Vancouver Real Estate Market Roller Coaster

From http://vancouvercondo.info/coaster - Good work.

Vancouver RE market rollercoaster from Vancouver Condo Info on Vimeo.

Canada's brewing debt storm - - Globe and Mail

For every $1 of disposable income, Canadians owe a record $1.47. How did it come to this?

By Paul Waldie and Steve Ladurantaye

From Saturday's Globe and Mail

Canadian borrowers are fast approaching a day of reckoning.

Lured by cheap money to buy up, buy in, expand and make over, families have pushed credit levels to a record high.

Now, mortgage rates are beginning to creep up and the Bank of Canada is poised to retreat from the record-low interest rates it adopted to fight the recession and spur recovery.

The end of the free-money era has left consumers more vulnerable than ever, and those who threw caution to the wind could soon face costs they can't handle.

Household debt has surged three time faster than income in recent years and now stands at a record high of more than $1-trillion. Put another way, Canadians owe about $1.47 for every dollar of disposable income. Even more remarkably, they took on more debt during the slump - a first for a recession - because borrowing was so cheap.

With debt levels this high, even a small hike in interest rates will be ugly for those whose incomes aren't rising fast enough to meet their day-to-day expenses.Their woes could have a snowball effect: As debt-strapped consumers pull back, their credit woes spill over into the broader economy and risk putting a damper on the recovery.

For some, the trouble has already begun. John Silver, who runs Community Financial Counselling Services in Winnipeg, has seen his caseload increase 20 per cent from last year. "We re seeing more people coming in with more stress with regard to their debt," he said.

Much of the recent rise in debt in Canada has been due to low interest rates, generally easier credit terms and fierce competition among lenders. Even when the recession hit in late 2008, Canadians remained far more confident than Americans in part because of a better housing market and stronger financial institutions. Consumer confidence in Canada is only about 20 per cent below where it was in 2007 whereas it's 60 per cent lower in the U.S.

The higher confidence level and stronger banks meant Canadians were far more eager to borrow during the recession than Americans, said Benjamin Tal, senior economist at CIBC World Markets."I can offer you a very low mortgage in the United States and you won't take it," he said. "In Canada you jump on it, because confidence is high."

Now though, "what I'm seeing is a consumer that is more sensitive to higher interest rates," he added.

Most of the increased debt, roughly 70 per cent, has been in mortgages, reflecting the still hot housing market in much of the country. That has left many households struggling to meet monthly payments on hefty mortgages and more susceptible to rising rates. Families in Vancouver, for example, spend about 68 per cent of their disposable income on the cost of maintaining their house, compared to less than 40 per cent 10 years ago.

"There's been a real frenzy just to get in [to a house] at all cost, because if you don't get in you may never get in," said Scott Hanah chief executive of the Credit Counselling Society, a non-profit group based in Vancouver that helps people sort out their debts.His organization is fielding about 4,000 calls a month and has seen a 10-per-cent increase this year in the number of people seeking help."Last year we saw an increase in activity of over 50 per cent. So to have a further 10 per cent increase on top of that is significant," he added.

There are many people in the same position as James Laidlaw and his young family, who borrowed to build onto their Toronto home, adding construction costs on to a mortgage to help finance $250,000 in renovations and an expansion of 600 square feet.

Even a jump in mortgage rates of just half a percentage point will mean an extra $1,700 a year for Mr. Laidlaw, his wife and two children."Every dollar counts and I'm already thinking about the other things that may suffer," he said. "Maybe we'll have to lose the vacation, or scale back Christmas.

"Canadians used to be big savers and cautious borrowers. In 1982, Canadians socked away 20 per cent of their disposable income and per capita debt stood at about $5,500, according to Statistics Canada. By contrast, Americans were saving just 7.5 per cent of their disposable income at that time and borrowed $6,500 per capita.

Savings and borrowing soon went in opposite directions in both countries and by 2002 debt levels surpassed disposable income for the first time. In 2005, the savings rate in Canada fell to 1.2 per cent, about the same as in the U.S. Meanwhile, per capital borrowing jumped to $28,390 in Canada and $48,700 in the U.S.Consumers are feeling the pinch. A survey last year by the Certified General Accountants Association of Canada showed 21 per cent of respondents could barely meet the interest payments on their loans. The group is about to release a similar survey this year and, said the group's chief executive Anthony Ariganello, the level of those struggling to cope has climbed to about 23 per cent.

