Hoorah for 2008 and Predictions for 2009

2008 in Review

2008 was the year that the entire world woke up to the fact that houses don't go up in value forever and the entire mess of a year that 2008 was can be summarized in that fact.  Stock, bond, and commodity markets all reacted to the spectre of a long and protracted recession with no quick turnaround in sight.  It is truly amazing to see how consumption and borrowing against the value of a home had an impact at inflating the US and Canadian economies.

Locally, house prices fell dramatically starting in May and benchmark prices are now down nearly 14% in the REBGV area and just over 9% in the FVREB area.  The pundits are still calling for a spring turnaround and many real estate agents will likely be disappointed with their incomes during 2009.  They had better learn how to get sellers to drop the price fast or no paycheques will be forthcoming in 2009.  I fully expect that many real estate agents and mortgage brokers will try to find other work during 2009.

Prediction Time

I was 2 for 3 on my predictions for 2008 but I missed a big one as I didn't see how bad the stock, bond, and commodity markets would turn out.  

Predictions make fools of us all unless we are lucky enough to guess correctly.  Sometimes an educated guess is better than nothing however and it is kind of fun to toss around what we think is coming during the next year.

Here are my thoughts:

1) Real estate prices in the Metro Vancouver area will fall by 20% or more during 2009 from current levels.  The fall in prices will be worst for apartments and will be best for moderately priced suburban detached homes.

2) BC will enter recession sometime in 2009.  Canada and the US will continue in their recessions throughout most, if not all of 2009.

3) The Vancouver construction industry will be decimated during 2009 with many more projects hitting the completion phase and the need for labour dries up.  See historical employement statistics here.  The Metro Vancouver area will probably see a loss of 50,000+ jobs in 2009 from the construction, retail, finance, and real estate professions.

November 2008 CMHC Data Redux

I recently posted about the CMHC data released for November 2008 and I wanted to revisit the statistics again because of a couple data errors and a desire to have a thorough examination of the facts.  Here is how things stand according to the CMHC Housing Now released this morning.

All data for November 2008:

Starts  = 973

Completions = 1628

Under Construction = 26035

Completed but Not Absorbed Units = 2261

This is the time of year for predictions so here are some things I expect we will see in 2009:

1) Starts will fall dramatically to the 12,000 annualized level.

2) Completions will also fall but will exceed starts for the next couple years.

3) Under Construction will fall to the 18,000 level or more by the end of 2009.

4) Completed and Not Absorbed units will rise significantly to over 4,000 units.

What do you think?

Opening the bottom window

I am no more able to tell you precisely when the housing market will bottom than I was able to tell you when it would top. But, I have strong faith that at some point prices will begin to rise again.

I fully expect to see the regular CMHC/Bank/Etc. local RE pumpers telling us that a price recovery is right around the corner. We will hear this every single month of the drop. But let's ignore their self-interested and delusional chatter.

As I said above, pinpointing the exact date of turnaround is not a productive exercise because I have no clue what will be the state of interest rates, employment, incomes, and other fundamental factors that will be important. For example, imagine that speculative excess has been squeezed out of the market by the end of 2010, but at that point interest rates start to rise as the US/Canada pull out of the recession. That would push the RE market down even further, most likely. But maybe we'll be ZIRPing for a decade like Japan. I don't know and I don't care to guess.

What I'm really interested in is trying to figure out some cues for when the 'window to a bottom' might open. Three things come to mind.

1. End of the Olympics.

I think that it is not possible for speculative excess to be squeezed from the market until those who are expecting the Olympic fairy to revive our local RE market finally see that this is simply fantasy. For the last few dead-enders, it won't clearly be fantasy until after the Games have left town. (And even then, I'm sure the pumpers will be telling us that it's a long-run thing and that we shouldn't have expected an immediate boost. Ha!)

So, no bottom until at least March 2010. I like this metric because it is a definitive date we can work with. But I think March 2010 is too soon for a bottom to form, so let's think of other measures.

2. Tightening of credit availability.

Credit will become much tighter. Anecdotally, we have heard that it is harder to get mortgages than it was a year ago. However, I expect things to become much tighter. See this post from CR, for example. Rates are low, but few qualify. We'll see higher required downpayments, more secure employment and income, and no more phantom suite income. Until credit availability tightens up, there will simply be too much fantasy buying with OPM. The window to the bottom will open when people actually have to start buying with their own money again.

The disadvantage of this metric is that I can't think of how to quantify it. So, it is hard to use this a rule to call the bottom window open. Conceptually useful, but practically difficult to implement as a decision rule.

3. Under construction falls below 10K.
   

My favourite measure that I'll be watching is 'under construction.' See Mohican's most recent post on starts/completions/under construction here. We have blown through historic highs for this measure; almost double previous highs. This has two important implications.

On the demand side, this has meant a lot of employment and income for the construction and related trades. If under construction drops, so will employment and income. Fewer renters for condos, and fewer buyers.

On the supply side, this huge amount of units under construction makes for a very large overhang of supply. With this huge overhang comes price competition among sellers. With 20 or 30 sellers competing for each buyer, prices will fall quickly--and can even undershoot fundamentals until the supply overhang is worked off. (Undershoot fundamentals? That would be cool to see . . . but I think it possible.) Also on the supply side, some of the laid off construction workers will go BK or into foreclosure, making the oversupply problem worse.

So, putting the demand together with supply, I predict that the coming big drop in units under construction will have a very negative effect on prices. It is only when this tsunami of supply and massive demand shrinkage finishes that we can begin to talk about the bottom window opening.

OK, so at what level will 'under construction' bottom? Don't know. In the US, CR tells us that starts are at the lowest since 1959. I'm just going to do a WAG based on Mohican's chart. I am fairly confident that we'll go back below 10K, as we always have after each boom. On the balance of probabilities, I think we'll see us go down to 5K. But I don't want to set up a decision rule that has a 50-50 chance of missing the bottom. So, I'll choose 10K under construction as my 'it's time to start talking about a bottom' indicator.

Questions for the readers:

A. What is your preferred indicator that the bottom window is open? Let's confine answers to things that are quantifiable, rather than anecdotal indicators.

B. What do you think of the 'under construction<10K' indicator?

Average Price -17% in Chilliwack

Chilliwack has 23.9 months of residential housing inventory with 1767 active listings and only 74 recorded sales in November. Here is the news release from the Chilliwack and District Real Estate Board.

Total MLS® sales activity decreased this November in the area served by the Chilliwack and District Real Estate Board, according to statistics released by the Board. The Board's MLS® system recorded $21,518,491 worth of sales this November. That's a 39 per cent decrease from the total posted this past October, and a 67 per cent drop from the total in November 2007. A total of 76 properties traded hands through the Board's MLS® system in November 2008, which is 38 per cent lower than the total from October and 64 per cent less than in November 2007.

The total value of home sales recorded through the Chilliwack and District Real Estate Board's MLS® system this November was $20,834,491 – which is 31 per cent lower than the total from October 2008, and 65 per cent below the amount posted in November 2007.

