Bubbles and Bread
Posted December 16th, 2009 in Mortgage Rates, Real Estate
War Paint
Bread Lines Photo Credit According to Garry Marr, reporter with the Financial Post, the Chiefs are putting on their ‘bubble’ war paint. Marr points to David Rosenberg as the lead drummer claiming that ‘housing values are 15% to 35% above where they should be based on fundamentals such as personal income and residential rents.’
He goes on to say the BMO’s ‘reluctant’ Douglas Porter thinks it’s a ‘bubble on a bubble’ claiming the rush will be this spring as everyone tries to get in before the bank rates increase and the HST kicks in. But, as Marr reports, Porter claims, ‘there might a pop in 2011′.
Chorus Line
Rushing to be in step, this new chorus of bubble squeakers line up as Marr points to ‘one senior real-estate industry veteran who claims that all the crash noise may be nothing more than the need for headline space’.
Market Perspective
From the archives of the Vancouver Real Estate Board:- November 2008 seemed to approach disaster in housing sales. On December 2, 2008 the Real Estate Board of Greater Vancouver claimed that “Sales of detached properties in November 2008 declined 69.8 per cent to 322 from the 1,067 units sold during the same period in 2007. Sales of apartment properties declined 67.9 per cent last month to 410 compared to 1,276 sales in November 2007. Attached property sales in November 2008 decreased 73.7 per cent to 142, compared with the 540 sales in November 2007.”
- “Residential benchmark prices, as calculated by the MLSLink Housing Price Index®, declined 12.8 per cent between May and November 2008, amounting to an 8.3 per cent year-to-date price reduction for detached, attached and apartment properties in Greater Vancouver between November 2007 and 2008.”
- “December 2008’s reports showed that “sales of detached, attached and apartment properties decreased 35.3 per cent in 2008 to 24,626 sales compared to 38,050 sales in 2007.” This period also set a new record low where “for the first time in 27 years that Greater Vancouver homes sales for December were higher than November.”
Marr affirms the above with a quote from CREA’S Chief, Gregory Klump who says ‘It was an extraordinary weak housing market a year ago’.
Mortgage Perspective
Adding credence in support of Klump’s remark, Marr makes note of Peter Vukanovich who as the president of Genworth, says that ‘a year ago nobody was buying anything.’ Perhaps more stirring is that according Vukanovich ‘consumers have been switching to fixed rate products, leaving them less exposed’ to bank rate increases.
Quoting Vukanovich, Marr says that ‘over 80% of production for the last month was in fixed-rate mortgages with a very significant portion of it in the five-year [closed] mortgage.’ What would be more telling is to see if CMHC claims numbers equal or greater than to Genworth.
More Listings Please
Aside from Carey’s – BoC’s governor, recent warnings about being prudent or Minister Flaherty telling us to go with fixed rates, something that will let some air out of the Bubble Band is more product on market place shelves.
As these words are cobbled REBGV’s residential listing count is 4,178 for detached and 5,924 for attached properties. In 2008, the numbers were 7,111 for detached and 9,728 for attached.
Having a roof over your head is not much different than having bread to eat. It is one of the fundamentals the Chiefs seem to ignore. When bread was in short supply, people waited in line ups for hours at a time just to get one loaf. With the limited amount of homes for sale in Vancouver, can there any wonder why people are scrambling and choose to pay more for what little there is?
*Disclaimer: Statistics Courtesy REBGV. While believed to be accurate they are not guaranteed. **Numbers provided may vary as they are dynamically posted by the REBGV. Quotes courtesy of Garry Marr, reporter with the Financial Post and the Real Estate Board of Greater Vancouver
I completely agree that prices will become parabolic as buyers lock in rates as they start rising and try to get in before the HST…
“less exposed” is appropriate, cause it means they don’t have to pay the piper until 5 years have passed.
68% of Canadians are home owners, and 70% of our economy is based on consumer spending. if a significant portion of those 68% experience a dramatic rise in housing costs with a matching raise in salary, it will make a significant dent in our economy.
