

Canadians can expect to enjoy relatively cheap borrowing costs for some time to come — even after the economy returns to full capacity and the Bank of Canada starts hiking interest rates, bank governor Stephen Poloz said Thursday.

Poloz says it will likely take until early 2016 before the economy is firing on all cylinders and inflation is back to two per cent. But even when it does Canadians shouldn't expect a sudden increase in interest rates to fight inflation, he told a business group in Saskatoon on Thursday.

"Our economy has room to grow and when we do get home, there is a growing consensus that interest rates will still be lower than we were accustomed to in the past," said Poloz.

"Both because of our shifting demographics and because after such a long period at such unusually low levels, interest rates won't need to move as much to have the same impact on the economy."

Poloz says the new normal will be lower rates than in the past and people should get used to that.

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So CMHC changed the rules and you are require to put 5% down? Ummm… Vancity says nope.

We get it: saving for your first home can be a serious challenge -- especially here in BC. Even a 5% down payment can sometimes feel like an unattainable financial goal.

This video will give you a basic overview of how the Down Payment Helper Mortgage will match the amount you've currently saved for your down payment, up to a maximum of $12,500.

Who says you need 5% down in Vancouver?

(hat tip b5baxter)

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Vancouver's Average House Price Drops From Last Month's High

As always, Larry Yatkowsky is out with the latest monthly real estate numbers and the average detached house price has withdrawn from last month's record high.

Vancouver’s Detached home average price has dropped to $1,209,542 from $1,361,023.

We thank Larry, again, for the prompt date he provides every month.

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An update on a property in Richmond: House that sold for 33% below assessed value in 2012 now in foreclosure.

Faithful reader will recall 6691 Gibbons Drive in Richmond.

Back in Oct/Nov 2012 we made a couple of posts about this property. The hook?  The property was listed - and sold - for 33% less than it's assessed value. Assessed at $1,258,600, it went for $845,000.

Pretty good deal, eh? Well… apparently it wasn't for that particular buyer.

Word comes from Richmond realtor Arnold Shuchat that the property is now a foreclosure sale.  From Shuchat's blog:

Another Court ordered sale (foreclosure sale) hit the market today at 6691 Gibbons-see MLS# V1054760. This property was listed back in March 2012 for $1,258,000 and eventually sold for under $850k in November of 2012. It is just listed for sale at $1,049,000 and is assessed for property tax purposes at $1,112,000.

Foreclosures usually mean that mortgage commitments are not being honoured. Often the owner stands to lose some equity in this process as well as costs for legal fees. Many times the lender will also lose depending upon the loan to value of the property

The listing says: "Excellent building lot or investment property in a prime location surrounded by new Million Dollar homes. Wide 84' frontage with a total of 7834 sq ft allows you to build a 3600 sq ft home plus a 3 car garage. Solid 2 level 2550 sq ft 4 bedroom + den home. Excellent location within walking distance to Thompson Elementary, Burnett Secondary & Terra Nova Shopping Mall"

Ya gotta love how it's being listed at the current assessed value and not for what it sold for.  It will be interesting to see what it sells for this time.

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More Concerns Out Of China?

The bad news continues to flow out of China. The Telegraph reports that: Tumbling Chinese yuan sets off 'carry trade' rout, triggers derivatives contract

China’s yuan has suffered its biggest one-week fall in 20 years, nearing key trigger levels that threaten a wave of forced selling and mounting stress for those with dollar debts.

The jitters come amid reports of fire-sales of Hong Kong property by Chinese investors desperate to raise cash, some slashing their prices by 20pc for a quick sale. A liquidity squeeze in mainland China has already led to the collapse of Zhejiang Xingrun real estate this week with $570m of debts, the biggest property failure so far.

Meanwhile Hong Kong's The Standard, in an article titled Bankruptcy Looms, reports that in addition to the solar, coal and real-estate developer companies that are on everyone's radar as potential future bankruptcy candidates, one can also add steel makers to the list, with its report that Highsee Group, the largest private steel makers in Shanxi province has defaulted on CNY3 billion of debt, unable to repay its bonds on time.

Finally, a South China Futures Brokerage shuts down on "significant business risks"

Will the ripples be felt here?

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Wed Post #2: Is China's 'Minsky Moment' at hand?

Numerous articles have been written about the tremendous debt that is being created world wide, and in China specifically.

