Canadian Business Magazine on the Housing Bubble

As if to follow up on yesterdays post, Canadian Business Magazine hit the newsstands today hilighting the Canadian Housing Bubble.

And it's an excellent read.

The magazine hits all the key points we've been talking about for the last year and a half.

They zero in on the central causes of the massive rise in home values the last 10 years: the Canadian Mortgage Housing Corporation (CMHC).

Canadian Business Magazine (CBM) cuts right to the chase and points out how the federal government stoked the housing market for an extended period and that "Canadians should brace themselves accordingly for a more jarring correction in residential real estate."

Do tell?

CBM attempts to outline how CMHC played its "critical, if underappreciated, role."

As we noted yesterday, CMHC over the last decade has dramatically lowered its minimum qualifying standards for insuring mortgages. CMHC sets the bar for home ownership through those minimum qualifying standards.

Lowering standards for acceptance, insuring mortgages with no downpayment and increasing amortization periods from 25 to 40 years for that insurance had a profound effect on housing prices.

• "If people were able to purchase houses with zero down, they were doing that," says Jerry Marriott, a managing director at bond-rating agency DBRS. "If people were able to purchase houses with longer amortizations and therefore have a lower monthly payment, they were doing that...That was partly what was supporting an increase in house prices."

CBM also notes the Bank of Canada's role:

• "The Bank of Canada did its part. Officially, it sets the overnight rate (the short-term interest rate at which financial institutions lend among themselves) primarily to keep inflation in check. That rate stood at 5.75% a decade ago but has trended lower ever since. Interest rates are a powerful influence on consumer behavior: lowering them encourages citizens to borrow and spend, while raising them rewards savers and punishes debtors. The housing market is particularly sensitive to interest rates: they're critical in determining a mortgage's monthly carrying costs."

And like the naive car buyer who is lured into buying a new car based, not on what they can afford, but upon whether or not they can make the monthly payments... so too have millions of Canadians been hooked into buying houses based on a mortgages monthly carrying cost.

And in the process they set off a decade long bidding war for real estate.

It was a purposeful strategy by the federal government.

Between September 2008 and April 2009 the nation was spiralling down into the recession that was gripping the world. In an attempt to cushion Canadians from the recession, CBM notes that:

• Ottawa electro-shocked the housing market. "There was this absolutely massive assault on the recession by focusing on the housing sector," says David Rosenberg, chief economist and strategist at Gluskin Sheff. "And probably that wasn't an unwise decision, when you consider all the powerful multiplier impacts it has on the rest of the economy." Housing-related spending — a broad category that includes not only home purchases but also furniture, appliances, renovations and a host of other items — accounts for one-fifth of all economic activity. Rosenberg says federal measures to stimulate housing markets accounts for 100% of Canada's economic recovery.

As we know, the government attacked the problem with two key tactics. First the Bank of Canada instituted rock-bottom interest rates (0.25%). RBC economist Robert Hogue called the resulting low mortgage rates "undoubtedly the rally's most powerful driver."

Next Ottawa authorized CMHC to buy up to $125 billion in mortgages from banks and other financial institutions under the Insured Mortgage Purchase Program (IMPP). We talked about this move here, and it lays waste to the myth that Canada never bailed out it's banks.

They did, big time.

• The idea was to ensure lenders had a ready source of funding when traditional methods had been closed, which in turn allowed Canadians to keep borrowing. "This was a very good thing," says Tsur Somerville, an associate professor at the University of British Columbia's Sauder School of Business. "Financial system meltdown is a whole lot worse than governments taking on some additional mortgage-default risk."

These actions allowed credit to flow and gave the housing boom it's fuel to ignite a massive R/E bonfire. In Vancouver home prices have more than doubled since 2000.

More importantly, family incomes have not doubled.

• The value of outstanding mortgages surged from $427 billion to nearly $930 billion during the same period, which helped catapult the average debt-to-income ratios of Canadians to 145%, just shy of current levels in the U.S. and Britain. The Bank of Canada is mildly concerned. "Household balance sheets are still a significant source of risk," it reasoned in its latest review of Canada's financial system, "since the rapid expansion of consumer and mortgage credit implies that a greater proportion of households are likely to become vulnerable to adverse income and wealth shocks as interest rates rise from their exceptionally low levels."

CBM notes that the unwinding of the powerful housing-market stimulus is already underway.

• Ottawa terminated the IMPP on schedule in March. It has tightened CMHC's lending standards, albeit modestly. And the Bank of Canada began ratcheting up interest rates this year. Renewed government intervention cannot be ruled out, but it would be expensive and only delay the reckoning.

The magazine attempts to temper how bad the reckoning will be. They say that when Canada's correction arrives, it'll likely prove less traumatic than America's.

I disagree.

Canada's lenders generally have legal recourse to borrowers, meaning they can pursue a borrower's other assets in court in the event of foreclosure. That makes it more difficult to simply abandon a home that has become a financial albatross.

Many argue that this will keep Canadians from defaulting on their mortgages.

We will see.

I suspect that as values start to drop, the number of people who bought the maximum amount of house they could at emergency level rates will find that they are seriously underwater when mortgages come up for renewal.

Even if interest rates never rise, this will be problematic.

But bump interest rates up just a few percent, and I forsee enough Canadians being forced into foreclosure that it will cause a devastating domino effect - especially here in Vancouver.

I seem to be in the minority on this issue, even amongst R/E bears.

And I seriously fear what this could do to our country. As we noted yesterday, CMBC is on the hook for $770 Billion dollars in mortgages and only has $9 Billion in assets - a condition which CBC noted was "more leverage than any U.S. bank or lending institution ever had."

If CMBC has to pay out even only 10% of that $770 Billion, it would require a taxpayer bailout of $60 Billion.

It took our nation over 10 years, and the introduction of the GST to get rid of a then-record $40 Billion deficit a decade ago.

If the dominos fall as I worry they will... Canada will be in serious trouble.

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Denial

My favorite topic, the Canadian Mortgage and Housing Corporation (CMHC) is front and centre in the news again.

As stated numerous times before, the only reason our real estate market hasn't tanked like it has in the United States is because of the way our government intervened in the financial and real estate crisis of 2008/2009.

The feds slashed interest rates to dirt in order to stimulate the economy and then, to further stimulate the real estate market, changes were made to CMHC.

After the CMHC decided to remove the price ceiling limitations in 2003 (that is, it would insure any mortgage regardless of the cost of the home), the inflating of the housing bubble was ramped up in 2008.

At that time Canadian home prices had started to dip as affordability became the worst on record in many cities. That's when the CMHC publicly admitted that it was ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.

As a result, in 2008, some 42% of all high risk applications were approved; a 33% increase over 2007. That trend continued through 2009 and 2010.