The average price of homes sold through the Board's MLS® system this November was $281,547, which is six per cent less than the average from October 2008 and eight per cent lower than the average from November 2007. It is also 17% lower than March 2008.

The Board cautions that the average residential price is a useful figure only for establishing trends and comparisons over a period of time. It does not indicate an actual price for a home due to the wide selection of housing available in the area.

A total of 318 new residential listings were added to the Board's MLS® system this November, an eight per cent decrease from October 2008. As the month came to an end, there were 1,767 active residential listings on the Board's MLS® system.

The Chilliwack and District Real Estate Board is an association of 283 REALTORS® that provides services to and sets standards for members. The Chilliwack and District Real Estate Board serves Chilliwack, Agassiz, Hope, Boston Bar and Harrison.

Additionally, there is no shortage of new homes in the area:
http://www.fraservalleyparadise.com/
http://www.fallsresorthomes.com/
http://www.ridgeresort.ca/
http://www.cornerstonehaven.com/
http://www.aspenterrace.ca/
http://www.calibrehomes.ca/
http://www.skyylife.com/
http://www.adera.com/
http://www.sagehomes.ca/
http://www.highpointestates.ca/
http://www.harrisonhighlands.ca/
http://www.buildmasterhomes.com/
http://www.falconheightshomes.ca/
http://www.westbowhomes.com/
http://www.floraliving.com/
http://www.newmarkliving.com/
http://www.eversfieldlane.com/
http://www.argyleliving.com/
http://www.millerestates.ca/
http://www.resortswestbc.com/
http://www.paramountproperties.ca/
http://www.aspenwoods.net/
http://www.garrisoncrossing.ca/
http://www.sprucelandhomes.com/
http://www.thewoodsatgarrison.com/
http://www.foresttrailsatgarrison.com/
http://www.gablesatcoppercreek.com/
http://www.lifeathartford.com/
http://www.lifeatserenity.com/
http://www.jinkersonvistas.ca/
http://www.graystonearbor.com/
http://www.stoneycreekranch.ca/
http://www.clovercreekliving.com/
http://www.fairmontonspadina.com/
http://www.newhome-condos.ca/
www.vedderridgeconstruction.com/cedarsprings
www.vedderridgeconstruction.com/walkercreek
http://www.westwoodliving.ca/
http://www.silvervalleyestates.com/
http://www.retrieverridge.com/

CMHC Data for Vancouver - November 2008

The Canada Mortgage and Housing Corporation keeps accurate statistical records of the housing market activity across the country and here is a collection of that data for the Vancouver Census Metro Area up to November 2008 (pdf). The chart shows the number of housing units started in the past 12 months (red), completed in the past 12 months (yellow) and the number of housing units under construction (blue) at any point in time. Click the chart to make it bigger.



Several interesting things pop out to me as I observe this chart and the data underlying it:
1) We are currently in a very large building boom.
2) There have been several boom cycles in Vancouver's history
3) The current cycle has born witness to a statisical occurence that has not happened in any previous boom cycle - the number of units under construction has far exceeded the number of starts or completions.

This last observation could be for a variety of reasons:
1) More multi-unit projects which take longer to complete - has that really changed so much since the 90s?
2) A shortage of labour - why start so many projects if developers don't have the labour
3) The prevalence of the pre-sale contract which allows the developer to pass on a portion of the financial risk to the pre-sale buyer and thus no rush to complete when you already have buyers locked into a contract. Why not start more projects so you can lock in more pre-sale buyers and then take a long time to complete because you have too many projects on the go. Seems like a recipe for success from a developer standpoint. The issue then becomes what happens when all developers proceed down this path and a systemic problem creeps into the system with that systemic problem being gross oversupply. Add in the unprecedented level of speculators taking part in pre-sale contracts and we are now just seeing the tip of the iceberg of what happens to a local housing market when these things converge.

Fun times!

On another note - CMHC tracks the number of completed but unsold housing units and this number has risen from 892 units (11/07) to 1295 (11/08). Clearly the market is saturated and cannot absorb any more housing units at current price levels.

Head in the Sand at the CMHC

From the Globe and Mail:

Canada Mortgage and Housing Corp. officials ignored warnings from senior Finance Department and Bank of Canada officials during the past two years that its active business in high-risk mortgage insurance could overburden consumers.

According to sources familiar with the discussions, CMHC executives did not heed the warnings and continued to underwrite larger volumes of insurance policies for risky home loans with 40-year amortizations and minimal down payments.

The sources said the federal agency's executives disagreed about the potential risks and defended the creditworthiness of borrowers who were granted insurance for the riskier mortgage products.

One senior Ottawa official said CMHC was such a significant underwriter of 40-year mortgage insurance polices that it currently accounts for two-thirds of the nearly $56-billion of 40-year mortgages that were approved by banks, trust companies, credit unions and other lenders during the first six months of 2008.

Unlike the United States, Canada does not publicly release data about different classes of mortgage debt. CMHC does track mortgage data, but its officials have declined requests by The Globe and Mail for information about the volume of 40-year and low-down-payment mortgages. In a statement issued last night, CMHC said it discussed mortgage risks with central bank officials in 2006 after former bank governor David Dodge raised concerns about the new breed of long-term home loans.

"CMHC officials took the governor and senior bank officials through the materials and discussed how the product was administered. The Bank of Canada was reassured by the fact that CMHC's product includes no change in mortgage qualification criteria and as such would not be of significant concern to the Bank. We know of no other concerns that the Bank of Canada or the Department of Finance had with our activities that in their view would threaten financial stability," the statement said.

The agency said only a "relatively small" proportion of the $334-billion in mortgages it insures are either 40-year or zero-down-payment mortgages. A spokeswoman declined to put a figure to "relatively small."

Finance Minister Jim Flaherty announced in July that the federal government was cancelling its policy of guaranteeing 40-year mortgages as of Oct. 15 in order to shield Canada from the kind of housing crash that has devastated the U.S. economy. However, according to sources, bank executives had been warning Mr. Flaherty and central bank officials since the beginning of 2008 about a dramatic and unexpected increase in demand from consumers for 40-year mortgages with small down payments.

Lenders, insurers and government officials interviewed by The Globe characterized the first half of 2008 as a period of apparent paralysis by federal decision makers. These sources said bank and insurance executives and finance officials disagreed over how to pull the plug on popular and risky mortgage products. One of the few things they did agree about, according to sources, was that there was insufficient monitoring of CMHC, which accounts for about 70 per cent of the total value of mortgage insurance underwritten in Canada.

"There is an accountability issue at CMHC," said one senior Ottawa official, who declined to be identified.

CMHC is a federal agency that has been supplying mortgage insurance since 1954, and is currently overseen by Human Resources and Social Development Canada. In response to a question about its accountability, CMHC said in its statement: "The lines of accountability are very clear, like all Crown corporations CMHC is accountable to Parliament through its minister."

