THE CMHC is getting more flack

It is becoming a daily occurrence for someone in the media, or an academic to attack the CMHC for either helping ignite the RE bubble in Canada or for building up a good head of risk for which we are all responsible.

The latest were this and this.

This was the first detailed set of results the CMHC has published and showed declining activity thanks to Flaherty's changes. Here is a snippet:

According to the CMHC, these numbers show it’s doing a good job of maintaining a healthy, sustainable housing market.

But Finn Poschmann, vice president of research at the C.D. Howe Institute, is skeptical. “The size of the drop in refinancing is surprising to the point of shocking,” Mr. Poschmann said in an email. “You could hardly have better evidence of the extent to which CMHC practices have been supporting high debt and risky borrowing by homeowners.”

A frequent critic of the organization, Mr. Poschmann argues that CMHC practices have helped inflate housing prices and encourage consumers to take on more debt than they can handle.

It's obvious isn't it- if you help people buy more than they can afford you will be pumping an already over-heated RE market. Of course the CMHC has tried to defend it's actions. All organizations want to feel that they are doing good, and want to expand and grow not be kept in check.

I can see how in it's early days the CMHC may have had a role. Prices were low, interest rates were high and folks had trouble getting loans. They were there to insure the riskiest of loans.

Yes it would have been better to leave it to private insurers, but we cannot fault it too much. RE was slowly rising and CMHC helped people get into positions to build equity. Most importantly it was small:

I won't dwell on the fact that CMHC ended up insuring rental and investment properties which is well beyond and goes aginst it's apparent mandate- to help Canadians own a home.

Now fast forward to today. We are sitting at very high RE values. we have easy lending standards with banks and mortgage brokers falling over themselves to lend and lastly we have the lowest interest rates in memory.

This would be the worst, most riskiest time to insure high-leverage mortgages. Not only that, but by adding further marginal buyers to this over-heated RE pile, they are making it even more difficult for the next generation of buyers to get into the market. Soon everyone needs CMHC insurance to get onto the first step.

A self-reinforcing loop.

Meanwhile the CMHC has bloated up since the above graph to a mega-monster! Over $500 Billion of coverage, $45 Billion of which have 10% or less equity and if we correct, as we surely, eventually, WILL- the Canadian tax payer will be on the hook and Government spending will be severely affected to pay for this.

As the Globe and Mail said:

The banks won’t lose. Only Ottawa will. It’s too late to do anything about those insurance policies now—we’re on the hook. But it’s not too late for Mr. Flaherty to show up at the CMHC board with a new set of orders: Shrink it.

Of course the Conservatives, despite having no love for the CMHC, panicked and doubled the size of it when the 2008 crisis hit. So they have to shoulder a big part of the blame.

I have always said - Government should strive to provide it's citizens with affordable housing. It should not place risk on future generations to allow everyone to own a home. In fact, by trying to do so, it may be making housing much less affordable for renters AND buyers.

Please vote in the poll folks...

Moving over to the dark side...

The perceptive ones may have noticed that ads have suddenly appeared on the blog. It's true, I have decided, after years of pumping this blog out to hit it rich and retire.

In fact it may only be temporary. I was tired of getting the e-mails and pop-ups saying the blog was busy enough to warrant throwing ads up.

OK, so I did it and I will tell you all how many Millions it brings in.

Maybe I can spend a bit more time on the blog.

In fact I am going to change a few things:

1) I have added a few more links to sites I like - they either deal with local RE or investing topics. I want this to be a hub for all good info. If you think I should add another one, please say so.

2) I want to put up more frequent posts, as I think things are getting interesting now.at We are at the cross-road. Inventory levels are high and Econ 101 would suggest that either the inventory will come off like 2010 or prices will fall like 2008. I am going to put up MOI for various areas inside and outside on Vancouver to monitor this.

3) Our first test will be August SFH average prices. I put up another poll to see if we are any more accurate in our guesstimates. We were truly off the mark for July. Here's the result of that poll:

17% Up Marginally

2% Up and Away

34% Down a Tad

40% Flat

7% Down the bowl (ie over 3%)

And the correct answer is Down the Bowl. Down 6.5% from June and 8% from the highs.

That huge drop was just brushed away by the RE bulls as an aberration. Who can blame them after the huge run up. However it will be harder to dismiss another big drop for this month.

BTW- anyone who has not read this excellent article on the drug trade and the housing market- I suggest you give it ten minutes.

The drug and organized crime industries are so big in the Province (17,000 Grow ops!!), it is no wonder that no-one wants to tackle them head-on, in case they bring on a major recession.

It reminds me of Florida a decade or two ago, when the Federal government wanted to stem the huge narco-money that was flowing into the State (also into RE- though mostly developments and shopping malls), the Governor asked if they could go slow to mitigate the economic impact.