Oh, and salaries/disposal income has been on the decline when adjusted for inflation for the last 2 decades. So cross your fingers, that’s about all the hope we have left.
Chris,
re the 68% – within this number I presume that you are including those who are “clear title” – (do not have any financial charge against their home)
Larry,
Yes the 68% includes clear title and people who have owned for years with a mortgage payment that is small relative to their income.
This is why I used the word “significant” cause I don’t have numbers breaking down that 68% further. That 68% represent the most wealthy Canadians (since its hard to own a house if you’re poor) and are the consumers driving most of the 70% of our consumption economy.
Any significant hit, 5%, 10%, 20% to that 68% will make a big dent in our consumption economy. We already saw it happen when people stopped buying big ticket items (homes, cars, TVs) in 2008.
Now chip away at the already decreasing disposable income and deflationary salaries with higher housing costs… and we have a growing problem for our consumption based economy.
Housing has to become affordable again at some point, otherwise there’s going to be a lot more people out of work.
It’s the math that scares me the most.
Take a $800,000 mortgage on a 35 year am, with a 5% fixed interest rate. This could be someone putting down 20% and buying a $1,000,000 place.
With annual payments of $48,000 (after tax money!, not including property tax!), at the end of year 15, the mortgage is still $610,000.
$720,000 in payments. $530,000 is interest.
Does anyone look at it like this?
Chris,
All good. Just needed clarity as some may have read that to suggest otherwise.
RE: Owning home = wealthy – suggest this is a generalized false assumption.
Chris, there are many who own, are on a fixed pension and barely get by. I don’t have the numbers but City Hall may let out how many are deferring property taxes. I suspect that number is increasing.
It might be an indicator as to how ‘un-wealthy’ some folks in this city truly are. I have met a great number of this population segment which includes a number of neighbours in this bastion of wealth called Kitsilano. While they are OK it’s not their idea of a ‘gold watch retirement.’
The tax incentive as you know, is that from a social housing perspective, the benefit of a much lower cost having seniors stay in their homes rather than at a ‘full care facility’.
IMO viewing that 68% figure, can be misleading in the overall picture – well, at least I believe it is for this segment.
As to incomes, didn’t some woman named Taylor go around ensuring that no one could strike during the Olympics? Watch for it. I think this province will be hamstrung in strikes as those labor agreements mature.
An aside – in New York as example, if you don’t pay your property tax your house is sold to pay them effectively turfing old folks onto the street. When I entered the fray to suggest they adopt a system similar to Vancouver’s I was unceremonialy labelled a socialist. I thought it ironic considering my job. I’m still called that when I turn up at their Blog events – nasty bunch!
Mike,
I’m sure Chris will ratchet up those numbers for you – get ready for a headache as they will surely tell you that banks are a business, a profitable one!
Larry,
I agree with the NY property tax law. Why?
Seniors are benefiting from generous healthcare that they never paid their “fair share” into. Healthcare spending is now > 50% of our budget, it was never before when they paid tax. Moreso, their spending racked up the deficits that our and later generations have to pay.
If seniors are sitting on expensive paid off properties and complaining about low incomes – sell the house. This doesn’t mean “turfing old folks onto the street”. It means selling and taking some of the equity to live, while buying/renting a smaller more affordable place for retirement.
Any home in Kits is worth > $1M (hell, any west of Main), and that invested in a modest bond will return 5% or > $50K, without touching the principle. > $50K is more than most average people live off of, plus CPP and OAS, so no, seniors in these situations deserve no preferential treatment.
Call me unkind for wanting people to leave their “homes” they’ve lived in their entire lives, yet that’s life and life isn’t fair. If you need money and ask for handouts while are sitting on millions, that’s not fair either.
Mike,
Most buyers only look at monthly payments. Its become how Developers, Realtors and Brokers market sales. Larry might politely disagree, that’s there’s good Developers, Realtors, Brokers that don’t – yet all you have to do is turn on the radio or read a local newspaper to hear/see the ads stating “mortgage payment the same as renting” or my favourite “with rates this low you’re wasting money renting”. Its become common practice to sell homes based on monthly figures, not sale prices.