Many are wondering if the 'Minsky Moment' is at hand for China.

The Minsky Moment refers to the moment at which a credit boom driven by speculative and Ponzi borrowers begins to unwind. It is the point at which Ponzi and speculative borrowers are no longer able to roll over their debts or borrow additional capital to make interest payments. Minsky states this usually occurs when monetary authorities, in order to control inflationary impulses in the economy, begin to tighten monetary policy. The PBOC’s latest Q4 Monetary Policy Report indicates it intends to continue to tighten liquidity in order to control the excessively fast growth of shadow banking credit.

Of the $1.8 trillion in Trust Loans provided by the shadow banking sector, nearly $600bn, or RMB 3.6 trillion will come due in 2014.

Defaults or near-defaults have begun to occur with regularity over the past three months and are likely to pick up in quantity significantly over the next year. As it is becoming more clear that investors may not get all of their money back, interest rates on trust products, wealth management products (WMPs), corporate bonds, and bank loans have risen by roughly 200 basis points in the last year.

Earlier this month China experienced it's first ever corporate bond default.

And the fallout has begun. WKZO notes: As credit tightens at home, Chinese sell Hong Kong luxury real estate.

HONG KONG (Reuters) - Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.

Wealthy Chinese were blamed for pushing up property prices in the former British territory, where they accounted for 43 percent of new luxury home sales in the third quarter of 2012, before a tax hike on foreign buyers was announced.

The rush to sell coincides with a forecast 10 percent drop in property prices this year as the tax increase and rising borrowing costs cool demand. At the same time, credit conditions in China have tightened. Earlier this week, the looming bankruptcy of a Chinese property developer owing 3.5 billion yuan ($565.25 million) heightened concerns that financial risk was spreading.

"Some of the mainland sellers have liquidity issues - say, their companies in China have some difficulties - so they sold the houses to get cash," said Norton Ng, account manager at a Centaline Property real estate office close to the China border, where luxury houses costing up to HK$30 million ($3.9 million) have been popular with mainland buyers.

Property agents said mainland Chinese own close to a third of the existing homes that are now for sale in Hong Kong - up 20 percent from a year ago. Many are offering discounts of 5-10 percent below the market average - and in some cases as much as 20 percent - to make a quick sale, property agents and analysts said.

Is it a precursor to what we are about to see in Vancouver? If so ponder this chilling quote:

"Many mainland buyers bought lots of properties in Hong Kong when the market was red-hot three years ago," said Joseph Tsang, managing director at Jones Lang LaSalle. "But now they want to cash in as liquidity is quite tight in the mainland."

Panicked Mainland Chinese appear desperate for cash:

In a nearby development called The Green - developed by China Overseas Land and Investment - about one-fifth of the houses delivered at the start of this year are up for sale. More than half of the units, bought for between HK$18 million and HK$60 million, were snapped up by mainland Chinese in 2012.

China Overseas Land was not immediately available to comment.

"Some banks were chasing them (Chinese landlords) for money, so they need to move some cash back to the mainland," said Ricky Poon, executive director of residential sales at Colliers International. "They're under greater pressure from banks, so they're cutting prices."

In West Kowloon district, an area where mainland Chinese bought up close to a quarter of the apartments in many newly-developed estates, some Chinese landlords are offering discounts on the higher-end, three- to four-bedroom apartments they bought just a few years ago.

This month, a Chinese landlord sold a 1,300 square foot (121 square meter) apartment at the Imperial Cullinan - a high-end estate developed by Sun Hung Kai in 2012 - for HK$19.3 million, 17 percent less than the original price. The landlord told agents to sell the flat "as soon as possible," said Richard Chan, branch manager at Centaline Property in West Kowloon.

"The most important thing for them is to sell as soon as possible," Centaline's Chan said. "In the past two weeks, those who were willing to cut prices were mainland Chinese. It is going to have some impact on the local property market, that's for sure."

It will be interesting to see if this selling frenzy occurs on our shores as well.

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Wed Post #1: Ron Paul On The "Illusion" Economy: "We are bankrupt and have been encouraged to take on more debt"

"So sometimes you have housing bubbles and sometimes you have housing busts, then you have housing bubbles and bond bubbles that's all [the] result of the manipulation of interest rates, which is my real objection to it." 

"So one half of our economy is socialized, because it's the control of the money supply, the control of the interest rates," "We don't believe they're capable of doing it and I think history shows that the record is pretty bad." 