Incredibly, however, between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% - possibly the smallest amount of change in post WWII history.

How can this be?

Because almost all of these mortgages were securitized by the CMHC; guaranteed by the Federal Government. As a result the Canadian mortgage securitizaton market grew from $100 billion in 2006 to $370 billion by the end of 2009.

These actions kept credit flowing to homebuyers in Canada while credit dried up in the United States. As a result the necessary real estate correction - which has occurred everywhere in the western world except Austrailia and Canada - was reversed in 2009.

And between mid 2009 and 2010 the Canadian real estate bubble was re-inflated.

So just how much exposure had the CMHC racked up by mid 2010?

According to this CBC report CMHC is now on the hook for over $770 Billion in secured mortgages.

$100 Billion in 2006 to $770 Billion in 2010!

Therein lies the fuel source of Canada's, and Vancouver's, massive housing bubble.

James Grant, editor of Grant's Interest Rate Observer, connects the dots to paint the picture the blogosphere has been warning about for the last few years.

Grant notes that an IMF study has concluded that Canadian house prices are 60% above their historical average. The median Canadian house - which is the price at which exactly half are cheaper and half are more expensive - is "certifiably unaffordable" in Canada. In fact, a typical house eats up just more than 40% of income. In Vancouver, it's more like 73%.

Grant quotes our own Bank of Canada: "The household debt-to-income ratio has remained on an upward trend ... as debt accumulation continues to outpace the growth in disposable income."

And then there is the CMHC. While it guarantees $770 Billion in mortgages, it only has about $9 billion in equity, a massively overextended position.

CBC notes that "it's more leverage than any U.S. bank or lending institution ever had."

Grant adds it all up and suggests that Canada is on the cusp of a real estate crash as severe as the one that the U.S. just went through, a crash that is just around the corner.

It's a warning that falls on deaf ears in our little hamlet on the Edge of the Rainforest, however.

Back on June 28th, 2010 MSNBC wrote that Vancouver is in denial over it's housing bubble.

Not only were we in denial then, but as real estate sales collapse in June, July and August, we are in denial now too.

Extended stagnating sales can only lead to a significant, inevitable price collapse. We saw this begin to play out in 2008/2009.

The inevitable was only postponed. And as reality looms on the horizon, everyone will claim that no one saw it coming.

"Whocouldaknown?"

The fact of the matter is the writing has been on the the wall for several years now... for anyone who wanted to read it.

It isn't different here. We're in denial just like everyone else was.

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Whither the empty lots?

Today the big news is the ongoing freezing up of the real estate markets.

From the Globe and Mail comes word that in Toronto the R/E market continues it's dismal performance in sales halfway through the month of August.

Meanwhile in Vancouver a contributor to the blog Vancouver Condo Info has posted sales statistics which indicate sales for new units (homes, condos, townhouses) in Vancouver West is on track to be the worst in a month of August in the last 15 years (only 6 units sold by August 17th - the worst August in the last 15 years was in 2008 when only 30 new units sold).

Ultimately the only figure that matters is price. But has noted on July 26th, there is a tremendous amount of inventory in the Vancouver market. MPC Intelligence Inc., a local market research firm, counted 6,659 condo units being put into the marketing phase between March 1 and July 1, 2010. This compares with just 1,937 that were on the market in 2009 and 5,066 in 2008.

It won't be long before developers start to slash prices in a desperate attempt to dump inventory. As we have already noted, Bob Rennie slashed prices last month by 40% because he could see this writing on the wall.

Which makes one wonder about the area around the stagnating Olympic Village. Vacant lot after vacant lot surrounds Millennium (Under) Water, each with giant signs up promoting pre-sales. If the completed Olympic Village isn't selling at all, you know none of these are moving either. Driving down the deserted 1st Avenue, I couldn't help but think that the area looked like some American ghetto... albeit one where the buildings and streets were brand spanking new.

It was eerie.

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Krugman talks about Canada

Sorry about the lack of posts for the last few days. I have been enjoying the glorious weather and it has left little time for sitting down at the computer.

If anyone reads the comments section, you will note that the seller referred to in the last post has opted to contribute a comment to the blog.

For those who do not know, the real purpose of this blog is to augment the lively debates I have with my work colleagues. I preach my real estate/economic mantra ad nauseum and, rather that torment my colleagues 24/7, I try to restrict my thoughts to only half my waking hours. Referencing articles, reposting info from other sources... that's what I use this blog for: a place where colleagues who are really interested come, read and then the conversation at work moves outward from there.

(Of course, this is the world wide web. And a side benefit is that so many others around the Province, Country, World had stumbled across this site. I benefit from those others who share their thoughts with me and I am pleased anyone really cares enough to drop in here to read what I have to offer on any given day.)

Currently at work there is an interesting situation developing. Two co-workers have recently sold their homes. Both have taken dramatically different paths when it came to selling and what they are going to do with the proceeds.

In the last post I outlined one of them. Both have, this week, given me permission to speak more in depth about their general situations.

Later this week I will expand on them (and hopefully you will see at least one of them once again offer their own thoughts in the comments section.

Today, however, I note with keen interest that Paul Krugman has been moved to comment on the Canadian economy and real estate situation.

Krugman is an American economist, Professor of Economics and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times. In 2008 he won the Nobel Memorial Prize in Economics for his contributions to New Trade Theory and New Economic Geography. He was also voted sixth in a 2005 global poll of the world's top 100 intellectuals by Prospect.

But above all he is the leading media champion of the Kenysian stimulus being used to combat the current worldwide economic crisis... which means, I am not a great fan.

To his credit, however, Krugman saw the housing collapse coming in the United States long before many others did (see, amongst others, this article he wrote in August 2005.

Now Krugman has some interesting thoughts about Canada. Speaking to the Canadian Bar Association on Sunday, Krugman spoke of the impending economic buffeting that is about to hit Canada.

Mr. Krugman said that Canada cannot be complacent in the face of disturbingly bleak global conditions, because Canadians spend too much relative to their household incomes and that our country's housing bubble has yet to burst.

(which is exactly what has been said here).

“Canada is by no means insulated,” he said. “Canadians borrow an awful lot. Savings rates have been very low. Household debt relative to income is very high here.”

Krugman recognises what so many of us seem completely oblivious towards as we carry on with our day to day lives. He expressed grave concern that the world economy is “drifting” along with high unemployment rates and low consumer spending instead of steadily recovering. Our biggest trading partner, the United States, is facing propects for its economy that are dismal: “I don't see when it will end.”

“Interest rates are as low as they can go, yet the economy is depressed,” he said. “This is a very weird place to be... When everyone decides that they want to save more and spend less, the economy shrinks. And when the economy shrinks, businesses see even less reason to invest and so investment falls.”