"We may be back into a recession [next year] because, remember, part of what has helped us get out of this recession was spending and consumer spending at that, and if people don't have money to spend we could be rapidly back in to where we started," he added.And while consumer spending and confidence have increased recently, both may be short lived, said CIBC's Mr. Tal.

"There is a gap between confidence and ability," he said. "It's a gap between what's in your head and what's in your pocket. And this gap is, of course, a matter of concern because consumer confidence is high due to the fact that interest rates have been extremely low and people are able to finance those mortgages and those loans.

"In a recent report, Mr. Tal concluded that "Canadian consumer fundamentals are weaker than they have been in almost 15 years."That's something that concerns officials at the Bank of Canada. If consumers run into trouble with their mortgage payments, that in turn can lead to "wider problems with other consumer loans, such as credit card debt," David Wolf, a Bank of Canada economist, said in a speech in January. "Consumers may also have to curtail other spending to cope with their debt burdens, creating adverse spillovers to the real economy.

"Michael Hammond has already scaled back his plans. The Ottawa resident has a pre-approved mortgage of $220,000 and has been looking for a house. He nearly bought a $214,000 townhouse last week, but backed off because he's still considering the effect of eventual higher rates."I am mulling over mortgage scenarios in my head like crazy right now," he says. "It's a scary time to be looking for a house. I'm looking at three cheaper homes today because I am so worried about overextending myself and getting caught five years from now.

"Neil Bigelow and his partner Tina Boudreau are also running over financial calculations as they prepare to buy their first home. The couple has been planning to buy a piece of land in Halifax and build their own home. But the prospect of rising rates has them worried about how much to borrow.

"Right now I could probably get $200,000 mortgage," said Mr. Bigelow. "But what's going to happen down the road because interest rates are not going to stay where they are at."

By the numbers

68%: Average amount of disposable income households in Vancouver spend on the cost of a home

44%: Average in Toronto

35%: Average in Calgary

36%: Average in Montreal

30%: Average in Ottawa

21%: Percentage of Canadians who say they can't manage their debt load

147%: Debt-to-income ratio in Canada, a record high

157%: Debt-to-income ratio in the United States

70%: Percentage of debt held in mortgages in Canada

Certified General Accountants Association of Canada, CIBC Economics, National Bank economics and Statistics Canada

Federal government set to restrict mortgages

Federal government set to restrict mortgages

We will soon see what the changes will be.

From CBC:

Sources say the measures will discourage reckless real estate speculation, such as borrowing heavily for an investment property that is not the investor's primary residence. Flaherty is also set to deter households from taking on more mortgage debt than they can afford to repay when interest rates rise, as they are expected to do later this year.

The finance minister is also expected to discourage people from raising cash by refinancing their homes with larger mortgages — again because they may not be able to make the payments at higher interest rates.

The Canadian Press reports that Flaherty will implement a debt affordability or income test that applicants must pass to qualify for mortgages insured by the Canada Mortgage and Housing Corp.

Read more: http://www.cbc.ca/money/story/2010/02/15/flaherty-mortgage-rules.html#ixzz0ffwmWG2F

UPDATE:

National Post article outlining the changes: http://www.nationalpost.com/news/story.html?id=2570414

The Confidence Game

con·fi·dence n.

• Trust or faith in a person or thing.
• A trusting relationship: I took them into my confidence.
• That which is confided; a secret: A friend does not betray confidences.
• A feeling of assurance that a confidant will keep a secret: I am telling you this in strict confidence.
• A feeling of assurance, especially of self-assurance.
• The state or quality of being certain: I have every confidence in your ability to succeed.
• adj. Of, relating to, or involving a swindle or fraud: a confidence scheme; a confidence trickster

Consumer Confidence
Business Confidence
Builder Confidence

It all seems like all anyone really has these days is Confidence. We wouldn't want real profits or growth, or sustainable behaviours; would we?

Every day that goes by, I get more of the distinct impression that big chunks of the economy are part of a confidence game that resembles at best, blind faith and at worst, a giant swindle.