"The economy on the surface looks good, but if you look at hardcore unemployment and standard of living of the middle class, there's still a lot of problems out there... So if we look only at the stock market, then we're in denial."

(Hat tip: Zero Hedge)

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Dark clouds over Hong Kong's property market as 'perfect storm' looms

Interesting article in the South China Morning Post titled, "Dark clouds over Hong Kong's property market as 'perfect storm' looms."

It seems real estate prices and sales have fallen significantly since the Chinese government instituted measures last year to cool the real estate sector. So much so that analysts are expecting more gloom in the months ahead.

Overall property sales plunged to a 23-year low last year, a development that has fuelled fears Hong Kong will repeat the major downward trends the colony has experienced in the past.

What's evolving is seen as the perfect storm: government curbs that crimp demand at a time of increasing supply combined with an imminent interest rate rise that threatens to set off a severe price correction.

A collapse in demand that saw overall property sales plunge to a 23-year low of 70,501 deals last year has fuelled fears of a repetition of major downward trends of the past.

Amid the continuing slide, which began when the government imposed a hefty increase in stamp duty in February last year, gloom-and-doom forecasts of prices plunging as much as 35 per cent in two years have emerged.

"There are strong similarities with the 1997 bubble, but the exceptionally low level of interest rates has encouraged homebuyers to borrow more in this cycle than in 1997. So the market is far more dependent on inter-generational transfer of equity, low supply and low interest rates," said Andrew Lawrence, the managing director of real estate equities research at Malaysian investment bank CIMB Securities.

Before 2009, about 75 per cent of property transactions required a mortgage, Lawrence said, but following a drop in mortgage rates, now at a historical low of about 2.2 per cent, nearly every property transaction had been mortgage-funded.

One of the most bearish property analysts in the city, Lawrence said home values could fall more than 50 per cent in a worst-case scenario if the government did not relax the higher stamp duties. 

The real estate collapse in 1997 had no floor because it was driven by economic contraction, which created a downward spiral.

A repeat of that today would have stunning repercussions.

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Now it's the Chinese Millionaires in Richmond banding together and threatening to sue.

In our last post (Chinese Millionaires In Beijing Upset Canada Terminating Investor Program, Threaten to Sue) we told you about how the Federal Government of Canada, in last month's Federal budget, had cancelled the International Investor Program (IIP).

Under the scheme, would-be migrants worth a minimum of $1.6 million loaned the government $800,000 interest-free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world's most popular wealth immigration programme.

In response 10 investor applicants  in Beijing held a news conference to plead to the Government of Canada not to dismiss the pending 45,500 applications that had been frozen in the system.

Their desire? Process those applications before terminating the program. Those investor applicants (some of whom had applied five years ago) also stated that they were discussing their options with lawyers in Canada and whether to sue for compensation for the years they had been waiting.

Well now it appears it's not just applicants in Beijing who keen to litigate.

40 Chinese community groups in the Vancouver suburb of Richmond gathered this week to also protest the cancelation of Program - and to discuss their own plans to sue the Federal Government.

According the the Richmond News:

Chinese community groups gathered in Richmond to protest the cancelation of the Investor Class Program in last month’s federal budget, and to consolidate their efforts to fight, and potentially sue, the government.

Banners with messages such as, “We love Canada. We are willing to contribute” and “Say no to the latest changes of immigration policy” provided the backdrop Wednesday for the six-person panel, which addressed the crowd about the economic implications of cancelling a program which expedites immigration for the wealthy.

Chris Ho, an immigration lawyer, who was the only speaker to address the crowd in English, pointed out the mixed messages being sent by the government in regards to investment and immigration.

“The immigration minister had announced ... that a new investor program would be coming. That was in January of 2014. In February, we have the minister of finance announce that the program is being cancelled.”

In justifying the cancellation, Minister of Immigration Chris Alexander is reported as saying, “there is also little evidence that immigrant investors as a class are maintaining ties to Canada or making a positive economic contribution to the country.

“Overall, immigrant investors report employment and investment income below Canadian averages and pay significantly lower taxes over a lifetime than other categories of economic immigrants.”

Ho argues that the minister has no evidence. “Do we have a very conclusive study or information that can point us to that? I don’t think so,” he said.