It means there are dark economic times ahead, but how many people in our everyday lives understand and appeciate that?

Krugman noted that interest rates are getting so low that it will soon be impossible for central governments to use them as a lever to stimulate borrowing and spending.

“The traditional response has run out of ammunition. It’s about as low as you can go,” Mr. Krugman said. “So we have depressed economies that need a solution.”

Krugman didn't go there, but I continue to maintain the writing is clearly on the wall. There is a tremendous amount of deleveraging to be done around the world - and particularly in Canada.

In Canadian real estate, it has only just begun.

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Will seller's try to wait out the downturn?

As the summer creeps into it's second half, you can smell the season starting to turn. The air has a cooler edge to it and my yard fills with the early leaves that are starting to fall.

In Real Estate, the malaise of June/July continues.

Early statistics suggest that we could be on track for 2nd worst August for sales since 2000. 2008 would be the one year which could be worse that this. It seems listings are trending higher which, as the esteemed VHB notes on one blog, is rare as August listings have only been higher than July’s twice in the last 10 years.

Another interesting tidbit I came across. Apparently, the average person in BC makes almost $10,000 more than he/she did in 2001. But the average house costs $450,000 more than it did in 2001.

This is a stunning 45x the rate of income growth.

How could the market start to falter?

But sales are occurring.

A co-worker has sold his condo this month. And his story is telling.

Adament that he would not accept less than $800,000 for the condo he paid $300,000 for 10 years ago, he was prepared to rent it out rather than go below this artificial threshold.

After negotiating over an original offer of $760,000, a Hong Kong buyer finally closed on the sale.

It's interesting because it is tangible evidence that there is Asian money is still at play in this market. The HK buyers were keen to be set up in Vancouver before school starts in September, so pressure was applied to the real estate agents (on both sides) to cut their commissions in half.

End result was that my co-worker got is plus-$800,000 price, the HK couple got their price; and the R/E agents took a big haircut on their commissions to make the deal happen.

It will be interesting to see how many other sellers are prepared to follow a similar path: wanting to sell but defiant that they will not cut their asking price.

How many will follow through on their threat and pull their listing in favour of renting?

In this particular case, pulling the listing and renting wouldn't have been a problem because the mortgage owing is low enought to allow rent at market rates.

It will be interesting to see how many sellers actually go this route.

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Has our reckoning started?

Real Estate never goes down.

Throughout North America that has been the sentiment. And when the dot com bubble burst at the turn of the century, stimulus money flowed into the next great bubble: Real Estate.

And with it, the 'real-estate-never-goes-down' mantra became a truism.

So when the bubble started to burst in the United States, defenders trumpeted how their particular area "was different."

So much so that "it's different here" has become a rallying cry in city, after city, after city.

And it hasn't just been cities.

It was different in Florida, it was different in New York, it was different in California.

It was also different in Ireland, England, and Spain.

The reality, of course, is that it wasn't.

And in those countries where the bubble has yet to burst, most notably Australia and Canada, an unsettling sense of concern is beginning to spread.

In response... the same rationalization takes hold: 'it's different here'.

All across Canada this refrain reigns. And no where, it seems, as loudly as in the Village on the Edge of the Rainforest.

When the collapse started, in 2008, the standard denials were uttered. And when massive stimulus seemed to counteract the collapse - the chorus only intensified.

But was our reckoning merely postponed?

We have written about Bob Rennie as a bellwether. And there is no doubt concern is mounting in the real estate industry.

Now articles are starting to appear that suggest the tide is turning across our Canada.

In the Financial Post appears this article, 'Getting real: Bull run coming to an end for Canada's housing'

In it a couple from Canmore, Alberta is profiled.

A condominium they bought three years ago currently languishes on the market.

Kept as an investment when they purchased another home, it has now become an albatross.

“It never occurred to us that we wouldn’t be able to sell for what we paid,” says the couple.. “People were making $100,000 [on paper] a year on their condos.”

Bought for $315,000, the couple will be lucky to get their money back when it finally sells. Worse, in the meantime they are only reaping $1,100 a month in rent while their investment costs them $1,800 a month to carry. And as it languishes ont he market, the property isn’t going up in value.

Now, forced to also sell the other house they bought, they are also unable to get what they originally paid for that property, never mind the over $30,000 they have invested since buying it.

So they have two properties which hang like albatrosses around their necks.

It is the American Experience speading to Canada.

As the Financial Post notes,

• "Their tale is one not often heard over the last decade, the longest bull run in Canadian housing history. People have been competing wildly for homes and double-digit annual price increases have been the norm. The market corrected slightly in 2008, but the correction was short-lived. Average prices in Canada dropped 10.2% in the first quarter of 2009 from the previous year, but rebounded dramatically. By the fourth quarter of last year, prices had jumped 19.1% from a year earlier.
  
  But the market appears to be slowing again. Last quarter, prices were up just 5.2% from a year ago and July sales dropped as much as 40% from last year in some major markets. Even if there is no U.S.-style collapse, everybody from the consumer to the mortgage broker to the real agent may have to accept a new real estate reality: For the first time in a decade, housing might become boring, with flat sales and price increases just ahead of inflation."

Compared to a U.S-style collapse, boring would be a godsend.

In the second half of 2010, the story we will be following is how this all plays out. Will we simply see a flat market in Canada? Or has our own reckoning started?

In Alberta they are discovering that Canada, as a whole, may not be different from the United States after all.

In Vancouver one constant remains: the mantra of 'its different here' continues to reign supreme. Things may be bad in Alberta, but Vancouver is... you know... different!

Will that mantra be shaken in our fair Village during the latter half of this year?

We will see.


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I light a fire...

Faithful readers know that in the inflation/deflation debate I side solidly on the side of looming inflation.

We may go through a period of deflation first... but inflation is coming: guaranteed.

That's why I note today's decision by the Bank of England to keep interest rates at historic lows.

Bank of England Governor Mervyn King has announced he is setting aside his inflation target to protect the economy from the biggest budget cuts since World War II.

And this action is taken as a split widens on the nine-member British Monetary Policy Committee (MPC) on the danger posed by rising prices. Resisting calls to increase interest rates, King insists it may be a “considerable” time before the benchmark interest rate of 0.5 percent returns to “normal.”

Prices continue to rise in England and King is tolerating faster inflation as Prime Minister David Cameron’s push to slash the Group of 20’s largest budget deficit threatens to hurt the economic recovery. Policy maker Andrew Sentance, for now the only advocate of higher rates, counters that growth is solid enough for the bank to withdraw emergency stimulus.

Inflation has exceeded the bank’s 2% target since December.

“King is willing to take risks with inflation,” said Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official.