In relation to our local real estate market, to me, it resembles the giant swindle, with realtors and mortgage brokers taking advantage of the uninformed masses who place great 'faith' in the value of real estate ownership. They are blindly pursuing ownership at all costs with little or no thought to the immense risks they are taking on by putting themselves into massive amounts of debt. with little or no money down. We shouldn't come down too hard on the realtors and mortgage brokers though, since they are providing a service to willing consumers and they are just do their darndest to get that eager debtor the right amount of financing and the house they they just 'have to have'.

I actually put the blame squarely on the government and inappropriate rules that fail to guard the CMHC and hence taxpayers from massive losses in the future. After all, requiring a 10% downpayment is so 1999. Perhaps a speculator tax and extended ownership requirements for principle residence capital gains tax exemption (currently 12 months) would be appropriate rule changes too. After all, in countries with these sorts of rules, home ownership isn't a confidence game based on ever increasing home values and massive debt burdens but rather an appropriate personal and financial choice based on financial sustainability and lifestyle preferences.

Yes Virginia, There is a Housing Bubble

Condo lineups return

Yes Virginia, There is a Housing Bubble

Total madness. People lining up to buy a small box in the sky on a busy street next to a polluted waterway. Awesome!! Sign me up!

Reminder - the interest only payments on $500,000 are $1350 / month at today's 3.25% or nearly $2,200 / month at 5.25%.

Mortgage lender warns of housing bubble

File this article under: "No Shit Sherlock" and to beat all it is significantly worse in Vancouver.

November 12, 2009, Tony Wong, Business Reporter - Toronto Star

Low interest rates have caused some Canadians to act "irrationally" in the housing market, potentially taking on too much debt that could lead to economic difficulties down the road, says the president and CEO of ING Direct Canada.

"You have situations in some markets such as Toronto where people are making multiple offers for homes, they are paying thousands more and waiving conditions. It gives me concern they may not be thinking rationally, and this could lead to problems," Peter Aceto said in an interview Wednesday.

"Canadians are also paying their homes off slower and slower, and the concern for me is that they are buying more house than they can really afford."

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

"It's almost as if Torontonians feel very concerned they are missing something with such low rates." said Aceto. "The problem is: can they afford to pay for their mortgage five years from now, when interest rates go back up?"

Sales of existing homes in the Toronto area were up 64 per cent in October from the same time last year, while average prices hit a record $423,559, up 20 per cent. Bidding wars have become common in choice neighbourhoods.

Bank of Canada Governor Mark Carney has already expressed concern that an asset bubble may be forming. And other financial community heavyweights such as CIBC World Markets senior economist Benjamin Tal told the Star last week that consumers are "blinded" by low interest rates.

However, Aceto is the first bank president to express concern over the housing market.
He acknowledged that his comments will likely not be popular with money lenders since he is also in the business of selling mortgages. "What I do know is that we shouldn't be focused on the short term," he said

"We shouldn't be interested in just selling mortgages to get our numbers up for the next quarter. If banks help our customers make the right financial decisions, then we will have a healthy and happy consumer and economy. It just makes sense."

Aceto's former job at ING was chief risk officer. He spent two years in California during the height of the real estate bubble, and felt that Canadians would not be as spendthrift as their American counterparts. But when he arrived back in Canada he was surprised to see that some consumers were acting in a similar way.

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think," said Aceto.

For consumers with 35-year amortizations, which ING sells, he advises that they accelerate their payments.

"That way if you have a $300,000 mortgage, instead of owing $280,000, maybe you only owe $200,000 when rates are higher. It prepares you for difficult times," said Aceto.

Despite his concerns, Aceto maintained that the Canadian economy is in much better shape than the U.S., where zero-down and longer amortizations created a massive housing bubble. And he said the Canadian government has done a good job in limiting long-term amortizations to 35 years.

"The banking system is much more sound, but that doesn't mean we should be complacent," he said.

Behavioural Finance - Effects on Housing

This is a decent background read on the implications of various studies on the housing market.

http://www.prres.net/papers/Kishore_Behavioural_Finance_Application_Property_Market.pdf

Developer Turns Condos into Rentals

I came across this interesting article -- from January 2007 -- about a developer named David Franco turning an unbuilt Washington DC development from luxury condos into rentals. To quote:

"In many cities, banks have significantly scaled back loans to condominium builders. Some have demanded that developers sell half or more of the units in a building before even beginning construction.

