Disappointed with the CBC

This morning The Current on the CBC ran a piece on the Housing Bubble and the warnings from the OECD and Carney, the changes from Flaherty and the OSFI proposals.

It is here if you would like to listen to it.

Here is the disappointing part- the panel. Sherry Cooper, a media-savvy bank economist, the head of a mortgage broker's association, and a realtor! Where is the balance??

Where is David Madani, how about Ben Rabidoux even Garth Turner?!

If you are going to ask such a one-sided panel, why not just bring on the board of the CMHC and ask them what they think about it?

First, Sherry (God her voice grates on me) says the 1 TRILLION in mortgage debt the Canadian banks hold is not a big deal as the highly leveraged stuff has been insured by the CMHC, then she dismisses the calls from the OECD for higher rates.

Did she forecast the US housing bubble and subsequent collapse? If so, we should listen to her, if not...

The other two had their expected pro-RE positions. Toronto keeps marching along, one of them said gleefully, not understanding that they are marching over the abyss.

Actually the panel were not as partisan as they could have been. I think even the RE-ra-ra movement realizes that we are dealing with fire here. Fire that could very easily consume us all, and they are trying to sound responsible, least they be held resposnible for what follows.

been a while

Sorry for the lack of posts. We are all waiting to see if the higher inventory and lower sales keep putting pressure on prices.

Another unequivical drop in average prices would be nice. Nothing too dramatic, just a few %. Enough to give the prudent some heart and put fear in the stomach's of the speculators but still stop the politicians from 'doing something'.

Here are some numbers for you. They are SFH from April 23- May 23rd. Even if we assume some sales are still to be loaded on the system, I think they show the lay-of-the land pretty well.

Sales/inventory (SFH)

Maple Ridge: 68/715
New West: 23/110
Sunshine Coast 28/669
Squamish 10/222 !
West Van: 58/518
N. Van 109/393
Surrey 238/2309
Abbotsford 66/840
Van West 105/1043

Local Taxes and then some..

Local property taxes are a confusing morass. When property prices rise, the assessed value rises and people think that their taxes go up because of that.

Well they do and they don't.

Lets remember how they assess the property taxes...

BC Assessment Authority estimates the value of your home supposedly compared to equivilent properties that recently sold. The municipality then multiplies this by the tax level eg 0.4% or 1% is mutiplied by the home value and you have the tax payable. Here is a typical schedule of assessment for a municipality, in this case Surrey.

So of course if the value of the property goes up the amount payable goes up.

However even if property prices fall, unless they cut services, the municipalites need the money to pay for the garbage and policing and rec centres and so they would just have to increase the level of taxable rate to make up for the fall in property prices.

Here is a nifty calclator for the whole of the GVR.

Of course when property prices are rising, the municipalities should be lowering the tax rate and giving home owners a break. But human nautre being what it is, when property prices go up, the municipalities get flush with cash and build shiney rec centres and new infrastructure projects and when prices start going down, they wonder how to fund them and have to raise the taxable rate.

There are ways of reducing the property taxes with a home-owner grant and additional grants if you are over 65 or disabled.

Some municipalities also allow the over 65 and disabled to defer property taxes until the property is sold, a very noble proposition, except I have seen very wealthy seniors getting grants and deferring while a working family struggles to pay their share.

Remember that big recession that was going on somewhere else...

In the US and in Europe where they were sooo irresponsible - where they spent more than they made and let their house prices run away to extreme levels...ha ha... fools.


We had solid banks, a great Finance Minister and an even better Bank of Canada Govenor. We had China. We had things people need like gold and water and wheat and copper, we would never catch the Great Recession.


Well it's here!


The TSX peaked in early 2011 and it is down, down down from there.


China is not happy and looks to be backing off it's 15 year run of hitting Blackjack again and again. 


Our housing markets are at all time highs of lack of affordability,  our household debt has surpassed the spend-and-live-for-today Americans when interest rates are at all time lows. 


We have let a quasi-government outfit run by a very mediocre board run up a huge mountain of liability with inadequate over-sight and risk control (IMF's words - not mine)- I cannot even bear to type their name..


..and if it hits the fan...we cannot cut rates, coz they are already near enough zero, we cannot boost spending coz the Provinces are already laden to the gills with debt and some are having trouble selling their bonds - the biggest two that's who, and coming to a Province near us soon. The Fed's deficit is becoming 'structural' too, which means they are here to stay and any significant downward pressure on house prices will wipe out the CMHC's equity and the Fed's piggy bank will get raided.


In short, we have brought upon ourselves, the very thing we were chiding others for doing. 


But if you believe this guy, there is nothing to worry about.