The combination of persistent inflation and budget cuts has widened the debate about when to raise rates in England.

Sentance voted for higher rates at the last two meetings of the MPC. And while there are calls for the central bank to be “incredibly vigilant” on prices, inflation was allowed to rise to 3.2% in June and has exceeded the government’s 3% limit since March.

King said last week the rate is likely to stay above the bank’s target “for much of next year”. King “sees no need to try and offset what is likely to be rather a temporary continuing overshoot,” said former Bank of England policy maker Charles Goodhart.

Fears of continued recession have economists and central bankers eager to ignite inflation and King's actions are sure to be echoed in North America.

Goodhart says officials may find it hard to justify their actions after a “pretty poor” forecasting record in the past two years.

With the inflation overshoot set to persist. Goodhart make an interesting observation.

“In a sense we’re in the worst possible situation, with inflation above target and output growth well under target.”

Meanwhile, on the real estate front in Vancouver

Check out this Global TV clip on the declining real estate sales environment.

How desperate is the climate getting in the industry?

At the end of the clip we have our favorite downtown huckster, Ian Watt, actively encouraging buyers to start pitching low ball offers to undercut asking prices.

Will wonders ever cease?

(hat tip to Observer in yesterday's comments)

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You have to know when to hold them...

Today the 'official' July 2010 real estate sales statistics were released for both Greater Vancouver and the Fraser Valley.

And as we posted on the weekend, the picture is not pretty.

How ugly is it, you ask?

“We didn’t anticipate this level of change,” said Deanna Horn, Fraser Valley Real Estate Board President.

Of course the inability of the Real Estate Boards to 'anticipate' is almost considered a joke on the real estate blogs, as this post over on VREAA illuminates.

As expected, the Greater Vancouver Residential Benchmark price is down for the third consecutive month:

April, 2010: $593,419
May, 2010: $590,662
June, 2010: $580,237
July, 2010: $577,074

Sales in July fell 45% from the same month last year, and prices have fallen 2.8% since peaking in April... not quite a 'crash' by any stretch of the imagination, but the endgame is clearly afoot.

According to the Real Estate Board of Greater Vancouver (REBGV) the supply of properties for sale has increased so significantly that the decline in sales now threatens to pull prices lower, with inventory levels 33% higher than this time last year.

In fact, the REBGV now calls Vancouver a “buyer’s market,” which seems odd because clearly people aren't buying.

Is this a temporary lull or the start of a significant drop in real estate values? That, of course, is the central question being debated by the R/E bulls and bears.

Once again I feel compelled to cast an eye towards Bob Rennie, Vancouver's anointed condo king.

His stunning marketing moves to slash prices by 40% in both the Okanagan and for condos in Vancouver at the luxury Fairfield Estates serve as a bellwether.

The market is changing and he is responding by attempting to stay ahead of the curve. Either Rennie is throwing away massive potential profits or he is facilitating significant reductions in advance of a bloodbath starting in earnest.

When the 'crash' starts with 40% reductions from the market's biggest player, the prognosis in Camp Rennie can't be very bright.

A good gambler knows when to hold... and when to fold.

And Rennie does not appear to be willing to up the ante.

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A stunning statement by Greenspan

Local blogs continue to ruminate on the pending release this week of the R/E sales statistics for the month of July.

(And for those who are interested in such numbers there is a breakdown at the bottom of this post of the Unit sales per municipality and the percentage drop experienced from July 2009 vs July 2010)

But there was something mentioned on Sunday morning political TV that will ultimately impact Vancouver Real Estate far more profoundly than the start of this current downward trend.

For those of you who believe interest rates will never rise again because the government will not allow it - heed these words of former US Federal Reserve chairman Alan Greenspan;

"There is no doubt that the federal funds rate can be fixed at what the Fed wants it to be but what the government has no control over is long-term interest rates and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment there is no sign of that because the financial system is broke and you can not have inflation if the financial system is not working."

In other words, we will be in deflation until the broken financial system is unbroken. And when it does start to repair - look out - because we will then have severe inflation.

And THAT will make this months declining sales numbers look like a selling bonanza.

You can see the Greenspan clip here.

For those are interested, statistics by area from the same source as yesterday:

Real Estate Unit sales comparing July 2009 to 2010

Burnaby East: -64% (57 to 20)
Burnaby North: -47% (215 to 112)
Burnaby South: -52% (257 to 123)
Coquitlam: -45% (304 to 166)
Islands-Van. & Gulf: -75% (12 to 3)
Ladner: -77% (79 - 18)
Maple Ridge: -36% (215 to 136)
New Westminster: -52% (170 to 80)
North Vancouver: -42% (273 to 158)
Pitt Meadows: -46% (41 to 22)
Port Coquitlam: -50% (152 to 75)
Port Moody: -47% (119 to 62)
Richmond: -53% (632 to 292)
Squamish: -3% (31 to 30)
Tsawwassen: -56% (55 to 24)
Vancouver East: -42% (461 to 267)
Vancouver West: -37% (880 to 553)
West Vancouver: -20% (97 to 77)
Whistler: -45% (35 to 19)

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July Stats

Over the course of the month we have blogged about dramatic reductions in real estate prices in the Okanagan, and Bob Rennie bringing dramatic reductions to the Fairmont Estates condos in downtown Vancouver.

Next week the R/E sales numbers for the month of July will be released and they will not paint a pretty picture.

Over at the blog Vancouver Condo Info, contributors to the comments section have been bringing us some of the numbers. I invite you to persue the comments section for all their contributions.

If the data is accurate, final sales numbers for total unit sales are down 45% from July 2009. The total number of unit sales is the 2nd lowest in a decade.

Here are the total unit sales for the month of July since 1995:

July = UNITS
1995 = 1978
1996 = 2100
1997 = 2303
1998 = 1816
1999 = 2181
2000 = 1710
2001 = 2737
2002 = 2759
2003 = 4140
2004 = 3114
2005 = 3825
2006 = 2802
2007 = 3955
2008 = 2215
2009 = 4197
2010 = 2297

Meanwhile the story in new home sales is even more dramatic. New home sales in July 2010 compared to July 2009 are down an astonishing 70%. The total number of new home sales for July 2010 is the lowest since 1995.

YEAR= UNITS
1995 = 296
1996 = 442
1997 = 350
1998 = 311
1999 = 298
2000 = 205
2001 = 288
2002 = 221
2003 = 488
2004 = 343
2005 = 724
2006 = 445
2007 = 503
2008 = 215
2009 = 441
2010 = 129

Earlier this month we profiled how the benchmark price on the west side of the City of Vancouver had dropped a dramatic $91,000 in the month of June.

Well the west side continues to get hammered.