In hopes of salvaging something from their costly plans, hundreds of developers like Franco are looking to the strong market for apartments, planning to rent their units for at least a couple of years while waiting for today's condo surplus to shrink.

After six weeks of failing to lure more than a couple dozen buyers, Franco and his partner, Jeff Blum, joined the builders of nearly 6,000 condominium units in the Washington metropolitan area who have decided in the last three months to recast their projects as rental apartment buildings."

Read the whole thing. Like a book we've already read, today we hear this:

"In the face of sales that have ground to a halt, Wall Financial Corp. has decided to scrap its 414-unit Wall Centre False Creek condominium project in favour of building rental apartments on the site, company principal Peter Wall said in an interview.

In its last quarterly financial results, Wall Financial said it had sold almost 30 per cent of the Wall Centre Creek's units, 120 in all, but that sales had come “to almost a complete stop” during the quarter."

I see. What an innovative concept! Vancouver hasn't seen any substantive purpose-built rentals for years now so sounds like a winner; a real contrarian move. Surprised nobody else has thought of that. I would love to see how Mr. Wall pitches this idea to his financial backers, or is he using his own money?

Denial - It's Not a River in Egypt

The Nile River is a long river, in fact, it is generallly regarded as the longest in the world. It represents a very large drainage basin, covering much of North Africa.

Likewise, DE-NIAL can be the drainage basin of your finances if you aren't careful. According to Wikipedia, denial is a defense mechanism in which a person is faced with a fact that is too uncomfortable to accept and rejects it instead, insisting that it is not true despite what may be overwhelming evidence. The subject may deny the reality of the unpleasant fact altogether (simple denial), admit the fact but deny its seriousness (minimisation) or admit both the fact and seriousness but deny responsibility (transference).

So today, many of the people you see around you are in denial about the reality of the Canadian real estate market. They are so uncorfortable with the fact that prices have fallen and are falling further that they outright deny the fact. Sometimes they admit that prices have fallen but minimize the impact that it will have on Canadians or themselves. Sometimes they just admit that prices are falling and that it will have a big impact but walk away from their 3 spec condos.


Yes folks were are in the denial stage. Next stop 'fear' - - I'm scared.

Good luck!

B-b-b-b-baby, You Just Ain't Seen Nothin' Yet

The Vancouver real estate market, along with the rest of BC and Canada, has now entered the full blown correction stage. Nobody is denying the reality that prices are falling and that it is very difficult to sell a home right now. Vancouver real estate prices have retreated nearly 15% in the past 7 months and Canadian prices as a whole have retreated 5-6%, depending on the data you use.

Many prognosticators, extrapolators, eternal optimists, and kool-aid drinkers have concluded that the worst is behind us in terms of price drops and I will now tell you why that is far from being the case.

Quite simply, there is TOO MUCH DAMN SUPPLY for the level of demand we had last year nevermind the level of demand we see today in the midst of a full blown credit contraction and recession. Shockingly ;-) people don't really want to commit themselves to a 35 year payment schedule, with payments double their current rent, when their job prospects are weak or at risk.

For those of you who are now planning on waiting until 'the market recovers' to sell your home, you may be waiting many, many years. The real estate market is not like the stock market, where crashes and recoveries can happen over a period of weeks or months. The real estate market takes years to exhibit the same market movement so get honest with yourself and don't let your realtor give you some mumbo-jumbo about a spring market rebound because the facts just don't bear that point of view out.

So the question becomes - When will we see more demand and less supply - ie. a recovery?

The answer of when a recovery will come is not complicated and actually we can make an educated estimate of when supply and demand should come back into balance. When supply and demand come back into balance, the worst of the price drops should be over and we can reasonably expect a 'recovery' of sorts, or at least no more big price drops!  This doesn't necessarily mean a return to the rapid price appreciation of the bubble years nor does it mean that we will attain the lofts heights of 2007 pricing again soon, in fact, it is likely that we will not see spring 2008 peak pricing for at least a decade and if we adjust for inflation, my children may never see that day.