When The Globe contacted Human Resources Minister Diane Finley, her spokeswoman replied: "We will have to decline and allow CMHC to respond to the questions applicable." According to people familiar with CMHC, the agency imported U.S.-style mortgage products to protect its dominant market position from large U.S. insurers who were allowed into the Canadian market in 2006. Canadian laws require borrowers with less than a 20-per-cent down payment to obtain insurance for their mortgages.

"They felt they were pushed into to this because of the new competition," said a person familiar with CMHC.

Underlying these concerns, sources said, was a federal internal study launched by the new Conservative government in 2006 to review the possible privatization of a number of agencies, including CMHC. The prospect of privatization, one source said, fuelled concerns that the agency needed to be seen as an effective competitor.

CMHC said in its statement that its decision to insure longer-term and lower-down-payment loans in 2006 "reflected the market trends for the period." Until 2006, the agency and its only rival, Genworth Financial Inc., did not insure mortgages that were amortized beyond 25 years. In February of 2006, several months before four U.S. insurance giants were allowed into Canada, CMHC introduced the country's first 30-year mortgage insurance product. What followed was a ferocious battle for market share between CMHC, Genworth and American International Group, the first of the new insurance entrants.

State of the Canadian Mortgage Market

The annual survey (pdf) from the Canadian Association of Mortgage Professionals is very insightful and I've been a reader now since they began the annual survey. This was the most interesting annual report I've seen yet and here are some of the highlights:

Home Equity Among Canadians - not an unhealthy situation overall but this does not reveal regional disparities and weaknesses.

Among home owners who have mortgages, the average amount of equity is $136,000, representing 51.7% of the average value of their homes ($263,000).

For owners without mortgages, equity is equal to the average home value of $280,000.

The total value of owner-occupied housing in Canada is estimated at $2.39 trillion. Mortgages on these homes total $664 billion, leaving $1.73 trillion in home owners’ equity. This equity is equal to 72.3% of the total value of the housing.

Mortgage Arrears - rising but historically low for now

The rate of mortgage arrears in Canada remains quite low, at 0.28% as of August 2008, which is just slightly higher than the 0.25% rate that has been typical during the past two years. The rise in the arrears rate was mainly concentrated in Alberta (from the below average rate of 0.15% a year ago to the current 0.30%, which remains close to the national average).

Speculation on Real Estate - nationally not a problem but BC has big problems and Alberta smaller problems

[A] key difference between Canada and the US is that an “investment motive” – buying based on expectations of price gains rather than based on real needs – generated a housing market bubble in the US. In 2006, resale market activity in the US was about 20% higher than it should have been based on economic fundamentals; current activity is 40% lower than it should be based on fundamentals. In Canada, there is very little evidence of an “investment motive”. Therefore, Canadian housing markets are not susceptible to the exaggerated downturn that has been seen in the US. However, there has been some investment motive in British Columbia, and BC may experience more of a market slowdown than the rest of Canada.

Equity Take Out - ALARMING - Canadians and especially BC residents have been using the increased values of their homes to cover over systemic financial problems and spend money they don't have. VERY ALARMING

The survey data indicates that 22% of mortgage holders took out equity from their homes or increased the amount of the mortgage principal within the past twelve months.

The average amount of equity take-out is estimated at $41,000.

Various findings from the survey can be combined to generate an estimate of the total amount of equity take-out by Canadian home owners:
• At present there are about 8.9 million owner-occupied dwellings in Canada.
• Next, we need an estimate of how many home owners have mortgages. The 2006 Census of Canada indicated that 57.9% of home owners had mortgages. This was an increase from 55.2% in the 2001 Census. Projecting this change suggests that at present about 59% of Canadian home owners may have mortgages, or about 5.25 million.
• 22% of home owners with mortgages have taken out equity during the past year.

Average amounts taken-out vary across the country, from about $30,000 in Atlantic Canada, Quebec and Saskatchewan, to about $40,000 in Ontario and Manitoba, $47,000 in Alberta, and $57,000 in British Columbia.

Those who took out equity were asked what they used the money for. Some people indicated more than one purpose. Therefore, the following responses add to more than
100% - on average, 1.27 purposes were given:
• 56% indicated that the money would be used for debt consolidation or repayment.
• 39% gave renovation or home repair as the purpose.
• 14% mentioned making purchases as the purpose.
• 7% mentioned investments.
• 11% mentioned “other” purposes.

From the responses, it is estimated that 40% of the (dollar value of the) take-out (or about $18.5 billion) was for debt reconsolidation and repayment. Therefore, while the amount of outstanding mortgage debt would have increased by this amount, totals for other types of debt would be correspondingly reduced.

Condo Market is "Overheated" - Will Dunning

Shocking, just shocking . . . . there was overbuilding? Bob Rennie and Cameron Muir never told me that. This article points out the massive overbuilding in Toronto but Vancouver's overbuiding, on a per capita basis, is significantly larger. See this post.

From Tony Wong - Torstar News Service
A prominent Toronto housing economist is warning of an impending chill in the city's overheated condominium market. The record number of units set for completion in 2009 and beyond will drive down housing prices and cause vacancy rates to go up as some condos sit empty.

By the end of September, there were 33,919 condos under construction in the Toronto metropolitan area – more than three times the city's annual average – said economist Will Dunning in a report on the rental and condo markets." This very large pending inventory is setting the stage for a substantial correction," Dunning said in an interview yesterday. There are currently 26,000+ housing units under construction in the Vancouver area.

The warning comes on the heels of figures yesterday showing sales of existing homes in Canada continued to slide in the year's fourth quarter. Declines were steep amid the lowest level of monthly activity in almost eight years as investors worry about the faltering Canadian economy." In the short term, condos are the most vulnerable aspect of the market," said CIBC World Markets senior economist Benjamin Tal. "I think there is a lot of oversupply, especially in cities such as Toronto and Vancouver." Vancouver, we are the best place on earth for something, especially if that something is thinking that we are the best place on earth . . . or perhaps condo speculation.

Already, some prominent developers have warned some condo projects being marketed may not make it to completion. In a tight credit market, as falling sales hit the new home market, speculators and investors take cover.Toronto condominium starts are normally in the 10,000 to 12,000 range annually, but a bottleneck in construction from record sales in prior years has a significant number of units still to be completed, Dunning said. Many of those units were bought by finicky investors who are quick to exit the market if they don't get the returns they expected. Flippers were once the desired consumer for condo projects and now they are the bane of many projects.

Analysts say 30 per cent to 50 per cent of sales in certain buildings were to such investors, with some already set to exit the market. As a result, the number of condos listed for sale in central Toronto is already up a stunning 75 per cent in November from those on sale a year earlier, according to Dunning." It appears that this process – excess supply in the condo sector and owners acting to sell the units – may be underway already." The large supply of condos will affect the apartment rental market, Dunning said, as units now under construction become available for occupancy; in effect, " With the weaker economy, the supply will exceed the need." Yes, it looks like rental vacancy and rates are headed in a favourable direction for renters.