According to figures supplied by real estate agent Larry Yatkowsky:

• Median price on the west side is down 8.6% in July (and almost 13% in the last 2 months),
• Average price is down 12.7% in July alone,
• Sales are down 60% from June,
• And price reductions have been 4 times greater than sales.

Mr. Yatokowsky offered the following comments on the current real estate market;

"The predominant factor is the slow drop in the number of listings combined with continuing price reductions. Prices appear to be dropping steadily and the number of listing mandates that are failing to sell are increasing. How many ‘failed to sell’ listings will we see in the weeks ahead – the numbers are climbing? How many come back to market to ‘try again’?

A great number of sellers still want to sell but buyers are reticent to jump in – they remain uncertain except for one thing – just are not ready to pay the prices sellers are asking. What is known is that the stronger hand being played by buyers is currently winning. Until sales begin to increase we can expect this state of market to continue. In the days and weeks ahead is that sellers will be forced to make further and substantial price adjustments before that happens."

And so it goes...

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Reprecussions

There is one truism I have maintained these past two years.

In 2008 we experienced a deep financial earthquake whose repercussions we still do not fully understand or appreciate.

And those repercussions continue to reverberate.

There is still an astonishing amount of debt consolidation left to play itself out.

Further evidence of this are figures from Mark Zandi and Robert Shiller on the underwater equity statistics in the United States.

For those who think the recession is over and that we may be on the cusp of a recover, consider these observations from Zandi/Shiller that are making the rounds of the blogosphere:

• 19%, or 14.748 million of the 77.570 million US households, are in negative equity
• 30.6% of the 48.243 million of homeowners with first mortgages are in negative equity
• 21.8% of the 67.578 million in owner-occupied single family homes are in negative equity
• 4.133 million of the 14.748 million of underwater homeowners are underwater by 50%+, meaning the owe more than 50% more than their homes are worth
• Of the 50%+ underwater category, the worst states are California (672K), Florida (423K), and Texas (344K)
• Total Negative Equity in the US is currently estimated at $771.1 billion
• California mortgages have $234 billion in negative equity, Florida mortgages have $79 billion in negative equity, Texas mortgages have $48 billion in negative equity
• $2.4 trillion in total mortgage debt is impaired due to negative equity

Stunning figures to ponder.

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'The Death of Paper Money'?

Interesting article in the London Telegraph this week titled 'The Death of Paper Money'.

Apparently there is growing interest in a long out-of-print book called 'Dying of Money: Lessons of the Great German and American Inflations' by Jens Parsson.

According to the article, Ebay has a copy available for a starting bid of $699. Amazon has a copy of the book for $234.

The Telegraph article focuses on Chapter 17 of the book which is entitled "Velocity". That chapter says that each big inflation - whether the early 1920s in Germany, or the Korean and Vietnam wars in the US - starts with a passive expansion of the quantity of money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

The book vividly and thoroughly recounts the influence of inflation throughout history with special emphasis on the U.S. economy and the hyperinflationary events of the 1920s in the Weimar Republic, Germany.

In the Telegraph article, the writer (Ambrose Evans-Pritchard) notes that the book is suddenly in high demand amongst elite banking circles, particularly with QE2 immanently pending.

If you are interested, you can read the entire book here on Scribd.

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Stagnating Vancouver Real Estate Market?

As July comes to a close, it is increasingly clear that the real estate market is changiing.

On Friday I wrote that MPC Intelligence Inc., a local market research firm, counted 6,659 condo units being put into the marketing phase between March 1 and July 1, 2010.

MPC noted that this amount of inventory approaches numbers thrown onto the market during the headiest days of pre-sales in 2007. Sales, however, are nowhere near 2007 levels.

The 6,659 condo units now in the marketing phase compares with just 1,937 that were on the market in 2009 and 5,066 in 2008.

Meanwhile the latest overall R/E stats are now out from realtor Rob Chipman.

Although it is just a mid month estimate, the current level of Vancouver 'months of inventory' (MOI) is on track to rise to 7.5 months. In the Fraser Valley it is 8.4 months.

The sales numbers being generated for July could leave the industry on par to record the lowest sales for the month of July in the past 10 years, even lower than during July 2008 (which was in the midst of the 2008 credit crash).

No wonder Bob Rennie is slashing the price for condos in the Fairmont Estates by 40%.

If the market continues to slow, things could get ugly.

If you know of any listings which are slashing their asking prices, post them in the comments section or email them and I'll pass them on.

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Sleight of Hand?

The Craigslist Ad is enticing, alright.

• "This is it! An affordable opportunity to own in beautiful downtown Vancouver in Yaletown at way less than original purchase price."

Peaks your interest doesn't it? Especially since the condo market appears to be softening up in the Village on the Edge of the Rainforest.

More from the Craigslist ad:

• "Suite #1405 at the "Beasley" (named after former city planner, Larry Beasley)is the highly sought after "E" plan and originally sold for $547,900. We are offering it for sale at an incredible price of $459,000 (assignment of contract). The "E" plan is one of the very few plans in all of Vancouver that are a corner suite taking advantage of the natural light. It includes a stone granite kitchen island that opens up to the spacious living and dining room area, heated tile bathroom floors, Stainless Steel Kitchen Aid appliances and engineered hardwood floors. Not only does it have a den but also an extra flex space thereby smartly utilizing its spacious 678 square feet. The added amenities include a fully equipped fitness centre, meeting and library rooms and not to mention the unique 8th floor, 60 foot out door dog run area. The building is currently under construction from reputable local developer, Amacon who is responsible for building many beautiful properties within the city for the last 40 plus years such as the "Brava", the "501" and the "Melville" to name a few. Completion date is set is on target for a November 2011 completion... I was also one of the original sale people on this development. I look forward to hearing from you."

Wow!

So one of the original sales people is (apparently) cutting his losses and is willing to offer you one of the suites that he had secured for himself (presumably to flip), cutting the price from an initial $547,900 to $459,000: a loss for him of $88,000 (about 16%).

Or is it?

Keen local market watchers may recall an initiative launched by Amacon Development in 2009 called the 'pass it on' campaign. MAC Marketing Solutions trumpeted this campaign and rolled out the first version with the stalled Yaletown condo development 'The Beasley'.

In this campaign, Amacon offered reductions on the prices of their condos ranging, on average, from $100,000 - $250,000 off the initial purchase price. And these 'savings' were even extended to those who had already signed pre-sale agreements to purchase at the higher 'initial purchase price'.

It means no one ever actually bought a Beasley unit at the 'original purchase price'.

In all likelihood our Craiglist sales person paid, at best $447,900 for his Beasley condo. As a salesman associated with the project, he no doubt paid less than that.

Caveat Emptor, as they say, because these condos at the Beasley have already seen 'cuts' from their initial purchase price of at least 22%.