A Slow Motion Crash?

That would be OK? It would stop the IQ-Challenged politicians from intervening, though they have probably led us into a land-of-no return with ZIRP and the CMHC and unregulated, lax bank lending, and the other gimmicks that helped fuel this fire.


From Today's Globe and Mail:

Vancouver’s real estate swoon deepens

PAUL WALDIE AND  TAVIA GRANT

From Wednesday's Globe and Mail

Published Tuesday, May. 15, 2012 9:17AM EDT

Last updated Tuesday, May. 15, 2012 7:44PM EDT

Deja Vu all over again...

Fannie Mae CEO 2007:

"We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.

September 7th 2008: Fannie Mae is placed into Government Conservatorship. 

From Wiki:
The law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased the national debt ceiling US$ 800 billion, to a total of US$ 10.7 Trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks. 


So far the Congressional Budget office estimates that $300 Billion of support has been given to the two agencies by tax-payers.


CMHC May 2012:


“CMHC follows prudential regulations as set out by the Office of the Superintendent of Financial Institutions, with CMHC maintaining more than twice the minimum capital required by OSFI,” it said. “As a result, CMHC is well positioned to weather possible severe economic scenarios.”



It pointed out the agency “manages its mortgage loan insurance and securitization guarantee operations using sound business practices that ensure commercial viability without having to rely on the government of Canada for support.”

Are you reassured now?

Great write up of the mess we are in...

From here, which BTW , is a great site for investing your RE savings pile in preferred shares.

The CMHC Annual Report is out. Of particular interest is the table of 5-year financial highlights on page 98 of the PDF … in 2007, there was $345-billion of insurance in force; at the end of fiscal 2011, there is $567-billion. Thanks for inflating the bubble and subsidizing your pals at the banks, guys! To put the figure in perspective, consider this factoid from the Canadian Housing Observer 2011, Chapter 4:

With a contribution of about $330 billion to the Canadian economy, housing-related spending accounted for 20.3% of GDP in 2010, up from 20.1% in 2009.

Gee, it sure is a good thing we’re so much better regulated than those dumb old Americans, eh?
Meanwhile an unfootnoted citation by the G&M states:

CMHC estimates that roughly 25 per cent of condominiums in the Greater Toronto Area are sold but sitting vacant — shades of Miami at the height of its collapsed condo bubble in 2007. Other analysts say the 25 per cent figure may be too low.

Nope, no bubble at all, no sir! Not with Spend-Every-Penny keeping a firm hand at the tiller! For anecdotal support for the phenomenon, try driving along the Gardiner and looking at all the see-through condominiums that now line it. However, if you are driving, DO NOT make notes while discussing your findings on your cell ‘phone! Remember, Smokey the Bear says “Only you can prevent forest fires!”

How do you make your mortgage payments?

A) rent out the basement- or even live in the basement and rent out the upstairs.


B) take in foreign students - house, clean and feed them.


C) Rent out the whole home and go rent somewhere cheaper yourself


We have seen all the above in the crazy YVR market, but how about this:


D) run a small grocery in the house to help pay the mortgage.


Look at the # 8 in the Weekly Drop

Almost rebuilt 3 bedroom house with an established convenient store on main floor. Also having possibility to build a laneway house of which design and drawings are available. Great opportunity living in the prestigious area while making enough enough money to pay mortgages. Close to Lord Byng Secondary School and Queen Elizabeth Elementary school, about 10 minutes to UBC. The Pacific Park is nearby. Just an excellent live and work property. Don’t let the chance go by.

Fraser Valley

April Stats


5% less sales than last April


7% more listings than April 2011


6% more inventory than April 2011


2nd lowest sales for an April in the last decade


SFH

Average price down 8.1% YOY!!


Median price down 3.7%


And yet MLS HPI Benchmark is up 5.3%- huh!


Look at South Surrey/White Rock. Half as many sales as last year, average down, median down, benchmark up!


Very odd. To have the median and average down so much YOY and yet the benchmark up so much. We will let that go without comment and assume that they have used some sort of reproducible methodology to calculate the benchmark.


Sales to listings is 14%. Well into buyer's territory - see the graph that they have near the end of the stats presentation

Sometimes we have to look past RE in our town

and look at the bigger picture. The 'and then some', in the title of this blog.


We know that the CMHC is finally going to be roped in, the question is, is it too late?


It may well be. The CMHC has accounted up to 60% of all mortgages in recent years according to it's $600 Billion Cap and the $1.1 trillion Mortgage industry.