The Canada Mortgage and Housing Corporation reported last week the vacancy rate in the Toronto area fell sharply to 2 per cent from 3.2 per cent a year earlier, but Dunning said the supply of new condos in the coming year will keep rates from dropping further, and will likely cause vacancy rates to rise. So far there haven't been any catastrophic failures in the Toronto area, although one key project, MintoUrban Communities Inc.'s 300-unit Minto King West site, is on hold because of slow sales. The developer is expected to break the project into two smaller buildings. First-time buyer Janet Chang, 26, said she decided to hold off on buying a condo in downtown Toronto this year because of the uncertain economy." It's tough having to live with your parents for another year, but the last thing you want to is to lose your equity in a condo," said Chang, an accountant.

Before the advent of the economic meltdown in the United States at the beginning of the fourth quarter, new condo prices in the Toronto area were holding up well. Prices for new condos in the third quarter were up by 2.5 per cent over the prior quarter, or about $406 per square foot, according to market research firm Urbanation. Since then, many developers have slashed prices off their suites and added incentives such as free televisions and even a new car over the past few months. In 2006 the average condo price in Toronto was $239,816. Toronto has 'overpriced' condos but Vancouver has super-duper-touched-by-Bob-Rennie-exceptionally-overpriced-condos.

Meanwhile, there was more dismal news for the national real estate market as seasonally adjusted sales for November numbered 27,743 units, according to figures released by the Canadian Real Estate Association. Sales were down 12.3 per cent on a seasonally adjusted month over month basis, and a far steeper 42 per cent unadjusted compared with November 2007.The national average price of a home was down 9.8 per cent to $280,880, or more than $30,000 less than a year ago." The report underscores that the Canadian housing correction continued in earnest," said Millan Mulraine, economics strategist for TD Securities. British Columbia, Alberta and Ontario were the three provinces reflecting the greatest decreases, said the realtor association."

National sales activity and price trends will continue reflecting increased cautiousness on the part of lenders and buyers as the economy works its way through and out of the recession," said the real estate association's chief economist Gregory Klump. In cities such as Toronto, sales of existing homes plunged by 50 per cent in November, the biggest decline since April 1989 when sales dropped to 54 per cent. Gregory, you forgot to mention that prices in Toronto dropped 30% the last time that this type of sales drop happened.

Housing Bubble - Canada Style

TORONTO, Dec 15 (Reuters) - Existing home sales in Canada fell to their lowest level in nearly eight years in November, as the economic slowdown squeezed housing markets across the country, the Canadian Real Estate Association said on Monday.

Existing home sales were down 12.3 percent to a seasonally adjusted 27,743 units in November from October, CREA said, which marked the lowest level for monthly activity since January 2001.

The average price was down 9.8 percent at C$280,880 ($226,516), compared with the level recorded in the same month last year.

CREA said the housing market reflected the economic reality of the country, which the Bank of Canada said last week was entering a recession.

"These changes in the Canadian housing market reflect a broader and weakened picture of both the economy and buyer sentiment," said CREA Chief Economist Gregory Klump.

"National sales activity and price trends will continue reflecting increased cautiousness on the part of lenders and buyers, as the economy works its way through and out of the current recession."

The drop in existing home sales for the month was not as sharp as the 14 percent skid recorded in October, but the latest decline reinforced the view that consumers were growing more cautious and spending less as fears of a recession mount.

"The report underscores that the Canadian housing correction continued in earnest in November as sales activity continues to moderate at a fairly brisk pace," Millan Mulraine, economics strategist at TD Securities, wrote in a note.

Home sales dropped by double digits in most provinces. Sales skidded 14.0 percent in Alberta, 13.1 percent in British Columbia, 12.4 percent in Quebec and 12.1 percent in Ontario, said the association, which represents about 97,000 brokers and agents across the country.

($1=$1.24 Canadian) (Reporting by Frank Pingue; editing by Rob Wilson)

But there is no subprime in Canada and we don't have all those 'risky' mortgages here in Canada so I guess we won't see the kind of problems the US is having.

........

Oh wait a sec. . . . . . we did have risky mortgages and . . . . what's that . . . . . our house prices are falling extremely fast. . . . . hmmmmm. What do you mean . . . the Canadian economy is extremely vulnerable?

Comparing Benchmark to the new HPI

Following mohican's post on the new HPI from National Bank Financial Group and Teranet it is worthy to compare the data to the so-called "benchmark" indicator published by the GVREB. Below is a graph comparing the normalised benchmark data released by GVREB to the Teranet - National Bank House Price Index(TM).



Indeed the two track each other reasonably well. It is probably too much to ask that the conspiracy theories surrounding the opacity of the benchmark data will disappear.

Edit: here is the series going back until December 1998. Still not much difference.

Case Shiller House Price Index - Canada Style

In many real estate markets across the country, the change in real estate prices is represented by the 'average' or 'median' price. Although an average and median do represent some things about the sales of homes they can pose problems for those trying to analyze what is really going on. One of these challenges is that average and median prices can change dramatically if the mix of sales changes to favour the low end of high end of the housing market.

Take this situation for example:

In October, 5 homes sell, priced at $200, $250, $300, $450, and $900.
Average price = (200 + 250 + 300 + 450 + 900) / 5 = Average Price is $420.
Median price is $300 which of course tells a completely different story.

In November, 4 homes sell priced at $175, $200, $350, and $425.
Average price = (175 + 200 + 350 + 425) / 4 = Average price is $287.5
Median price = (200 + 350) / 2 = Median is $275

The determination that I have made is that average prices and median prices have some value to inform us of price changes but they are highly volatile based on the number of and mix of sales. If there are a large portion of high end or low end sales those numbers can really be thrown off. This is why some real estate boards (REBGV and FVREB) use a benchmark which adjusts prices for quality so 2000 suare foot, 4 bedroom homes are compared against other 2000 square foot, 4 bedroom homes. These benchmarks eliminate a lot of problems with averages and medians.

An even better method of measuring prices is the repeat sales method which is called the Case Shiller Home Price Index in the United States. There is a national index, 20 city index, 10 city index, and separate indexes for 20 large metro areas in the United States.

On December 2nd, 2008 Canada got our own repeat sales house price index as National Bank Financial Group and Teranet ... announced the launch of the Teranet - National Bank House Price Index(TM), the first independent representation of the rate of change of Canadian single-family home prices based on the "repeat sale methodology."

You can read more about this methodology here. Essentially this methodology is a true apples to apples comparison of homes. The major issue with the repeat sales method is that there is a time lag to get the data out to the public and this timelinesss is an important factor when making large financial decisions such as a purchase or sale of a home or investment. Additionally, the current index is only available for six cities across Canada and if you are trying to follow other markets I guess you are left to do your own comparisons.

I am glad that someone with the appropriate resources has undertaken the task of establshing a repeat sales methodology house price index for major Canadian centres. It will allow observers to have a more accurate view on what is actually happening to house prices.

For now those prices are falling in Vancouver, Calgary, Toronto, and Halifax.