In the current supply / demand situation, with well over 15 months of inventory in every major BC real estate market, we will see price drops in the order of -2% or more per month. This has been true of the past year.

For argument's sake, let's just say that the demand in the current real estate market does not deteriorate further and again let's imagine the looming supply of new homes under construction that will complete in the next 18 months is reasonably around 20,000 units. With current existing home inventories in the Greater Vancouver area and the growth in listings that is typical for the first half of the year we should see approximately 25,000 units for sale by the time May or June rolls around. Sales will likely be in the 1200 to 1500 per month range giving us a months of inventory metric well over 15 months again.

This means that 2009 will not be a positive year for prices in the local real estate market. In fact, assuming the trend shown in the chart above holds true this year, we should see continued price declines of 2% or more per month. If there is a further influx of inventory via new home completions or existing homes coming onto the market, or a further deterioration of demand, things could be much, much worse.

In regards to prices, here are my best case, reasonable case, and worst case scenarios for 2009:

Best Case - average of 2% declines per month, inventory does not exceed 25,000 units, sales hold up at 2008 levels, benchmark price finishes the year above $525,000.

Reasonable Case - average of 3% declines per month, inventory does not exceed 30,000 units, sales fall modestly from 2008, benchmark prices finishes the year above $475,000.

Worst Case - average of 4% declines per month, inventory exceeds 30,000 units, sales fall dramatically from 2008, benchmark prices barely finish the year over $400,000.

If these predictions seem alarming, then you haven't had a good look at the facts yet. There will be no recovery until 2011 at the earliest. For those of you looking to sell a home this year, get real, and drop your price to be the lowest in your neighbourhood, otherwise it isn't going to sell. For those of you looking to purchase, wait, or drive a very hard bargain, and be prepared for further price drops. If you are a developer, cut prices hard, 30% or more, and finish up your projects fast. If you are a city that happens to have a huge development full of unsold units on your hands, get rid of them, FAST.

Real estate prices will be 20-40% lower than now only 12 months from now so move fast if you're selling and move slow if you're buying.

Good luck because You Ain't Seen Nothin' Yet.

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

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.

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.

Canada faces housing bust: Shiller

Jacqueline Thorpe, Financial Post Published: Wednesday, October 01, 2008

The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets as Vancouver and Calgary, said Robert Shiller, the University of Yale professor who predicted both the 1990s stock market boom and bust and the US housing slump.

Mr. Shiller, co-founder of the S&P Case/Shiller Home Price Index, said psychology is the primary driver of bubbles and it appears that Canada has been caught up with home buying fever just as the United States and other countries around the world.

Asked whether that meant Canada could face a similar bust Mr. Shiller said: "Yes, especially in places that went up a lot like Vancouver and Calgary. I don't think Toronto has been quite as extreme."

Mr. Shiller said there was a natural connection between the United States and Canada.

"I would be surprised that the bubble that appeared in the United States and elsewhere didn't appear in Canada," he said in an interview with the Financial Post. "It's psychology, I think that drives it.

Mr. Shiller, whose book Irrational Exuberance came out in March 2000 just as the tech bubble peaked, said it was essential for the U.S. government to pass a financial bailout, though he believes the United States is facing a "severe recession," regardless.

"I'm concerned problems are deeper than can be handled by the bailout but that doesn't mean the bailout doesn't do some good," he said.

He said a bailout might help restore some confidence to the stressed financial system.

"What creates a crisis is a lack of confidence," he said.

He said the housing crisis was primarily a policy failure by U.S. authorities.

The U.S. government was "totally blind" to it, regulators failed to monitor the mortgage industry properly and the U.S. Federal Reserve had very low interest rates at a time of the greatest housing bubble of all time.

While homeowners should take some personal responsibility for the debacle, they were being goaded into the fevour by an establishment that endlessly pushed an ownership society.

"They were doing what was considered right at the time," Mr. Shiller said.

Mr. Shiller said human nature seems to predispose people to spectacular excess, fanned by a voracious news media.

"Until we had newsapers and other media we had no bublbles, he said.

While ups and downs in the market can lead to creative destruction the current housing crisis has morphed into a system problem.

"The problem is that perfectly good firms are in trouble," he told the Financial Post in an interview at the Ontario Economic Summit.

