Bubble Consipracy
Posted March 29th, 2010 in Real Estate, Real Estate Stuff | 
Is This Real?
Are coalescing events a conspiracy to destroy what some see as a real estate bubble?
Theory
Conspiracy theories are so much fun. Their beauty lies within a series of events that on their own, carry little meaning. However, when attached by thin threads, manifestations can be claimed. Consider gentle readers the following events that might imply more than what appears on the surface.
Events Unfold
- CMHC’s new rules all but destroy the ability of self-employed’s to get a mortgage.
- Major banks increase the mortgage rates.
- Stats Canada says self-employment is surging.
Arithmetic
CMHC’s new rules for the self employed swirl around income declared. Under new rules taking effect on April 9th, it means you must offer a higher down payment or declare and prove that you earn more income. It then follows that if you declare more income, you pay more income tax. Adding this up tells you that if you pay more income tax, you will have a smaller budget which precludes a larger mortgage payment, which means you can’t pay what the seller is asking for his high priced home.
PLUS
Add to this, the income burden of higher interest rates declared today by the major banks. The supposition is that for the self-employed and others, a secondary problem is created in qualifying for that large mortgage. As with the effect of income tax on your income, the higher interest rate now squeezes you from the other side of this equation. It means that not only do you have less after tax money with which to qualify, the interest rate hike now pushes the ability to qualify beyond your budget because you have less income. Once again, you are unable to qualify for that big mortgage which again means you can’t pay what the seller is asking for his high priced home.
PLUS
Stats Canada today says there are more self-employed types. Under the old rules where you qualified for more mortgage with less declared income, you might have been interested in buying that high priced home because you were able to qualify for that large mortgage. However if Stats Can is right, it means that many more than before are now self employed individuals who will be governed by the new income declaration rules. Continuing this thought, it also means that there are more people than ever, who will not be able to qualify for that large mortgage. That being the case, it implies that fewer people will have the financial ability to buy a home.
Equals
Can this arithmetic be right? Do all these subtractions add up?
Recapping, there are now according to Stats Can, more of you who are self employed that will governed by rules that lessen your ability to qualify for a mortgage. Using Stats Can numbers, it means there will fewer buyers for homes which infers because of the restricted ability, a lessening of demand for home purchases.
This fuzzy conspiracy logic suggests that if the demand for homes is removed due to the above interventions on income, interest rates and increased self employment, what one asks, is the future for home sales and high prices?
Unanswered
The question that remains is whether these government agencies and those influenced by them – the banks, have conspired to burst Canada’s housing bubble?
Hi Larry,
Interesting. Yes, a number of factors are beggining to line up against this bubble. It makes the odds of a burst quite high, in our humble opinions.
Well, let’s bring it on. A healthy dose of reality will be good for everyone (given that it has to happen eventually).
On a completly unrelated note, that is a fantastic picture.
I can only hope so. But they should never have let this bubble grow in the first place.
Larry,
Are you at all surprised by the rather tepid sell/list ratio these days?
i can appreciate that sales are relatively robust, but listings pace is more so. Also, as we move forward we will soon (perhaps a month or so) going to reach a point where listings are higher year over year and sales lower. How will the market react to that, given how much of this is based on emotion?
@davers
re pic. yes it is. you should see the rest of them on his flickr page.
@1
nothing in Vancouver real estate surprises me.
“based on emotion” – interesting metric to measure but I haven’t seen this other than through observation
higher/lower YOY – how will the market react? – Suspect is there will be more bargaining, fewer multiple offers as more selection becomes available.
Hi Larry,
I suspect to.
Coupled with:
- less buying power
- less buyer urgency
- increased seller distress and urgency
Net result. Well, we know how bubbles end. Everywhere and always, in tears.
Most of the entrepreneurs I know – cautioning that a tiny sample does not a population make – will not and would not go on to obtain more debt if they are already straddled by the debt obligations of their business. Any good businessperson would know a large mortgage would limit the growth potential of their business. I suspect the so called entrepreneurs who are taking on mortgage are in fact the types like management consultants and that sort, who bill $150/hour and make a pretty good coin in a relatively low risk self-employed occupation. New startup types need not apply for they are already up the proverbial debt creek.
@1
quick – corner the market on Kleenix.
These arguments seem to make a lot of sense, in a 1 + 1 = 2 sort of way, but in this market I honestly would not be surprised if the answer ended up being 11.
re: “based on emotion” IMO the market will turn the moment that fear and greed among buyers/sellers swap places. We’re not there yet.
@John
remember it’s just a conspiracy theory, so ’11′ as an answer, is just as valid as anything proposed.