Toronto Real Estate Market - November 2008

I thought it might be interesting to have a closer look at other real estate markets across the country. Here is the Toronto market synopsis for November.

The Toronto area had 27,037 active listings at the end of November and had 3640 sales for 7.4 months of inventory. This is far, far less than the Vancouver, Fraser Valley, or BC Interior markets which are well over 20 months of inventory right now.

December 4, 2008 -- TREB Members recorded 3,640 sales in November 2008 from the 7,313 sales recorded during the same period last year in the GTA, TREB President Maureen O’Neill announced today.

The average GTA price in November 2008 was $368,582. During the same period last year, the TorontoMLS system recorded an average of $393,747, and in November of 2006 overall GTA prices averaged $355,727.

The 2008 year-to-date sales for the GTA was recorded at 72,086 from last year’s 88,695. The year-to-date GTA average price was $379,489 from last year’s $375,445

Within the 416 area (City of Toronto) there were 1,523 sales during November 2008. During the same month last year, 3,426 sales were recorded. The average price in the 416 area was $390,225 compared to $433,859 in November 2007 and $381,188 in 2006.

In the City of Toronto, 28,806 sales have been recorded year-to-date for 2008 from last year’s 36,804 during the same time period. The year-to-date 2008 average price in the 416 area is $411,155 from last year’s $411,640.

The 905 Region recorded 2,117 sales last month, compared to the 3,887 sales transacted during November of 2007. The average price in the 905 Region was $353,012 last month from $358,391 in November of 2007 and $335,522 in November 2006.

Year-to-date sales in the 905 Region for 2008 were 43,280 from the 51,891 recorded during the same period in 2007. The year-to-date average price in the 905 Region for 2008 was $359,245 from $349,774 in 2007.

Breaking down the total, 1,453 sales were reported in TREB’s 28 West districts and averaged $350,199; 629 sales were reported in the 14 Central districts and averaged $473,346; 651 sales were reported in the 23 North districts and averaged $410,253; and 907 sales were reported in TREB’s 21 East districts and averaged $295,470.

Median Price
The Median Price for November 2008 was $312,250, compared to $325,000 in November of 2007 and $298,000 in 2006. The YTD Median for the first 11 months of 2008 was $325,000, compared to $318,000 during the same time-frame in 2007, and $300,000 in 2006.

Vancouver CMA Housing Starts

The CMHC released the preliminary housing starts data for Canadian major centres for the month of November and housing starts basically dropped off a cliff across the country with Vancouver being no exception.

Starts fell from 2768 last November to 971 this November. It appears that the trend for starts is downward as we enter the correction phase of this real estate cycle. The rolling 12 months of starts has now fallen from a cycle high in July of 21,948 to 19,660 in November.

Construction unemployment is likely to start rising dramatically through 2009 if this trend continues.

RBC Economics - Housing Affordability Improves in Vancouver - Long Way to Go Still

These comments (in italics) are from RBC Economics:

Housing downturn — Canadian-style

Canadians have watched with amazement for nearly two years now at the collapse of the housing sector in the United States, the United Kingdom and other countries that experienced overvalued housing prices with the sense that markets in this country stand on much more solid ground. After all, the sub-prime business never represented more than a marginal phenomenon here; Canadian households, while carrying heavier debt loads than in the past, were not financially overstretched; Canadian banks emerged islands of stability amid the global financial storm; incomes remained well supported by steady job creation and a strong domestic economy; and the influence of speculation — especially on new construction — was deemed to be subdued.

Then, late in 2007, red-hot Alberta markets began to slide, followed earlier this year by British Columbia’s markets. Most recently, Saskatchewan, last year’s hotspot, and areas in Ontario joined the weakening trend. All of a sudden, Canada no longer appeared immune to a generalized housing downturn. In fact, the souring of economic conditions, eroding consumer confidence and, in some instances, past excesses are creating a downdraft that the majority of Canada’s housing markets will be hard-pressed to resist.

As a sluggish economy threatens income growth and makes households much more skittish about major financial commitments, issues of affordability are coming to the fore. Much of the market correction taking place in British Columbia, Alberta and, now, parts of Saskatchewan can be traced to very poor affordability levels in those provinces.

However, high home ownership costs are not unique to western Canada. RBC’s affordability measures lie above long-run averages in all provinces and across all housing segments, which suggests that the downdraft will be felt widely.

Still, the extent of “unaffordability” varies substantially by province, with measures running as high as 48% above average in the B.C. standard townhouse segment and as low as 6% above average in the Quebec detached bungalow segment. Overall, British Columbia, Saskatchewan and Alberta remain the least affordable markets in Canada (relative to their respective historical norms).

While the Canadian housing sector is undoubtedly entering a cyclical downturn, the risk of experiencing a U.S.-style meltdown is remote. The supportive factors mentioned above are still mostly in play and should provide enough backing to prevent markets from spiraling down even as the Canadian economy slips into recession.

In short, RBC provides a half decent view on the current housing situation. They pull a couple punches when it comes to pointing out how ridiculously unaffordable BC and specifically Vancouver is but that is what I expect from the bank. This is what they have to say about BC:

British Columbia — In full-blown correction mode

The situation is unraveling fast in British Columbia. Provincial housing markets are correcting from extremely tight conditions that built up during the boom and drove prices sharply higher (more than doubling between 2002 and early 2008). By the first quarter of this year, RBC’s housing affordability measures for
British Columbia ranged from 38% to 50% above long-term averages — the most inflated ownership costs of all provinces (the higher the measure, the least affordable is home ownership) and clearly an unsustainable position. Demand has subsequently dried up, while elevated prices have attracted more sellers, swiftly shifting pricing power to buyers. Prices began to decline in the spring, a trend that gathered speed through the early fall. This has helped improve affordability modestly in the second and third quarters, but levels in British Columbia still suggest that further price correction should be expected in the near term.

Not too bad for a bank economist! This is what they have to say about Vancouver:

Vancouver — Bumpy ride on its way back to earth

Despite price declines since the first quarter, valuations in Greater Vancouver continue to reign supreme atop Canada’s housing markets. In the third quarter, prices were roughly double the national average for most housing types, with standard condominiums the exception at “only” 70% above average. Meanwhile, median family income in Vancouver is estimated to exceed the Canadian norm by just 8%. Poor affordability is nothing new to the city, as its home ownership costs have long been the highest in the country. However, the significant deterioration in the past three years or so has exacerbated the situation, attaining unprecedented levels by the start of 2008 and adding tremendous stress on the local market. Price drops so far this year have brought some minor relief but much more is likely coming. With qualifying income estimated at more than $150,000 for a standard two-storey home and $135,000 for a detached bungalow, the vast majority of Vancouver families are effectively shut out of those market segments. The only option for many remains standard condominiums where the cost of ownership is not as steep.

Fairly balanced and they do allude to further price drops. The report properly lays blame on unaffordability for the price decreases in the local real estate market. It is outrageous that prices have gotten to these current high levels and the current correction is going to be very severe out of the necessity to bring affordability back for average families in Greater Vancouver.