A bailout may not be palatable, government assistance is required when the system fails.

The trick is to reduce conditions that fan bubbles.

In his current book, "The Subprime Solution," Mr. Shiller proposes several measures to reduce bubble conditions in the housing market including better information for prospective buyers and broader markets that trade risk better, such as the housing futures he has developed on the Chicago Mercantile Exchange.

There should also be new retail products such as "continuous workout mortgages," that go up and down with the value of the home equity and mortgage equity insurance.

Mr. Shiller, who would not give a precise forecast on the outlook for U.S. home prices, nevertheless said futures markets are predicting more price declines of 10% or more. His Case/Shiller index earlier this week showed home prices down 16.3% year-over-year this summer.

He expects things to get worse for the U.S. economy in the short-term.

"We're going to have a severe recession, most likely," he said. How quickly the economy recovers depends on policy.

"Unfortunately the bailout has hit a snag," he said. "There is resentment of rich Wall Street people. I am worried that the sense of trust, in confidence of each other is being damaged."

Mr. Shiller said he does not have another bubble in his sights as the U.S. economy will be "damaged for years."

"The housing bubble was of record proportions," he said. "Maybe the next big bubble will be your children's or grandchildrens...The excitement we had in the 1990s and in 2000 in the housing market is a fragile thing and it won't come back for some time."

What $1 Million Buys In Homes Around The World

From Forbes.com

What $1 Million Buys In Homes Around The World
Francesca Levy 09.18.08, 4:00 PM ET

It has been a dark week for Wall Street and an even gloomier year for U.S. real estate.

But in some areas of the globe, luxury homebuyers are seeing sunny skies.

As housing prices continue to tumble--down a record 4.8% in the second quarter of 2008 from the same time the previous year, according to the Office of Federal Housing Enterprise Oversight--those looking for a new home in the million-dollar range are getting a lot more for their money. The deepening subprime crisis in states like California and Florida, and in wealthy zip codes, means dream homes and investment properties are being added to the foreclosure list. In Los Angeles, for example, homes in the $4 million to $5 million range would have cost buyers an additional $1 million last year.

In Pictures: What $1 Million Buys In Homes Around The World

Those looking in Europe aren't as lucky. The dollar's decline means $1 million buys you much less. In Paris, many buyers pay for location and make do with apartments smaller than 300 square feet.

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In recent years, Americans have been investing in developing countries like Costa Rica, where the same amount will buy you 5,000 square feet of marble floors and Roman columns in lush surroundings.

In short--$1 million buys lot in Chicago and Cape Town, but not in London or San Francisco.

Luxury List
For our look at the world's property markets, Forbes.com examined five U.S. cities and 20 spots abroad, focusing on locales where U.S. investors did business or traveled for vacation or retirement. In each city we selected a million-dollar home that was emblematic of the market. In some cities $1 million homes were scarce, with the price point either far above or far below the market average.

Keeping tabs on property markets far from home is becoming increasingly important. As the worldwide housing arena has transformed, international real estate has become a growing trend. U.S. homebuyers have had to get creative, seeking out the places in the world where the dollar can still buy a luxury home. In recent months, the tightening American credit market has restricted even these investments.

The weakening housing market stateside has given British nationals an in. They have been snapping up U.S. properties, seizing on the strength of the pound against the dollar.

"The Brits are among our top buyers in New York," says Royce Pinkwater, senior vice president at Sotheby's International Realty. "There is a lot of wealth there, and it is a natural transition for them because we are English-speaking."

What $1 million buys in: Dublin Tokyo Vienna Moscow Sydney

However, the dollar's growing strength, coupled with the housing market's instability, may change this. Pinkwater says the currency's comeback, among other factors, is causing Brits to cool their U.S. buying frenzy.

"They are sitting back and taking a break to some extent," she says. "They're hoping the real estate market will keep going down."

But in many U.S. cities, inflated real estate prices can hold firm or slide only slightly in the city center even as they collapse in the surrounding areas, says Richard Green, economist and director of the Lusk Center for Real Estate at the University of Southern California.

"In the inland areas of Los Angeles, you can get a 4,000-square-foot house--a huge house," he says. But in popular Santa Monica or Marina Del Rey, "You'll get a shack."