See my comment on this post for the number of how “wasteful” renting is:
http://www.yattermatters.com/real-estate/real-estate-santa/
Chris,
“Larry might politely disagree” – you going soft on me?:)
The disagreement if in fact it is one, is only from the standpoint that the process is called marketing. In reference to the “monthly budget plan”, Like or leave it, the job is NOT to make the process of buying difficult.
With respect, if that were the case you and others might choose to be camp out at every condo project with a warning placard and or, giving lessons on the pitfalls of a 0 down 35 yr amortization.
For some owning is a dream, and we can agree that for some of those who buy that dream, what becomes true after a number of months or years is the nightmare of forclosure. In the end however, who are we to deny them the opportunity to live the dream and/or subsequent nightmare.
Larry,
I’ve said before that I face a morale dilemma – convince people what they are doing is wrong, or hope more of them do it so I can profit from their mistakes. What I’ve learned is exactly what you stated, for some owning is a dream, so no amount of my convincing is going to coax them out of that dream.
I’ve decided to join the ranks of the Developers, Realtors and Brokers to make money off their dream. While buyers are dreaming, I’m hard at work hedging my portfolio against their potential loss. They lose, I win.
Bring on the Olympic downturn, increased rental vacancies, increased unemployment, increased taxes (HST), and lets see what happens. The government is out of cards up its sleeve: interest rates bottomed out, amortizations reaching into retirement – what card is left to play to keep this house of cards from falling apart?
Remember, in my version of the story the Grasshopper dies, hopefully winter 2010.
Chris,
Know that you are not alone in the morale dilemma. Many face this fork in the road.
Looking back over 2009, virtually every deal this year included a ‘daddy’ talk. Once voiced the decision is no longer mine. While shoulders are broad, accepted is the fact that for some life is or will be hard that is beyond one’s personal domain. In contrast, others prosper.
As for grasshoppers – I wonder? Do they dream?
“Having a roof over your head is not much different than having bread to eat. It is one of the fundamentals the Chiefs seem to ignore.”
You cannot rent bread Larry.
n2V
sure you can but, it’s a very short term pass through lease
I find it a little bit difficult to take Chris as such a numbers expert when he appears oblivious to the bond market.
5% in a modest bond? Not a chance.
5 year Canada’s are yielding about 2.65% (even the 10-year is at only 3.45%).
Best 5 year GIC rates are about 3.25%.
Go shorter and those drop down to between 1-2.5%.
They may average 5% over the longer term…but good luck getting the grey haired market to understand how bonds work. Half of them start going on about getting 18% back in 1981.
but i couldn’t agree more about seniors pleading poverty from their million dollar living room.
@ different Mike
Who says you have to invest in Canada? :-p Look at Australia’s bonds.
There are bonds, preferred shares, … that will return 5-8% right now – even in Canada.
right, Chris…..because every senior wants to sell their home and invest in foreign currency bonds….
“sure Mr. Smith, your bond paid 5%, but because the CAD moved up 8% relative to the AUS, you are down 3%”. If you can find someone in my business who thinks they can have that conversation and not get sued…..
Mexican bonds pay 8% too…. neither of those are hardly a “modest bond”.
And the interest is taxable while the rent is not deductible.
Don’t get me wrong, I sincerely believe David Rosenberg has it right. This market is 15-35% overvalued.
But foreign currency bonds are where pigs go to get slaughtered. Accept the a ladder of 2-5 year bonds/GIC’s at crappy rates and sit on some cash making zero waiting for rates to go up and/or prices to come off.
Might as well go to the equity markets if you are going to take more risk than that.
@different Mike
We’ve already agreed that they’d prefer to sit in their million dollar homes and ask for handouts, so lets not make this about what they “want to do”, its about what they “should” do.
Are you going to bring a gun to every knife fight? Why buy in Mexico when California is much safer? or Australia?
Come on dude, you don’t make yourself look better by throwing every worst case out there. This is the problem with Garth Turner and the skeptics – they feed so much on the worst case that people don’t listen, and rightfully so.