Not content to let sleeping dogs lie, Cameron Muir had to weigh in on the affordability discussion with some BCREA talking points. Here are the quotes from the Financial Post:

Cameron Muir, B.C. Real Estate Association chief economist, said that affordability has actually improved more than the RBC report suggests because the report is based on third-quarter data and more information has since been collected. "We've seen prices erode even further," Muir said. Sales numbers are unlikely to go much lower than those seen last month, he said. Muir anticipates that after the first quarter of next year, if not before, sales numbers will pick up.

Home prices will edge down as long as there's an imbalance between the number of buyers and number of sellers, Muir said. Over the next several months, he predicts that gap will narrow and "home prices will firm up." By the second quarter of 2009, Muir said "we expect to be in a situation where home prices are fairly flat," and home sales will begin to increase on a year-over-year basis.

We'll hold you to that prediction Cameron. It is now enshrined forever and we'll see how your rose coloured crystal ball works compared to some eyes-wide-open analysis.

Welcome to Housing Analysis - Vancouver Condo Info Shuts Down

This post is the 400th post for this blog and I had hoped that I could post about something good but it appears that just as pope's blog - vancouver condo info - was really starting to hit it's stride, the Real Estate Board of Greater Vancouver has 'expressed concerns' about some of the content. Consequently the blog has been shut down.

I am interested in what concerns the REBGV has precisely and if they try to pull a stunt like that with me, I will make it very hard on them. I will vigourously defend my freedom to speak the truth.

I have my hunches on what the REBGV was concerned about and I would note that the pope's 'wiki' was likely incredibly embarrassing to many people in the real estate community. Although the real estate board could likely never win a legal action, they can exert pressure to make it difficult for a blogger to express themselves.

As usual this blog will be data based and analysis driven. I take a great amount of pride in the work we do here. Me and my co-bloggers really enjoy doing the analysis.

Pope's wiki is still up: http://vancouvercondo.info/wiki/index.php?title=Main_Page

Greater Vancouver Price / Rent Ratio

House prices in Greater Vancouver are overpriced and consequently the rental yield on properties is very low. The chart above (click to enlarge) shows the long term detached house price adjusted for inflation, the inflation adjusted rents for a 3 bedroom apartment and the price to rent ratio for the benchmark detached family home (I used a multiplier of 2 on the 3 bedroom apartment rent to represent the benchmark detached rent).

The price to rent ratio is at all time highs by a long shot with monthly rent representing 1/300th of the purchase price of a home. In some cases the ratio is much worse.


Any analysis of price vs rent would be ignorant if it did not account of the cost of capital, which is represented here by the five year mortgage rate. Mortgage rates were extremely high in the early 1980s and prices were also very high so the mortgage payment to rent ratio was extreme. It peaked in the third quarter of 1981 at 3.5 times equivalent rent to purchase the same property. In the current cycle we peaked at 2 times rent for equivalent properties. Clearly affordability was worse for a brief time in late 1980 through early 1982 compared to today.

The risk today is of course the prices themselves but the risk of mortgage rates rising is an additional risk that mortgage renewers must keep in mind. Would they be able to absorb an unexpected drop in house prices of 20% combined with a rate increase of 2-3%? Variable rate mortgage holders are in for just such a surprise over the next couple years. Fixed rate mortgage holders may dodge the bullet on the rate increase but the price decreases may leave them feeling a little trapped, especially if the payee loses his or her job.

Ratio of Owners to Renters

I was thinking about the state of the current real estate market in Greater Vancouver and I was wondering where future buyers of real estate are going to come from given the abysmally low current sales levels and the atrociously high prices. Who can afford to buy and how big is that pool of buyers compared to the population.

I had a look at the historic census data on home ownership versus renters in 1991, 1996, 2001, and 2006 and this is what I found. CMA = Census Metro Area.

In 1991, there were 588,590 occupied dwellings in the Vancouver CMA. 334,420 (57%) were owner occupied. 254,170 (43%) were rented.

In 1996, there were 692,720 occupied dwellings in the Vancouver CMA. 411,400 (59%) were owner occupied. 281,320 (41%) were rented.

In 2001, there were 758,390 occupied dwellings in the Vancouver CMA. 462,645 (61%) were owner occupied. 295,745 (39%) were rented.

In 2006, there were 816,770 occupied dwellings in the Vancouver CMA. 531,725 (65%) were owner occupied. 285,045 (35%) were rented.

We can safely assume that the owner occupied percentage has not fallen from the 2006 level. The current housing bubble was born out of a natural predilection towards home ownership and demographic trends, developed rapidly via low interest rates, and grew into a fat, disgusting beast via irrational ownership psychology and greater fool mentality. It is now time to pay for these excesses. Some of the excesses were part of the natural cycle but the bubble developed out of the unnaturally low interest rate environment and the bubble mentality

Given the above data, I just don't see any turnaround soon. Most of the potential buyers are gone. There are no more greater fools. The supply of homes for sale continues to build but there are very few willing buyers at todays prices. I expect that some renters may be convinced to buy if prices came in line with rents but this pool of buyers has shrunk over the past 20 years so there is little opportunity. Add to this the fact that many baby boomers will be looking to downsize from their large suburban homes into smaller dwellings over the next 10 - 15 years and you have a recipe for a very long and deep correction in housing.

Statistics from here. http://www.metrovancouver.org/about/statistics/Pages/KeyFacts.aspx

FVREB November 2008

Missus mohican is out and I'm looking after mohican junior. He is content with his snack for the moment while watching 'Big Comfy Couch' so I thought I'd put down a few thoughts after a celebratory smooth drink of Hennessey paired with some wonderful dark chocolate. A good way to end a day.

Why am I celebrating? Real estate prices are down, down a lot in fact and down very fast. I am going to celebrate every decile (10%) decline in benchmark prices because I don't want families who want to purchase a decent home to mortgage their future away just for the opportunity to own a home. We have a long way to go yet but, as predicted, this is becoming reality very quickly. In fact, I may be willing to throw a -40% party at a local pub when the time comes with the first 40 beers on me - I think that would be very nice - one for each percent decline. At the rate things are going, we may not have to wait very long, assuming the pub is still open and I'm still getting a paycheck!

Sales in the Fraser Valley were low, so low in fact that November 2008 broke the record for lowest sales in one month as far as the current records go back. Only 507 homes changed hands in November and with over 500,000 homes in the board jurisdiction, that fact is truly astonishing. Talk about illiquid.

Active listings in the FVREB were still extremely high for the time of year. We should see a sizeable decrease in listings during December.

With high active listings and low sales the months of inventory rose to the stratosphere in November. There is over 23 months of inventory in the FVREB and this bodes ill for any quick turnaround in the local real estate market.

Price changes are highly correlated to months of inventory so I'll be looking for substantial price decreases over the next 6 months. I waited 6 months for the first celebration at -10% but I may not have to wait that long for the -20% celebration.