So it this a deal in a downturning market to offer the unit at $88,000 off the 'original purchase price' when the units actually sold at a minimum of $100,000 off that original price?

You decide.

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Okanagan-style meltdown now being seen in Vancouver?

Yesterday we talked about the widespread real estate price-slashing in the Okanagan region of the British Columbia that started with the Bob Rennie marketed development known as Invue in Kelowna.

Recognizing that the market is turning for the worst, it appears Rennie is bringing those price cuts to downtown Vancouver.

The posh downtown Vancouver development known as the Fairmont Pacific Rim Estates and Hotel is an elite hotel/condo development located near the Canada Place Trade and Convention Centre.

The hotel occupies floors 1 - 31 with 400 rooms. Above that is a residential strata portion occupying floors 32 - 45 with 200 suites.

Vancouver Realtor Will Wertheim has sent out a tweet on Twitter advising that one of the suites in the Fairmont has dropped it's selling price from $5,250,000 to $3,088,000... a drop of 40% off of the original asking price.

Wertheim followed that tasty tidbit with another tweet advising that a second unit has been slashed from $2,750,000 to $1,598,000... a drop of almost 42% off the original asking price.

Both are Bob Rennie marketed properties.

News of these stunning reductions come just as the Vancouver Sun hearlds that a wave of presale condos are now flooding onto a slowing market.

MPC Intelligence Inc., a local market research firm, counted 6,659 condo units being put into the marketing phase between March 1 and July 1, 2010. MPC notes that this amount of inventory approaches numbers thrown onto the market during the headiest days of pre-sales in 2007, but at a time when real estate sales are nowhere near 2007 levels.

“It’s a big jump,” Jeff Hancock, senior manager at MPC said in an interview.

Hancock compared the 6,659 units now in the marketing phase with just 1,937 in 2009 and 5,066 in 2008.

Just like he did in Kelowna with Invue, Rennie can see what's coming and he's scrambling to stay ahead of the curve.

And that means starting off by slashing real estate prices by 40%.

Curiously... the 'hot asian money' we keep hearing about doesn't appear to be snapping up all these luxury properties at 40% off. Maybe it's because they aren't pre-sale contracts that can be 'secured' for a miniscule downpayment (like the sellout at River Green in Richmond)?

Those presales are the ultimate R/E speculator vehicle.

And that's the difference between 'HAM' actually supporting our market and 'HAM' leveraging a small wager (we call it a downpayment) on a presale contract that's unenforceable in Chinese courts.

In the real market, Bob Rennie is taking on the competition by slashing prices by 40%.

Things could get really ugly this fall.

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Expanding troubles in the Okanagan?

Back on July 10th we talked about the Kelowna development of Invue hiring Vancouver Condo King Bob Rennie. Desperate to move product in a stagnating market, Invue was dramatically hacking prices by 40% to dump inventory and get out of Dodge.

Was Invue having an irrational reaction to market conditions?

Apparently not. This week we learn that the shine is definitely off Okanagan real estate and there is no doubt a buyer's market has returned to the sun-drenched region. Not only are many developers delaying projects, but more and more are dramatically dropping prices on current units in a frantic effort to promote sales.

Back in June it was more than evident trouble was brewing.

At that time Okanagan Mainline Real Estate Board president Brenda Moshansky said in an interview that, "we're definitely slower on the recovery [than Vancouver or Victoria]. It's been slow and steady coming back."

Moshansky said that listings were beginning to flood the market. "We're seeing more listings coming on, but there's definitely now a heavy enough inventory to create a buyer's market. And Alberta, with their natural resource sector being slower, their discretionary spending for recreational spending has been a lot more cautious."

Invue was the first clear sign the market was collapsing when Rennie was brought in and prices were trimmed 40%. And now the bleeding is clearly spreading.

As reported yesterday on CKWX AM 1130, developers all over the Okanagan are following Invue's lead and are cutting prices.

Advertised prices on many new developments are down between 20-30%, six-figure savings in some cases. And according to developer Matthew Hay even deeper discounts can easily be obtained.

There is "a surplus of product on the market" and the evolution of "a whole buyer demographic that is nervous, cautious, sitting on their wallets, waiting to see how things shake out," said Hay

Clearly the age of the bidding wars are over and the irrational buying has ended.

As I said on July 10th, one wonders how long before these shifting sands of 'simple economics' hit the Vancouver real estate market? If a 40% reduction is just the first stage of the downturn in the Okanagan... how bad could this get?

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Oh look... a butterfly!

Two weeks ago I made a post speculating on the ramifications for Vancouver of a real estate collapse in China (A butterfly flaps it's wings in China... what happens in Vancouver?).

Curiously it triggered over 20 emails about how wrong I was on this issue.

To summarize, I have long viewed the China economic dragon as a paper tiger. China has, on a per capita basis, pumped as much - if not more - stimulus into their economy as America.

And that massive stimulus - source of the infamous 'HAM' we keep hearing about - has created a huge real estate bubble in China.

In recent months the Chinese central government has taken significant steps to cool the market.

And now the Chinese Central Bank has come out with warnings of a 'relatively large' property collapse later this year.

Specifically China Finance, a publication of China's central bank, has warned that there's 'very large pressure' for Chinese property prices to fall in the second half of this year.

Government measures to curb property speculation have had "initial" results and further effects will be evident in the second half, wrote Zhou Jiang, of the housing ministry's research center. The article is in the July 16 edition of the magazine.

Declines in cities where prices previously rose quickly will be "relatively large," Zhou wrote without naming cities.

Imagine if our Central Bank came out with such clear warnings about the bubble they created?

We'll watch with keen interest to see what fallout, if any, is felt in the Village on the Edge of the Rainforest.

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Interesting US currency development.

I have talked about gold on this blog in the past.

In North America there are those who eschew gold/silver as an investment and claim that "gold's only use today is as an inflation hedge as record debt depresses currency values, until fiscal order is restored."

They are right. The problem though is that people are starting to realize that it is going to be a long, difficult time until 'fiscal order' is restored.

As you peruse the blogosphere, articles can be divided into one of two sides of a philosophical fence. On one side the argument that we are slipping into deflation. The other, inflation.

I guess you could say it appears I sit on the fence. A deflation/inflation symbiotic relationship, if you will.

The problem is to look ahead and assess how things will play out. After that you make you decisions on how best to prepare for what is coming.

On July 8th I made a post about the austerity/stimulus debate. To me, there is no debate... there will be a second round of massive stimulus.

And because of that I would suggest that you will see the Euro roar back towards a high and the US Dollar will sink to new lows because. I think it's unavoidable because the financial condition of the USA dwarfs the problems of Europe.