But the paying of tax isn't the only angle the group is pursuing. There is, in their words, "the issue of expectations":

“There is a doctrine called legitimate expectation. This is not new. For someone who has already filed an application, they would expect someone to deal with the application. You can’t just cancel the application without doing anything.”

The groups also speculated on the economic impact of the cancellations:

Steve Kou, a representative from the business community, gave his speech in Chinese, but later answered questions in English about the economic impact of the lost of the investor program.

“If the cancellation happens, there are no new direct investors in Canada or B.C. So if there is no more money coming to Canada, the growth rate will slow further,” said Kou.

Kou stated that the cancellation would have a huge impact on the B.C. economy, in almost all areas, starting with real estate.

“The first area would be real estate. If you cannot immigrate to Canada, why buy the properties here?”

And in an attempt to leave no racist card unplayed, the groups also threw out this beauty:

Sophia Huang, another lawyer on the panel, challenged the government’s attitude, stating that Chinese immigrants came to Canada 125 years ago as railroad builders, and paid a head-tax, which was recently apologized for, but now they are saying “please don’t come.”

“We are saying, ‘Listen, you need to communicate with us better. We would like to come here, this is our country, not only your country, it’s ours. Our Chinese ancestors built this.’”

The coalition, supported by more than 40 community organizations, is calling for supporters to vote for people who will speak for the Chinese voice. It is also threatening a possible class action lawsuit for those affected by the immigration changes.

Oh my.

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Tues Post #2: Chinese Millionaires In Beijing Upset Canada Terminating Investor Program, Threaten to Sue

Last month, while we were enjoying a bit of a break, one of the bigger news stories was the fact that Canada axed the Immigrant Investor Program (IIP).

The announcement, delivered by Finance Minister Jim Flaherty as part of the government's new budget, meant that an estimated 45,500 mainland Chinese in the queue for visas in Hong Kong would have their applications "eliminated" and their fees returned.

The program had been in a state of limbo since 2012, when applications to the scheme were frozen.

Under the scheme, would-be migrants worth a minimum of $1.6 million loaned the government $800,000 interest-free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world's most popular wealth migration programme.

But as Flaherty noted in his budget speech which axed the program:

"For decades, [the investor scheme] has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require."

The Immigrant Investor Programme, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen crackdown and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme. About 67,000 mainlanders have migrated to Canada under the IIP.

Many believe that influx flowed largely to Vancouver and was instrumental in rapidly inflating our current housing bubble.

Ian Young, who writes for the South China Morning Post, attempted to quantify what the elimination of the program might mean for Vancouver real estate:

High property prices are the defining factor of life in this city. Yet despite a wealth of punditry, few have tried to actually calculate the potential impact of the demise of the millionaire migration scheme, which has brought tens of thousands of rich Chinese and others to Vancouver. 

So here goes.

From 2005 to 2012, the federal IIP brought 36,951 rich people to British Columbia. That’s an average of 4,619 per year, representing 1,340 households at current averages under the scheme. A 2011 study showed 90.4 per cent buy homes, suggesting 1,211 actual purchasing households per year have been removed from the Vancouver market by last week’s decision (since almost the totality of BC investor migrants live in its largest city). This is equivalent to only 4.25 per cent of the 28,524 residential sales in greater Vancouver last year.

At this stage it’s crucial to note that reducing the sheer number of sales doesn’t necessarily move a market down (the worst week of the 2008 stock market crash saw record trading volume in New York). But extracting buyers who pay above prevailing prices certainly does.

And I can think of six “known unknowns”, five of which will undoubtedly increase the impact of those 1,211 lost households.

First the relatively good news - for owners, anyway. We don’t know how many would-be IIP arrivals will find some other way of getting to Vancouver. Some will. Most probably won’t, because if options other than a years-long queue for the costly IIP existed, they would have taken them.

And now for the five scary bits, that will assuredly magnify the impact of those lost purchasing households.

• 1. Investor migrants are rich, so they buy more costly properties, and it’s the price of expensive detached homes that fuel Vancouver’s market. Condo and townhouse prices rose by a third from 2005 to 2012, but detached prices doubled. Under the most recent IIP benchmarks, principal applicants must have been worth a minimum of C$1.6 million. Compare that to the Vancouver average household worth of C$662,600 (Environics Analytics).  

• 2. Some IIP households buy more than one property in Vancouver. 