Benchmark prices for all housing types in the Fraser Valley are now back to February 2007 levels and I am looking for them to break through to August 2006 levels next month.

Wow!

REBGV November 2008

Here it is in a nutshell. See the FVREB post above for more commentary.

Sales are really low - nobody wants to buy a house at current asking prices.

There are lots of people who have their house for sale and their asking price is too high.


Consequently, nobody is buying because buyers and sellers can't come to a broad agreement on what homes are worth.

At the current sales rate it would take nearly two years to sell through all the inventory.


Prices are taking a trip in the waaaay back machine and now they are back to February 2007 levels. Oops for all you recent buyers who paid too much.

It sure looks like more price declines are on the way with such a high level of supply and low low low sales numbers.

REBGV Detached Benchmark House Price Falls 4.2%, FVREB -4.9% in November

The Real Estate Board of Greater Vancouver has released their monthly statistics package and it is in stark contrast to the 4 years ending in April 2008. Sales are insanely low, inventory is a record highs for this time of year and prices are collapsing.

Jesse updated his chart comparing Vancouver to other markets - wow!

And Agent Will said this of the November statistics on Real Estate Talks:

". . . what is not said in that report is that we had the lowest November sales (volume wise) in at least 16 years. Not just by a little but by nearly 50% below the previous lowest November. The question then becomes: If no one is buying (OK, 800+ sales is not no one) then who is? And why?

I'll tell you who is: Cherry pickers. The lowest price properties are getting bought at much lower prices. Weekly stats on my site show that sales price to the original list price is anywhere from 10-15% less. The biggest difference I have seen this past week was a 2.888m house selling for, gasp, 1.8m. That's a good 33% below. Now really is a good time to be making offers that make sense to you (I didn't say buying anything... only buying if the offer works in your favour).

A lot of time will be spent to get these offers through and many will be rejected but you potential buyers out there are now shopping in a market that is absolutely panicked and filled with Sellers acting like a deer in headlights, frozen stiff not moving (prices) at all. They want to move (who wants to get hit?) but are completely stunned by the turnaround. Some will be run over... others, with your
encouragement (offers), will move.

I will be back with charts later. Meanwhile, I have work to do.

Bull vs. Bear

Various versions of this chart have floated around for some time but I thought I'd post it here for discussion.

I think the conclusion you can draw from this chart is that the duration of bull markets is longer than the duration of bear markets. Additionally, bull markets nearly always rise higher than the previous bear market fell.

Keep in mind that a 50% fall requires a 100% increase to put you back at the same starting point. Additionally the chart is out of date because as of November 20th, 2008 the TSX had fallen 52% since June 18th, 2008.

When will things turnaround? I don't know, trying to time the market is for fools. Stocks are 'quite cheap' right now so I'm comfortable buying stocks because I have a long time horizon and a high risk tolerance. Perhaps the market will go down further but then stocks won't just be 'quite cheap', they'll be ridiculously cheap.

The advice of investing to your risk tolerance still stands.

Ubergeek Post Update - Price Changes and Months of Inventory in GVREB

Here is a quick update on the work mohican and I did in the spring around refining mohican's work tracking price changes and months of inventory. Remember that the best fit was to track half-over-half (i.e. 6 months over 6 months) price changes to a three month moving average of months of inventory (total active listings at the end of the month divided by the sales in that month).

Here is mohican's famous scatter plot for half-over-half versus 3 month moving average MOI:



Remarkably the correlation is disturbingly accurate into the downturn. Looking forward we can see how well the model has "predicted" the next month's price movements.



By happenstance we can see the model was consistently predicting larger price drops than actually occurred, except last month when it was bang on. In any case, the model predicts the November benchmark to be 14.1% below that of May of this year, or about $611,000. Likely a bit aggressive, but there it is. I am expecting the November benchmark to come in around $650,000 with what looks like a long way to go in the southern direction.

Thanks Jesse for the update.

I wanted to weigh in here on this model because at the time when we put it together we didn't know how well it would help us predict price drops. It apparently worked exceptionally well and put us ahead of the curve when looking at the size of the potential price drops. I see no reason to expect a change now. More price drops to come.

Vancouver CMA CMHC Data

It has been awhile since I updated the CMHC statistics. Here you go.



This chart shows the number of units under construction (blue) from 1948 through 2008. It also shows the last 12 months of housing starts (red) and the last 12 months of completions (yellow).

With the current slowdown in the local real estate market you would think that developers would accelerate completions and hold back on starts but it turns out the opposite has been true of the past six months. I can understand not rushing to push new units into this market but why start so many?

The number of housing units under construction is at all time record highs and there is a virtual tsunami of housing units close to hitting the market. This will flood the supply situation even further than now and combined with the abysmally low sales levels we are looking at large and sustained real estate price decreases for quite some time.

26% Price Drop in 6 Months

I received an email from a regular reader that informed me of a new home that has dropped in price 26% from peak pricing only six months ago. I looked into this alleged price drop and it checked out. Here is a link:

http://www.foresttrailsatgarrison.com/

This is a development of 40 or so smaller townhomes in the eastern Fraser Valley - Chilliwack. The asking price for these townhomes in May 2008 was $269,900 and today they are $199,900 with an additional offer of special financing for the first 3 years. It appears the developer is getting eager and wants to quickly unload the rest of this project. I am certain there is a fair bit of margin for the developer to work with here but I suspect the bonuses for those working at the developer won't be gigantic this year.

This is the biggest recorded asking price drop that I have seen so far. It is no surprise that we are seeing the biggest and fastest price drops in the farther reaches of the Fraser Valley. This is exactly what happened in the other North American bubble markets only it is happening here faster! In fact, this is quickly approaching affordable levels, albeit in Chilliwack. But with $10,000 down and a mortgage / strata / tax payment of $1300 / month it is comparable to rent. Very accessible for a first time homebuyer with stable employment, you just better not have to commute further than Abbotsford!

Post your anecdotes of price drops here with the developer's website or MLS Listing number.

Likely Outcome - Price Drops to continue to 2011/2012

In the efforts to visually represent a likely outcome for local housing prices I put together the chart (above - click to enlarge). I think it is likely that the benchmark detached house in Greater Vancouver will fall no less that 40% in value from the April / May 2008 peak price. This is a likely trajectory of the fall given the current and expected economic climate. I fully expect the majority of the price correction will take place over the first 24 months so we will see prices 30% lower by the time we are just about experiencing the hangover of hosting the Winter Olympics.

Of course nobody knows for certain how large this correction will be or how fast but I think based on current data this would seem a probable outcome.

It will be a good day when the average family can afford a basic home and condos are affordable for first time buyers.

Greater Vancouver House prices shoud be no more than $500k for a decent house in a decent neighbourhood and Fraser Valley houses $350k for the same. Greater Vancouver one bedroom condos should fall to $150k and Fraser Valley $120k. By the end of this, it will as if the bubble never happened except for the shattered finances of the speculators, and highly leveraged peak buyers.