Inflation and hyperinflation are always the product of a loss of confidence in currency. All hyperinflation in modern history has occurred for one reason, and one reason only. That is loss of confidence in currency.

Loss of confidence in a currency can be brought about by many reasons, but there is one constant factor. When hyperinflation has occurred in modern history EVERY economy involved was decimated as and when it occurred.

Everyone talks about the world wide economy falling into deflation. The fear is that the US Federal Reserve is out of ammunition to fight deflation.

Oh?

I disagree.

The US Federal Reserve can (and will) do Quantitative Easing to infinity. Nothing can restrict them on this. And the European Central Bank will not be far behind in following their lead.

You can argue all you want about deflation, but the next response by the US Federal Reserve is not that hard to predict (Bernanke has already written about it - his famous speech on the matter is where the nickname 'Helicopter Ben' came from).

With the next round of currency printing (QE2), you will in all probability see another $2 trillion in currency printed.

'Loss of confidence' is what is driving the interest in gold.

And that 'loss of confidence' is starting to manifest itself in the United States itself.

In mid-Michigan they are starting to take matters into their own hands. As ConnectMidMichigan reports, "New types of money are popping up across Mid-Michigan and supporters say, it's not counterfeit, but rather a competing currency. Right now, you can buy a meal or visit a chiropractor without using actual U.S. legal tender."

Minted by private mints, people are to buy and sell goods with pure silver coins. In one simple act they have completely bypassed the destabilizing influence of the domestic currency printers known as the US Federal Reserve.

Dave Gillie, owner of Gillies Coney Island Restaurant in Genesee Township talks about it in the article.

"Do people have to accept dollars or money? No, they don't," Gillie said. "They can accept anything they want or they can refuse to accept anything."

The U.S. Treasury Department says the Coinage Act of 1965 says "private businesses are free to develop their own policies on whether or not to accept cash, unless there is a state law which says otherwise."

And in Michigan, they are starting to use things other than US dollars.

"I sell three or four (of the non-US government silver coins) every single day and then I get one or two back a week," said Gillie.

Gillie also accepts silver, gold, copper and other precious metals to pay for food.

The is a trend starting. Gold is starting to be used as money. For food... and to load up your gas tank.

So why is there interest in these competing currencies?

I would suggest that events are clearly pointing to a point where QE2 is unavoidable and with it will come a crisis of confidence in the US dollar.

It means inflation and a spike in the value of gold/silver.

To me it seems you want to position yourself to take advantage of these two, apparently unavoidable, trends.

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Is the price collapse on Vancouver's west side accelerating?

More evidence that reality is somewhat divergent from the R/E 'spin'.

Faithful readers will recall that last month the R/E propaganda machine was attempting to calm jitters about a significant real estate turnaround.

You can't hide declining sales numbers, but panicking sellers were 'soothed' with news that 'Hot Asian Money' (HAM) was maintaining property values, particularly on the west side of the City of Vancouver.

Headlining this message on June 12th was our buddy Cameron Muir from the BC Real Estate Association who specifically talked about 'HAM' maintaining west side market values:

Perhaps this reassurance would calm nervous buyers and keep them dashing into the market, a move which would support market prices?

Well, as we already know, the Real Estate Board of Greater Vancouver (REBGV) statistics for the month of June 2010 came out and the numbers didn't reflect Muir's appraisal of the situation..

On the west side of Vancouver, where all the supposed 'HAM' money was supporting real estate values, the benchmark price for detached homes dropped a significant $91,000 from May to June.

And now... in the middle of July... it appears the downward slide continues.

As noted on VREAA the above pictured house at 3540 West 40th Avenue provides a snapshot of what could be an accelerating collapse.

Promoted as an outstanding Dunbar character home in immaculate, move-in condition, this 3,359 square foot 4 bedroom, 2 bathroom home sits on a 6,700 square foot lot.

It was touted as having been maintained in pristine condition with a high basement ceiling and large unfinished area with great suite potential if needed. The home was originally listed for sale at $1.549,000 on June 7th, 2010.

Hot Asian Money didn't exactly rush in to trigger a bidding war.

Instead what we witnessed was something more akin to a seller desperate to move the property.

On June 12th, 2010 the asking price was reduced to $1.449,000 - a reduction of $100,000 in the blink of an eye 5 days after the property was originally listed!

And with no one jumping in on that, the seller obviously received an offer from a buyer sensing the desperation.

On July 6th, 2010 the home sold for $1,340,000, yet another $109,000 shaved off the latest asking price.

That's a total drop of $209,000 (or 13.5%) off the original asking price... a far cry from several months ago when bidding wars were triggering sales in a day after listing at well over asking pricse.

More significant in all of this are the background details of this sale.

This home had been held by the owner for over 40 years. At first blush you would conclude that the sale is no big deal because the owner could obviously come down significantly from their asking price and still make a huge profit.

Which is true. And that is very telling.

As we have talked about before, a chilling dynamic will be hitting real estate in Canada over the next 15 years.

The first wave of Boomers are hitting retirement age this year. Statistics show that over 70% of these Boomers do not have adequate funds set aside for retirement. Their whole retirement 'plan' lies in selling their home, downsizing, and using the left over money for their retirement years.

In this cases, holding out for 10 or 15 months to get that optimal 'asking price' is probably not an option... especially if fears of a declining market start to grip the general public.

I suspect you will start to see more of this; long-time west side owners listing their homes and then quickly and dramatically slashing their asking price in order to realize the sale.

The chilling fact is that anyone who bought in this area in March/April (at the top of the market) is suddenly $210,000 underwater from their purchase price. And if the benchmark price continues to plunge, other Boomers will fall over themselves as they drop their asking prices in a desperate attempt to close that sale. Remember, even at 50% off current asking prices, any real estate sale represents a stunning profit over what these owners paid 40 years ago. And as momentum builds, latter Boomers will be frantic to salvage what they can from their retirement 'plan'.

Fear.

For Boomers who have all their retirement plans wrapped up in the value of their house, it will become 'the' most significant motivating factor.

This particular home owner shaved almost 14% off their asking price when the home was only on the market for 1 month. Imagine what a wave of Boomers will do if their homes languish on the market for almost a year?

We will watch the next 12 months with keen interest.

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We don't need no stinking downpayment!

Remember back in February when Finance Minister Jim Flaherty brought in new, 'tougher' mortgage standards?

The prevailing impression was that it would stop reckless borrowing by Canadians who were putting themselves, and the country, at risk with highly leveraged borrowing.

It is interesting to note that Flaherty said, “the measures will not affect the ability of a Canadian family to buy a house. It will affect those who are speculating. What we’re getting at is the speculation in multiple condominium units in particular which we see in Vancouver, Montreal, Toronto and in some other places in Canada.”