• 3. Some high-value purchases have a cascade effect through the market. For example, when a Chinese investor immigrant pays C$3 million for an elderly widow’s rancher on Cambie Street, that sale triggers the purchase of a three-bedroom townhouse in Kitsilano and down payments on condos for her two adult children. Such things happen - not always, but sometimes.  

• 4. Now for one of the two biggest concerns. Our calculations so far only cover actual arriving immigrants. But how many of the 65,000 would-be immigrants who were dumped from the IIP queue last week had already bought in Vancouver? Of the applicants from 2009-2011 who made up the bulk of the backlog, 62.8 per cent were bound for BC. That’s an estimated 11,866 households. Not only have these households been removed from the pool of future purchasers, it’s reasonable to assume that some will soon be liquidating existing Vancouver holdings.  

• 5. The final unknowable is human nature. Already talk of an impending disaster in the market is a feature of Chinese-language forums. How many non-IIP owners will head for the exits too, and how fast will they do so? 

To be sure, there is no way of telling how much these five factors will come into play. But let’s make some conservative assumptions regarding the first three. Imagine that homes bought by IIP households cost twice as much as the average residential sale; considering that the rich Chinese who make up 81 per cent of Vancouver’s investor migrants are concentrated in expensive neighbourhoods of Richmond and the Westside, that’s not a stretch. Now imagine that each home-purchasing IIP household buys not one, but two properties (over how many years? Irrelevant, since the effect will be annualised over time). And let’s say that an IIP purchase triggers another purchase that would not otherwise have occurred in 25 per cent of cases.

The annual effect of the extraction of those 4.25 per cent of sales doesn’t look so insignificant anymore. On a dollar basis, our scenario balloons the figure to 21.25 per cent in lost sales per year. This estimate applies across the entire market; the effect will be magnified in the Westside and Richmond.

The actual impact remains to be seen and it's a story local real estate watchers are following very closely.

Which brings us to todays developments (and you gotta love this).

At a news conference in Beijing yesterday, 10 IIP investor applicants pleaded to the Government of Canada not to dismiss the 45,500 applications that had been frozen in the system.  Their desire?  Process those applications before terminating the program.

It seems while waiting for their approval, many of those 45,500 applicants had already come to Vancouver, bought homes and had enrolled their children in schools here.

Father-of-two Yu Qingxin, who manages commercial buildings, schools and hospitals in China, said he had already bought a house in west Vancouver for nearly $2 million Canadian dollars ($1.8 million) in preparation to emigrate… 

Another applicant, Du Jun, said he had moved his child out of the Chinese school system to a Canadian school near Beijing. Now, after two years studying at this school, it is almost impossible for his child to return to the Chinese education system, he said.

But now, with the termination of the IIP and the pending applications terminated, investor applicants (some of whom had applied five years ago) are discussing their options with lawyers in Canada and whether to claim compensation for the years they had been waiting.

Immigration consultant Larry Wang said that Canadian government's policy was "unjustified" and the investor applicants want Canada to "correct its mistake."

"They are not refugees. They can have a very good life in China. They just want to have a better life in Canada," said Wang, a Beijing-born Canadian.

Wang said it was Canada's right to stop its investor program, but it should not disqualify candidates who had already applied.

Umm… perhaps the issue here is that those applicants shouldn't have considered their application a fait accompli?

If you moved to Canada before being approved and then you application was, in effect denied, is Canada really to blame for your gamble?

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Tues Post #1: Is studying Gen Y providing a wake up call for Boomers in Real Estate?

“Boomers, wake up to this. A recent survey by Sun Life Financial suggests almost one in four Canadians see their house as their main source of income in retirement. Newsflash: Gen Y may not be able to pay the price you’re expecting to get for your home when you sell in the years to come.”

This gem of a quote comes from the Globe and Mail's Ron Carrick's latest column titled "Think Gen Y will prop up Canada's housing market? Think again."

Carrick closes with:

"If it’s not Gen Y’s economic struggles that cool the market, it will be the total disconnect between rises in house prices and income “

Amen.

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World's Biggest Bond Fund Cutting Canadian Holdings Due To Anticipated Real Estate Downturn Of Up To 30%

Pimco, the world’s biggest bond fund,is slashing its holdings in Canada due to an anticipated decline of 10% to 30%.

Some excerpts from the Globe and Mail article.