I am back

Back form the Sunshine Coast where waterfront prices are apparently down 16% from last year. The few sales are from Albertans who have a few more bucks and are getting ready for retirement or Vancouverites who have hit the jack-pot and sold out to the HAM.

Ferry fees are one factor $100 bucks for a midweek run back and forth with a couple of kids, add in gas and ferry food and all the other goodies and that week-end getaway is MUCH cheaper to rent than own. AND who is going to look after it while you are busy earning the dough to run it? What happens when pipes freeze in winter, or a big branch comes through the roof in a windy storm or the septic tank backs up from a tree root.

Then there is the wait at the ferry terminal..and did I mention the cost. No wonder ferry ridership has collapsed.

Looks like the ferry corp will be pulling out of sponsoring the Canucks. Why would a Public Ferry corp sponsor a very profitable professional sport's team? Why would they have a luxury box to entertain guests? What guests? probably the same reason they pay the CEO over a Mill.

If they are trying to support the community, how about supporting 1000 Peewee teams instead?

Back to the SSC. The sellers there are pretty much under-water if they bought after 2006 from what I could tell. They are fighting hard to keep the prices up, even though demand has dried up. The price adjustments follow the market down, though I did see one sale for $1M on an $1.4 M asking. Nice one buyer!

Back to this town. Inventory is up. Up to October 2010 levels. Now it gets interesting. Where do we go from here. Sellers last year pulled their listings and then in the New Year we had the HAM invasion and optimism about the economy -remember the bank economists were still saying the Bank of Canada would raise rates this summer (which shows you how little use that field of 'science' really is)

Now our dynamic is slightly different. There is talk of a double dip. The B of C is running scared and the stock market has taken a nasty little tumble. Of course there is still HAM money and gold mining executives are sitting on some big bonuses, so there will always be money flowing. Heck, even in the US where they have a critical recession with 10+% unemployed, someone found a few bucks under the cushions to buy a $16 Million Lamborghini - and no he didn't work for BC Ferries.

RIP

A very fine Canadian is dead, at the age of 61. A tragic loss for us all.

Jack was a fighter and a truly courageous man.

He took all the attack the right wing media could throw at him from the smear campaigns about his ethics to calling him Taliban Jack.

They did their worst and he still fought back with grace.

BTW- if you want to see how shamefully biased to the right our media is have a look here.

We have lost a GREAT Canadian.

I am off for a week...couple of things

I was cycling past 3 Harbour Green, a new ultra chic development, starting at $5 Million.

The ads on the building mention a 'communal Ferrari' (not sure if you can see read it in the picture). It is actually on the front and back of the building.

Just wondering, what happens if two suites owners want to use it on the same night?

How much is a Ferrari in any case? Enquiring minds need to know.

BTW- As we head into the last part of August. Anyone want to guess what happens to the SFH Average price for August. I won't put up a poll, just put your guesstimate below in the comments.

Last time we had a major correction in our real estate, it took a worldwide credit crunch. It looks like we are heading into another one now, will it have the same effect?

The business cycle in a nutshell

Capitalism has many flaws, however one of it's biggest virtues is the business cycle. Firstly, as most will agree, the graph for any socio-economic parameter has been trending up for the history of humanity. Whether that be GDP, protein consumption per capita, or survival, we are moving upwards. The reason is our increasing numbers coupled with our ingenuity.

Even catastrophes like HIV or WW2 only put a temporary dent in this progress.

However it is not a smooth line up, but a jagged saw tooth.The cycle (and there are multiple different cycles running at the same time- eg commodities/industrial production etc) in it's most simplified situation is thus:

Along comes a need or an innovation- eg railroads in the US to bring wood and gold back to the burgeoning eastern seaboard or the Internet. This draws in money which causes a boom in the sector or even the whole economy. Eventually it becomes too speculative as investors are mesmerized by the huge gains made by the early money. More and more money flows into the sector, so much so , that bubbles often form in these assets or companies and they leave their most optimistic fundamental valuations. Eventually the boom turns to bust as not all the 'blue-sky' projections can be met.

Companies go bust. Most railway companies in the US went belly-up as did the Dot-com companies. Debt is defaulted on. A recession in that industry or even the whole economy ensues and we wait for the next driver.

The graph above is the picture of human greed and fear. It is stupidity too, however, it is necessary to move us along the graph upwards. Without speculation, we would not have had dozens of railway companies fighting to cross the US. The process would have taken decades longer.

So are we always stuck with this business cycle, where a mis-allocation of resources ends in tears- which can often be so severe that it leads to social upheaval eg WW2?

Some economist like Keynes suggested acting to smooth out the cycles. Intervene to reign in speculation as the cycle went up and add money (borrowed if need be) on the way down.

Then we had fools like Greenspan and Bernanke (and the Treasury secretaries like Robert Rubin, Lawrence Summers and Paulson who worked with them) who thought they could halt the business cycle- they unfortunately influenced all the other Central Bankers from Europe to Canada.

