Tuesday, December 15, 2009

End of Year post

Well 2009 didn't quite pan out as we had expected. It started OK for those of us hoping for reasonable house prices in our city and Province. By the end of 2008, demand had completely collapsed with the MOI near 20. Compare that with 4 +/- now.

However the central banks and governments made a herculean effort to turn things around. Having ignored all these bubbles on the way up, and in fact helped inflate them, they threw caution to the wind.

Buying bad loans from banks, cutting interest rates to zero and in Canada doubling the CHMC's capacity to insure loans. How smart is that??? Encourage people with limited resources to access funds, when prices are high, when unemployment is starting to rise and when interest rates are at historic lows! Exactly what happened in the US. Maybe, just maybe too many policy makers are from Goldman Sachs...like Mark Carney, and Hank Paulson and Robert Rubin and dozens of other decision makers.

As I mentioned in a post early in 2009, the combination of lower mortgage rates and the 15% or so price drops meant that the actual carrying cost of an Average Vancouver property was 30-40% lower.

That was enough to bring people flooding back and we have had another boom in house prices.

Almost every bank economist and even Mark Carney at the Bank of Canada have warned on bubbling home prices. Duh..what do you expect? It would be like inviting your buddies to an all-you-can-eat ribs buffet and then reminding them of their bulging midriffs. They aren't going to hear you.

Rosenberg, the permabear, says the risk for mortgages has been shifted from the banks themselves who are happily gorging on the steepest yield curve for twenty years - ie they pay almost nothing to borrowers but lend long at much higher rates- while the CHMC will pick up the lion's portion of the losses, when and if they occur.

Here are some of my thoughts:

1) House prices have increased at a rate twice as fast as family incomes since 2002.

2) House prices in Canada are up 80% since 2002

3) In the US and Europe, consumer debt to income levels are dropping, as debts get paid by a chastened consumer. In Canada it is still rising.

4) In Vancouver we have been in a pressure cooker for prices for several years. Olympic build out and hype, low interest rates, relative lack of land, population growth and speculation have all fed the frenzy.

However ironically we have not been able to surpass our previous highs (yet) while many other cities in Canada who have not faced these events ..have and are.. hitting all time highs. Even in Ontario which has seen it's manufacturing base badly damaged.

This suggest that interest rates are the most important factor.

It certainly walks and talks like a bubble and does not seem sustainable to me. Unfortunately as a species we are not too concerned with sustainability. The wise thing to have done would have been to use tax and fiscal policy to try and slow down the rise in house prices. Instead they have done the opposite and are now faced with a monster which if disturbed will cause major collateral damage to everyone, even the prudent.

So it would seem that interest rates are the main driving factor.

Well short rates cannot go any lower, so they are 'as good as it gets'. Long rates have been drifting up in the US and I suspect will start drifting up here too. Who wants to be paid 3.5% for a ten year bond. Not me.

I have no forecast for interest rates, but will watching them closely. Generally speaking, short rates are set by the Central banks and the bond markets decide long rates. However there is so much manipulation in the market, with Central banks buying bonds long bonds to keep long interest rates down, and keeping short rates too low (some say 4% too low) for too long, inflation be damned, that they don't make sense.

Remember Greenspan - the previous Fed Chairman, he told folks to go short and variable in their mortgages, and then proceeded to raise rates 16X!! Basically pushing everyone who listened to him into foreclosure. It was as if he was a Manchurian candidate planted by another country to destroy the US.

Well it seems to me like a lot of folks are doing a Greenspan here. They look at their 2.5% short term rate and can afford the payments, but if rates were to suddenly move up by 2-3% they would be calling the CHMC to pick up the keys and then we would all pick up the cost.

They say predictions are only made by fools, so here is mine:

All assets are linked now. Gold and stocks and commodities. Until they keep rising , our RE will also have a strong bid. Some of this is fear unwinding, some is our old friend speculation coming back. A lot is based on the US dollar carry trade...borrow US dollars for next to nothing and buy something, anything.

When and if this all unwinds, then fear will return and folks will see their homes once more as a burden to carry and not path to life-long financial freedom.

When will that happen? Will it even happen? We shall see

Happy holidays to you all. May you have a prosperous and healthy New Year.


  1. Thanks for a year of good blog posts!

  2. I agree it's nice to have another stalward here when other sites have been closing the doors.

  3. I'd like to thank you as well.
    Have a great holiday and all the best.

  4. It's the interest rates. Occam's razor. Low rates fueled the bubble after the .com crash and they're at it again. Unfortunately I think it will be several years before the general public starts truly realizing what houses are fundamentally worth.

    I drove by a 2 up 2 down 60 year old house in E Van (Renfew Heights) that was listed in 2004 for around $350K. It just sold for $710K, with a few renovations. Rent wouldn't be much more than $2100 gross per month. That's about a 3% cap rate. Take that to the bank. LOL

  5. jesse # 3% cap rate is not so bad in this enviroment. How much are you getting on your CD ? not more than 0.4%. So it all depends how you look at it.

  6. @Anonymous, 3% cap rate is for a long term investment. Cap rates are typically inflation independent and should be well above 7% for a condo.

    I can get a risk free investment at 3%. I can get close to risk-free and tax efficient preferred shares paying 5%. But even a cash investment returning 0% will be better than buying an overinflated asset returning 3%. I'll let fish's readers figure out why.

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