Pimco’s primary Total Return Fund, with assets of almost $250-billion (U.S.), cut its holdings of Canadian debt to 2% in the third quarter of last year, compared to 4% 12 months earlier.

About a month ago, on Pimco’s website, Mr. Devlin wrote that there is little chance of an all-out meltdown in Canadian real estate and that he expects a more orderly cooling.

A full crash, he wrote, would only be sparked by developments he doesn’t see in the cards, such a sharp hike in interest rates, a sharp rise in unemployment or a disruption to mortgage credit.

But you have to wonder… what other dominos would fall if real estate declined 20%? 

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Sat Post #2: Vancouver's Average Detached Home Price sets another record high

Once again we thank realtor Larry Yatkowsky who promptly provides monthly statistics for the interested to peruse.

The big news for this month? Vancouver's detached home price hits another record high at $1, 361,023.

VMD over on Vancouver Condo Info provides an interesting comment on February's real estate sales.

Vancouver February 2014 estimated sales will come in at approximately 2,500.  That's an impressive 39% increase over February 2013.  Presumably the R/E media will highlight this fact as evidence the real estate market is surging back.

On the flip side, the February 2014 sales are -4% when compared to the 10 year average.  January 2014 sales, when compared to the 10 year average, had surged 6%.  So February 2014's totals failed to maintain that sales surge.

As VMD says, wonder which number the papers will use as headline?

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Sat Post #1: PBS examines the mysterious epidemic devastating the west coast starfish population

PBS out of Seattle is examining the mysterious epidemic devastating the local starfish population.

Starfish, also known as sea stars, are wasting away by the tens of thousands, not just in Puget Sound, but up and down North America’s Pacific Coast. And nobody knows why. It seems the Sea stars are experiencing a mass die off all the way from Southern California to Alaska, with mortality rates up of 97% according to biologists. The die off has spread in a matter of 2 months, from just a few areas, to the whole Pacific ocean coast.

Shortly after the Washington State observations, a mass die-off of both Sunflower stars (Pycnopodia helianthoides) and sun stars (Solaster dawsoni) was observed in the waters around Vancouver, BC at the end of August and the beginning of September, 2013.

At first, only a certain species known as the sunflower star seemed to be affected. Then it hit another species, then another. In all, about a dozen species of sea stars are dying along the West Coast. It’s been coined sea star wasting syndrome.

But researchers say it’s too early to connect these outbreaks.

In addition we note that back in August, Washington's blog posted an article asking: Is Fukushima Radiation Contaminating Tuna, Salmon and Herring On the West Coast of North America?, an article in which Washington draws attention to various other developments in the waters off our coast.

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Fri Post #3:Bloomberg reports the obvious. Says Gold Price "Manipulated For A Decade", repeatedly slammed lower.

Bloomberg is out with a story headlined "Gold Fix Study Shows Signs of Decade of Bank Manipulation" and confirms what many have long suspected about Gold and Silver manipulation in the market.

The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say…

“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which hasn’t yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”

The paper is the first to raise the possibility that the five banks overseeing the century-old rate -- Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA -- may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.

The report identified patterns that are suspicious in the extreme. And with the revelations about fixing in other markets, such as Libor, have all but confirmed that the market is being blatantly manipulated in the minds of many investors

Abrantes-Metz and Metz screened intraday trading in the spot gold market from 2001 to 2013 for sudden, unexplained moves that may indicate illegal behavior. From 2004, they observed frequent spikes in spot gold prices during the afternoon call. The moves weren’t replicated during the morning call and hadn’t happened before 2004, they found.

Large price moves during the afternoon call were also overwhelmingly in the same direction: down. On days when the authors identified large price moves during the fix, they were downwards at least two-thirds of the time in six different years between 2004 and 2013. In 2010, large moves during the fix were negative 92 percent of the time, the authors found.

There’s no obvious explanation as to why the patterns began in 2004, why they were more prevalent in the afternoon fixing, and why price moves tended to be downwards, Abrantes-Metz said in a telephone interview this week.

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Fri Post #2: CMHC Announcement - Much Ado About Very Little?

So the big CMHC announcement, which had the real estate industry all a tither, was made this morning and the result was a bit of a yawner.

As we speculated yesterday, it was all about CMHC premiums.

Starting in May Canada's national housing agency has increased the amount of money that homeowners with less than 20% down payments must pay to insure their mortgages.