They allowed the cycles to go as high as possible and even advocated removing the few legal restrictions which kept the worst of human greed and speculation under check. This is from the free-market theories of Milton Freidman.

It led to HUGE up-cycles and misallocation of resources- eg the Dot-com boom. When these bubbles burst, they then became Keynesian - lowering interest rates and trying to bail out the stranded speculators.

They did this prior to the Dot-com with a number of mini-booms/busts like the LTCM (derivatives explosion) and the Russian and emerging market debt boom/crisis.

What this did was make the up swings huge but cut off the down swings. It seems like a good idea and in fact many wise economists in Central banks thought that Greenspan had found the Holy Grail. Lots of up, but very little down. There were no major recessions from 1987 when Greenspan took over.

Of course all that does is delay the inevitable. You don't get a good purge of speculation, the big money gets the message fast- we will be bailed out of our mistakes. So each bubble gets bigger as it has to swallow the losses of the previous one too.

Thus we had the huge housing bubble in the US. When that burst they tried again. Zero interest rates and even took the debt of speculators onto Government books. However it was too big and all the pent up excess had to come out of the system.

They could not stop the downward movement with their usual bag of tricks. The business cycle took it's full revenge.

There in fact several different cycles with different time frames that play out at the same time. There are short cycles and then longer more dramatic ones. Nicolai Kondratiev a Soviet economist and wrote about it. His theory was that this was how capitalism moved from animal exuberance to purging the excess speculation. A form of self-cleansing if you will. For suggesting this he earned Stalin's anger and was sent to a gulag and later executed there.

As I mentioned we have come though a period where we had the worst of both worlds. Regulators who did not regulate. Central bankers who were too close to the speculators and politicians who did not want the good times to be curtailed. The result was a delaying of the cleansing until we now have the mother-of-all down waves.

It is human nature to want to delay pain. We did it in Canada. When the crisis hit in 2008- we were in excellent shape. Low consumer debt, near balanced budget, and still buoyant commodity prices.

However our own Central bankers and politicians panicked. You know the script. Zero interest rates, CMHC doubling, Tax incentives, RRSP down-payments, Long mortgages etc.

All leading to our own speculative bubble which as Ben has shown is right where the US was when they burst. Had they done nothing we would have gone though pain. However it is very likely that as a result there will be even more pain.. I guess everyone just hopes it bursts on someone else's watch.

It is like a party where everyone is get rat-faced drunk and a few people nag that this is not going to end well. "This will end with fights, and vomiting, and maybe even more serious events". - They are told they are Spoil-sports! Drink. Enjoy the fun.

Of course the bears in the US were fully vindicated, not that it gives them much comfort, since they have to share the pain with everyone else!

The evidence is mounting

Ok maybe it is a bit too soon to put up my roller coaster picture. But I have been waiting for a LONG time to use it :)

However, lets say we are hanging precariously at the top.

August SFH was down. We have huge MOI's from outside Vancouver. Here is Larry's latest contribution.

And in case you missed my Whistler post

fish10 said...

Whistler 5 sales in a week with 777 on the books. MOI = a very long time.

Of these five sales some got real bargains and some, inexplicably, paid almost full price. Original list and final sale price;


L 314 S 220!!
L 479 S 469
L 759 S 600!
L 739 S 712
L 1050 S 995

Have a great week-end!

TIMBERRRR.......

DANG!

This is what happens when sentiment changes. It is sudden, dramatic and painful.

Many Billions of $ disappeared from Canadian's net worths. What does this mean to housing:

1) The B of C has torn up it's rate increase memo.

2) There is no way that this will NOT impact housing.

REBGV Report

HERE

Lots of interesting stuff.

The HAM areas are still on fire YOY- Richmond, West Van and Van West. While the hot money flows out of China, these places will sizzle.

However, where the local tax-payers live things are VERY different.

Look at the Benchmark prices.

These areas are negative YOY (SFH):

Port Moody
Sunshine Coast

These areas are negative over the last three years!

Squamish (-15%)
Maple Ridge
Port Moody

Lots of areas flat or negative for apartments YOY and over three years.

MOI = 6

FVREB Just in HERE

No time to look through in detail. MOI = 7.6

Oh- Victoria

Here is the graph from the VREB.

A $50K drop Average drop in SFH prices month on Month!

That's huge : -8%! in one month.

Flat year on year and Townhouses are down Year on Year by about -7%. Condos are down marginally YOY.

The housing bear has landed in Victoria. Here is the VREB press release which is refreshingly honest.

DANG!

Well lookie here!

Our poll asked what you thought abut SFH for June compared with July (only a small % of you guys voted)

Nevertheless the results were:

40% Flat

17% Up Marginally

2% Up and Away

34% Down a Tad

7% Down the bowl (ie over 3%)

And the correct answer is Down the Bowl. Down 6.5% from June and 8% from the highs.

Dang!

(Sorry about the picture BTW)