Money Hole: Pros and Cons

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

"Boring" Canada's Financial Tips for the World

Ottawa, November 13, 2008

From Finance Canada.

The following guest column by the Honourable Jim Flaherty, Minister of Finance, appeared in today’s Financial Times. In it, Minister Flaherty outlines Canada’s five-point plan to restore stability to the international financial system.

"The financial crisis that began 14 months ago in the US has intensified and spread around the world, threatening to roll back economic progress that has been made over the past two decades. Governments have been responding in a co-ordinated fashion and will continue this work in the lead-up to the summit of the Group of 20 leading economies.

"Few countries are as dependent on trade or as integrated into the global financial system as Canada. Yet our financial sector continues to weather the turbulence better than many other countries. This did not happen by chance. Canadians by nature are prudent and our financial system has been characterised as unexciting. Canada’s regulatory regime ensures that stability and efficiency are balanced. As a result, Canadian taxpayers have not had their money put at risk in response to this crisis. If Canada’s financial system is boring, perhaps the world needs to be more like Canada.

"Before we examine grand designs for global regulatory regimes, we need to recognise that good regulation begins at home. Effective national regulatory regimes could have prevented this crisis and must be our first line of defence against any future one. We all need to draw lessons from those systems that worked well and apply them to our national regulatory regimes.

"First, we need to regulate all pools of capital that rely on leverage. The crisis has demonstrated the devastating impact that unregulated entities can have. Transparency requirements must be the price of admission to global markets. Different financial services may have different regulatory requirements, but we need to bring them all under a regulatory umbrella.

"Second, capital and liquidity buffers need to be large enough to handle big shocks. Moreover, regulators must restrain overall use of leverage. Some have criticised high Canadian capital requirements for banks as being too conservative. But the strong balance sheets of Canada’s banks through this period speak for themselves.

"Third, it is not enough for regulation to look at individual institutions. It needs to look at the system as a whole. Risks that may appear sensible in isolation can be unsustainable from a systemic perspective. This systemic vantage point must be used to mitigate any tendency to underestimate risk when times are good. This requires co-ordination across the government, central bank and regulatory agencies.

"Fourth, we need to make market infrastructure more transparent and resilient. Non-transparent over-the-counter trades and naked short-selling reduced the stability of the system.

"This crisis has demonstrated that even countries with strong financial systems can feel the effects of inadequate regulatory regimes elsewhere.　Countries may hesitate to impose new requirements on their own institutions if these measures will create a competitive disadvantage. This points to the importance of the fifth step: strengthening international co-ordination, review and surveillance to create a better second line of defence. Canada was a pioneer of the joint International Monetary Fund-World Bank financial sector assessment program. This independent review of domestic financial systems should be mandatory and public. We need to strengthen the role of international colleges of supervisors to ensure better understanding of systemic risks and to co-ordinate national actions. We need IMF surveillance with teeth. Countries must live up to their responsibilities to support global financial stability and growth. Nowhere is this more important than in correcting global imbalances through appropriate exchange rate and macroeconomic policies to support growth.

"The process of how we make decisions is equally important. In two decades of unprecedented growth, we have seen the emergence of dynamic new economic players that must be full participants at the global table. Canada took one of the largest share cuts of any country in the recent IMF reform exercise to ensure that emerging economies are better represented. This broader range of voices must be heard in other venues such as the Financial Stability Forum.
"Together, these reforms must ensure that incentives are aligned to support stability and that resilience is built into the financial system.

"The open market system did not fail in this crisis. However, some forgot Adam Smith’s maxim that the invisible hand needs to be supported by an appropriate legal and regulatory framework. We need to work together to strengthen those frameworks, and that work must begin at home."

Canadian Banking - Up for Discussion

Video here. http://www.cnbc.com/id/15840232?video=926680705

TORONTO, Nov 12 (Reuters) - Canadian banks should be able to get through the financial crisis without relying on the kind of government aid that is being deployed to financial institutions in other countries, Toronto-Dominion Bank's top executive said on Wednesday. While the Canadian government just announced an increase in the size of its bank mortgage buyback program -- boosting the program to C$75 billion from C$25 billion -- the federal government is actually making money on that program, TD Bank President and Chief Executive Ed Clark said.

"This is a pretty good deal from the government's point of view," since it gets paid to buy mortgages from banks that a government agency has already guaranteed, he said. Canadian banks, with strong balance sheets and healthy mortgages on their books, are using the government buyback program to fund themselves at rates comparable with, or better than, what banks elsewhere in the world can get, he said. Clark was speaking at a financial conference in New York organized by Merrill Lynch.

"We would like to get through this crisis without government bailouts, there have been no bailouts of the Canadian banking system," Clark said. TD, which has grown substantially in the United States through acquisitions in recent years, does not have to make another U.S. purchase to fulfill its business objectives, he said. The bank acquired New Jersey-based Commerce Bancorp earlier this year, and privatized TD Banknorth in 2007.

"We can grow organically, if you take a look at the average bank in the U.S. and strip out acquisitions, it's not obvious that there's a lot of organic growth there," Clark said. But TD, Canada's second largest bank, would consider U.S. acqusitions if certain conditions were met -- that is, if a potential deal were in its existing East Coast footprint, if it were cheaper to buy than build out its branch network, and if it involved minimal asset risk.

"You're not going to see us suddenly move up the risk curve in this environment," Clark said. He also said it seems "inevitable" that a U.S. recession will spread to Canada, where the bank's loan book is more retail oriented. TD expects provisions for credit losses to rise in the next few years, but from a low base, Clark said.

REBGV October 2008

The formerly 'immune' greater Vancouver housing market caught a cold in May and it has turned into pneumonia as the weather has grown colder this fall.

The number of homes for sale in the area is at record levels.


The level of sales is abysmally low.

Consequently the Months of Inventory, the number of months it would take to sell all the homes currently listed for sale, is in the stratosphere.

This basically means that prices are going to keep going down, down, and down for quite some time.

And down they are falling, nearly 10% since May. Yes TEN PERCENT or $75,000 off the benchmark single family home. $75,000 is a lot of money.

This post is brought to you by the letters P and D.

PRICE DROPS. Here now, here to stay.

FVREB October 2008

One could undeniably say that real estate prices in the Lower Mainland collapsed during October 2008, which is likely to be the first of many months of drastic price reductions.

The story is rather simple.
1) Prices went up a lot
2) Nobody could afford to buy anymore
3) People still wanted to sell so active listings rose significantly

4) People still can't afford to buy and sales dropped off a cliff.


5) Consequently the months of inventory rose to unprecendented levels.



6) Prices began to moderate.
7) Prices began to fall
8) Prices began to fall quickly.

9) Prices are now lower than one year ago.

10) Prices will certainly fall much further given the supply of homes on the market. The correlation between the supply/demand scenario and price changes is rather strong.

Welcome to your real world, made in Vancouver, real estate bubble and crash.

Yours in lucid sanity,

Mohican