It's an important distinction. Because the average joe seems to think that you can't simply buy a home with no money anymore... a move that strengthens our nation's housing market.

The fact is that nothing is further from the truth.

You can still buy a home with nothing down in this country, as this mortgage broker in Abbotsford clearly tells you on their website.

• $0 Down Mortgages on Owner Occupied Properties: Are you tired of paying someone else’s mortgage? You don’t want to deal with landlords any more however, you have no money to buy a place of your own. We have the solution for you in the form of a $0 down mortgage. This means that almost anyone can own their own home. We have lenders who will finance 95% of the purchase price and give you 5% cash back for your down payment so you can own your own home. Also, you have the option to have your 5% down payment gifted from family or borrowed in the form of a loan.

As the current market 'slowdown' catches steam, look for R/E media propoganda go into overdrive as it targets and entices those sitting on the sidelines to get into the market under this arrangement.

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Shovelling it!

Right on cue, a call from the R/E playbook.

On Monday I wrote, "I suspect we will see the R/E machine gear up in a replay of 2009 and attempt to fortify 'consumer confidence'... look for the real estate P/R machine to ramp the propaganda by drawing on those pages from the media manipulation playbook that focus on 'consumer confidence'.

I envision a flood of articles on creative first time buyers finding ways to 'take the plunge' and commit to their future by finding creative ways to don the massive mortgage chains that are so crucial to greasing the real estate wheels of upward property mobility."

And lo and behold, four days later, we have this article from the Vancouver Sun.

Ostensibly it is a business section article about the dramatic drop off in sales for the month of June.

But that 'news' is buried around a typical R/E propaganda puff piece. In this case we hear all about a single mother who is ecstatic because she bought a home at a time when the market has only just begun it's downward spiral (or what the R/E playbook currently calls a "buyers market"). And the hook is that she got $9,000 off the asking price for a home way out in the distant Vancouver suburb of Maple Ridge.

The purchase is spun as a 'shrewd' by a home-hunter who is 'in control' in this buyer’s market.

No comment is made about an appalling this situation wherein a single mother winds up assumming a $400,000 mortgage after a minimum 5% downpayment at a time when the Governor of the Bank of Canada has spent the last few months warning Canadians about the dangers of assuming massive debt on the eve of significant interest rate hikes.

You can understand the Real Estate Associations attempting to 'market' in this fashion.

But for the media to pimp out R/E industry objectives by candy-coating signifcant business news that would otherwise adversely impact herd mentality home sales is nothing short of a breach of ethical journalism.

It's a sad commentary on our media, on our democracy.

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I'm disinclined to acquiesce to your request. Means "no sale".

The shifting sands of real estate continue to blow in Vancouver.

The big news today is the B.C. Real Estate Association coming out with the June sales figures.

Almost all British Columbia real estate markets experienced declines in sales in June, but Metro Vancouver experienced the biggest decline.

Sales in BC were down 22.5%t from the same month in 2009.

Active listings in inventory, in the meantime, climbed almost 21% to hit 59,232 units in June, which equaled a 9.3-month supply based on the pace of sales, Cameron Muir, the association's chief economist said in a press release.

“Market conditions have shifted from balanced conditions at the start of the year to a buyer's market this summer,” Muir said.

Hmmm... wasn't this the same Cameron Muir who said last month that 'Hot Asian Money' was going to maintain market values?

The key influences, he added, are the same ones that have helped to slow demand since they took hole in April: tougher qualifying rules for some mortgages, particularly for first-time buyers and those seeking secondary suites.

And so it goes.

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US Debt

Events going on the in the United States are crucial to our little hamlet in the Village on the Edge of the Rainforest.

As we discussed in 2009, pretending that we are somehow immune is pure folly. Our provincial forest industry is decimated without steady US sales, ditto our mining industry. Our other big industry, tourism, also draws substantially on American travellers. Even our giant underground industry (BC Bud) focuses on Yankee customers.

So as Pierre Trudeau once said; when the elephant sneezes, Canada catches cold.

And right now not only is the elephant sneezing... he's hacking, wheezing and generally doing very poorly.

So poorly that one wonders how the debt rating agencies of Moody's, Standard & Poor’s, and Fitch can continue to give America (and other western governments) AAA debt ratings.

Those debt rating agenciees are supposed to assess the credit risk of corporations, financial instruments, and sovereign nations around the world. But their dismal performance of doing that lay at the core of the 2008 Financial Crisis... after having given AAA ratings to the mortgage backed securities that brought the world to it's financial knees.

But today another ratings agency is making headlines, and they have a slightly different view of things.

China’s Dagong Global Credit Rating Company has burst onto the scene and has stripped America, Britain, Germany and France of their AAA ratings. In the process they are accusing their Anglo-Saxon competitors of ideological bias in favour of the West.

Unlike Moody's, Fitch and Standard/Poor's, Dagong gives much greater weight to “wealth creating capacity” and foreign reserves. As a result the US falls to AA, while Britain and France slither down to AA-. Belgium, Spain, Italy are ranked at A- along with Malaysia.

Dagong gives ratings of AA+ to Germany, the Netherlands and Canada... and it ranks China on a similar level.

Debate will rage about the independence of any agency from China, but complaints about the bias of Moody's, Fitch and Poor have been prominent and accusations about not downgrading western countries, particularly the United States have been rife.

This all comes on the heels of a report from President Barack Obama's national debt commission.

Republican Alan Simpson and Democrat Erskine Bowles painted an extremely gloomy picture to a meeting of the National Governors Association

The committee said the United States has to consider curtailing popular tax breaks, such as the home mortgage deduction, and instituting a financial trigger mechanism for gaining Medicare coverage.

They said America's total federal debt next year is expected to exceed $14 trillion — about $47,000 for every U.S. resident.

"This debt is like a cancer," Bowles said. "It is truly going to destroy the country from within."

Simpson said the entirety of the nation's current discretionary spending is consumed by the Medicare, Medicaid and Social Security programs.

"The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans, the whole rest of the discretionary budget, is being financed by China and other countries," said Simpson.

China alone currently holds $920 billion in U.S. IOUs.

Bowles said if the U.S. makes no changes it will be spending $2 trillion by 2020 just for interest on the national debt.

"Just think about that: All that money, going somewhere else, to create jobs and opportunity somewhere else," he said.

Making matter worse, the committee has identified a truism which makes this story of paramount importance to each and every one of us. The amount of debt the United States is carrying means, “we can’t grow our way out of this,” said Erskine Bowles. “We could have decades of double-digit growth and not grow our way out of this enormous debt problem."

The commission pulls no punches and says what everyone already knows: "the nation faces a fiscal catastrophe."

One wonders if Dagong was a bit too generous with it's AA rating for America?

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