In New York, $1 million offers a bit more flexibility than it did at this time last year.

"Hell's Kitchen is getting really good values. There you can get 600 or 700 square feet with amenities," says Julie Pham, a vice president at the Corcoran Group.

But those hoping to discover an outer-borough gem are probably out of luck, she says. "Unless you're willing to walk a pretty long distance from the subway, it's not going to be a big discount."

A few of the homes we found showcase cities with unusual housing patterns, like Mumbai, where a short housing supply contributes to high prices.

"You're seeing New York prices on apartments," says Green. "It's very hard to build anything there because of zoning laws. And while the average income is very low, there are a small number of very wealthy people all bidding for the same properties."

How is the housing market faring in your area? Weigh in. Post your thoughts in the Reader Comment section.

In London, where even one million pounds isn't likely to get you far, $1 million gets you an unimpressive one-bedroom apartment--one that may not even meet the American definition of a one bedroom.

"A good studio here would probably look like a one-bedroom there," says Pinkwater. "It's really tight."

Pinkwater says the city's real estate market is unhealthy.

"The market is definitely weaker in London, and I think it will become weaker still," she says. "It has become very, very expensive and now people are watching that market flounder."

Still, says Pinkwater, properties priced $10 million and up aren't going anywhere.

"The top end," she says, "will always be the top end."

In Pictures: What $1 Million Buys In Homes Around The World

What goes for a million bucks here in Vancouver? Post your best MLS listings here.

REBGV Sales Tank, Inventory Balloons, and Prices Fall at an Annualized -17.91%

Well, this is it, the market is officially done like dinner.

The REBGV released their monthly price, sales, and inventory statistics for July 2008 and here it is on the down low.

Active Listings are at an unprecedented level.

Sales are at an abysmal level.


The number of months of inventory is sky high representing the inability of buyers and sellers to come to a quick agreement on the value of properties in the area.

Prices have fallen for two straight months now and are rapidly retreating to year ago levels as the few sellers who must sell drop their prices and buyers who have the means are agreeing to these lower price levels.

I was truly amazed at how quickly inventory levels have grown this year and I was wondering if the tight correlation between months of inventory and price changes would continue during a down market. It is continuing and seems to be an amazingly accurate representation of the effect of high MOI on price change.

Monthly Speculation

Well, it is the end of July and the Vancouver area real estate market ain't so hot anymore. We've got over 20,000 homes listed for sale in the REBGV area, over 11,000 for sale in the FVREB area, and yet another 1,100 homes for sale in the CADREB (Upper Fraser Valley) area. This brings the grand total of listings to well over 32,500 and sales so far down the toilet that it's nearly unbelievable. This brings our total months of inventory for the entire region to over 9 months and we are at a listings per person ratio in excess of 1 listing for every 75 residents of the area. Population stats here: GVRD, FVRD.

This means that our current inventory levels are higher than the bubbliest of bubbly US markets and sales still have further to fall which is going to put even more pressure on prices. I fully expect Months of Inventory to be well above 10 by September / October and even higher in the wintertime. The pressure for price declines will be enormous as some sellers will need to sell and they'll have to cut their price dramatically in order to do so.

We've discussed price changes before and the relationship between price changes and the supply / demand function (Months of Inventory). Given that relationship, if April was the official top of the market for prices, July should prove to be the month that the market turned sharply negative in terms of price changes.

My personal speculation is that benchmark prices will likely be down 2.5% give or take 1%. What's your thoughts?

FVREB - June 2008 Stats

Well, here is the last of the local real estate board reports to go over for June 2008 - the Fraser Valley Real Estate Board.

Sales were 1,418 - down 31% compared to June last year.
Active Listings were 11,295 - up 47% compared to June last year.
Months of Inventory stands at 8 months at the current sales pace.


Median prices were mixed in June with detached and apartment prices rising and attached prices falling.


The benchmark price fell -0.3% during June and year over year the benchmark price has risen only 3.6%. We are fast approaching negative year over year price changes.


The price changes last month fell within the expected range when looking at the months of inventory metric. Prices will continue to fall while the months of inventory remains high.

Cheers.

PS - Kudos to the FVREB staff for issuing the corrected data for the active listings after they changed they way the data is measured last month.