On 95% Loan to Value mortgages the standard premium rises from 2.75% to 3.15%. Under the old system, that borrower would pay an insurance premium of $6,875 for a $250,000 mortgage. Under the new system, their premium would jump by $1,000 to 7,875. On a typical 25-year mortgage at 3.49 per cent, that person would be paying $4.98 more on their mortgage payment, every month, to pay down the fee.

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Fri Post #1: More West Coast Fukushima radiation stories in the news

More on the Fukushima radiation story hitting Vancouver and the North American west coast as the topic hits mainstream media.

You will recall we posted two days ago about the approaching plume of radiation in the ocean from the disaster at the Fukushima Nuclear Plant.

We also referenced an NBC story about how something is killing all the starfish all up and down the west coast of North America.

In another disturbing development is this news story telling us something is also killing off all the oysters and scallops off the BC coast: Mystery surrounds massive die-off of oysters and scallops off B.C. coast:

Something is killing oysters and scallops in dramatic numbers, causing suppliers to warn of shortages and producers to worry about the future of their businesses. The cause is unknown, but ocean acidification is the main suspect.

"The water is clean… we haven’t had any environmental concerns, so I’m not sure what’s going on,” said Mr. Perrault, who owns Little Wing Oysters and is president of the BC Shellfish Grower’s Association.

Yesterday we told you about the respected Scientific American Magazine  which had just published an article titled "Radioactive Isotopes from Fukushima Meltdown Detected near Vancouver"

On another front, News1130 ran a story asking: How much radiation testing is being done in BC? - Doctors maintain there is no threat to British Columbians:

VANCOUVER (NEWS1130) – Experts continue to insist we’re under no threat, despite low-level radiation from Japan being found off the BC Coast in recent months.

Radiation from Japan’s Fukushima plant meltdown three years ago has reached our offshore waters, according to the Bedford Institute of Oceanography in Nova Scotia.

Provincial Health officer Dr. Perry Kendall is among those saying it’s nothing to worry about. “All of the experts that I’ve consulted with both in Canada and in the US say there is no concern.

While Jay Ritchilin of the David Suzuki Foundation agrees there is no immediate concern, he says government monitoring remains minimal.

“A proactive government response with active monitoring, regular communication, some education about what various levels of radiation do and don’t mean, just seems to me to be something you would expect a government to do,” he tells us.

Ritchilin adds most of the research comes from independent groups.

CBC picked up on the radiation testing theme and published this piece: Fukushima radiation on B.C. coast measured by crowdsourcing - Scientists from Woods Hole Oceanographic Institution recruite 'citizen scientists' to collect data. The most stunning part is that an American Oceanographic Institute is calling on civilians to do water testing because government isn't:

People along the British Columbia coast are being asked to step in where governments in Canada and the U.S. have not — to measure radiation from Japan's crippled Fukushima Daiichi nuclear plant in B.C.'s ocean waters.

Scientists from the Woods Hole Oceanographic Institution in Woods Hole, Mass., are calling on the public to collect data from B.C.'s oceans for a crowd-funded research project.

The website ourradioactiveocean.org is recruiting "citizen scientists," ordinary people who can raise $600 for a home testing kit and then take water samples to return to Woods Hole for analysis.

"I think it's important to get measurements, and since the governments aren't doing it, we thought the public has a large concern we'd ask them help collect and fund the sampling," said Woods Hole Oceanographic Institute researcher Ken Buesseler.

Although it has been urged, Buesseler says there is incomplete monitoring, and little data, for radiation in Pacific coastal waters from either Canadian or American authorities.

Fisheries and Oceans Canada have taken measurements along the coast up to 1500 km west of Vancouver for cesium 134.

Isotopes from the meltdown three years ago were predicted by some to reach North America this year.

"There's a great alarm, when you don't know. People can speculate all kinds of things," said Buesseler.

Early results appear to be good news.

Eight samples are already in, exclusively showing isotopes from natural sources, or nuclear weapons testing from decades ago.

"But we think it's important to monitor that so people have some confidence that the waters are safe," Buesseler said.

He said from the available models and data, levels of Cesium-134 are well below levels considered safe to drink. Scientists do not believe radiation from Fukushima will cross the ocean in anything more than trace amounts.

He said the institute decided to fill the gap in information because dire warnings online of the potential impact of radiation from Fukushima was generating too much public fear, without any data to base it on.

As always, we'll keep an eye out for more news on this issue.

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