That is an astounding number for one institution. Then when you learn that the institution is Government backed, you wonder if we live in North Korea or a few of the last bastions of Government run economies. Except this semi-socialist animal has in fact made a few (brokers, speculators, developers) very wealthy and spread the risk to many.


To many of us bloggers, it was obvious what a scam this was which was benefitting a very few people. here's how it goes:


1) Bank of Canada keeps rates at zero.


2) Savers get zero on deposits + banks sell bonds at near zero as  they have implicit Gov of Canada backing = accumulate a lot of cash which has to be put to work.


3) Banks offer mortgages to everyone with a pulse..money back, high leverage, speculative, stated income, mortgage holiday etc etc


4) They get CMHC insurance - hence the bulk of the risk is transferred to you and I.


5) The banks sit back and clip coupons - getting 3-4% gross on each dollar lent, but since they are leveraged up, multiple times this amount.


6) banks look sound. Speculators, developers, mortgage brokers, bank CEOs and some realtors make great huge chunks of money.


The profit comes from the hide of savers (zero rates) + first-time buyers (higher prices) + the tax-payer (future liability)


No wonder they didn't want the golden goose to be killed. Several years ago David LePoidevin a money manager at National Bank pointed at the CMHC as the creator of the housing bubble. 


The CEO of National Bank jumped in to defend the CMHC and said that he did not share his manager's views. Who could blame him, the wagon kept on rolling and the bonuses kept on coming. A cool $5-6 Million a year, which is a lot for a small bank.


Since then the problem has been made a lot worse. About $300 Billion worse. 


When Flaherty doubled the CMHC lending cap, and dished out money to the banks, yes he saved Canada from the worst of the financial down-fall -But he knew what he was doing long-term.


- He was adding air to the housing bubble. A LOT more air. $300 Billion more in a $1 Trillion market! Now the bubble will deflate from a much higher level and cause a lot more collateral damage.
- He transferred risk into the future.
- He cynically backed a semi-socialist organ (which was set up after the war to help the poor get mortgages) and turned it into a financial megalith, a bonus generator for Bay Street.
- He bought Stephen Harper his majority.


In case any of you still think that it is wise to have a debt-burdened economy (and remember we are now at the same level of consumer debt that the US was before their collapse) then I would suggest you read this excellent summary from the most astute money managers in the US.


Economies which are debt laden from RE booms (think Japan, Spain, the UK and the US)  go through very painful adjustments. There is no reason why we should be any different.


The sad part is, it could have all been prevented. It is hard to imagine how we could all have been so foolish.
- 

David Dodge in Denial

Usually past Bank of Canada Governors keep their lips closed and sit on their criticisms when they leave office.


Not David Dodge it seems. In a speech in Calgary he wanted to have his say. Basically it boils down to the fact that housing is not in a bubble except in pockets like Vancouver and Toronto, and that is driven by off-shore money, not low interest rates and so interest rates should not be used to try and control housing.


While I agree that there is a significant effect from the HAM Tsunami on the markets, my answer to David Dodge is the graph produced by the Bank of Canada itself (below). If low interest rates are not the problem then why the huge run-up in our consumer debt, considering that only 20% of the population of Canada live in the two most bubbly cities

The C is Coming Back

What does C stand for? Convicted of Fraud? Ex-Canadian? The Face of bloated Capitalism?  Looks like 'the Conrad' wants to come back to the country he foresook and bad-mouthed.

And even though we don't usually let in people with criminal convictions, however minor, money obviously over-rules these genteel considerations.

Conrad was kicked out of the exclusive Upper Canada College after being accused of stealing and selling exams, his father was the president of Canadian Breweries Ltd, his mother was the daughter of the founder of Great West Life.

Frequently critical of Canada and especially those who dared to criticize the  US,  he eventually renounced his Canadian citizenship - how ironic that he was nailed by the US, our fragmented securities commissions rarely jail such a high-profile, well connected miscreant.


So when he is out of jail, can we expect to see him holding soirees with his nouveau riche wife Barbara?  and maybe Macleans can put his porky face on the cover a few times to try and rehabilitate him, and before you know it, he will be back to being the same old arrogant wind-bag telling US how WE should run OUR country...sheesh.

Only a Few Hours left

For comments to the OSFI about the CMHC

If you have a moment send a quick e-mail here:

B20@osfi-bsif.gc.ca

You can mention the $600 Billion Liability that is sitting on our shoulders, the weak, pro-RE CMHC board and the criticisms of risk management heaped on them by the IMF, Nomura, Bloomberg, the Globe and Mail and others.

You can mention that they have distorted their mandate of helping Canadian's buy housing they can AFFORD and have helped fuel the current housing boom which has brought prices to a record lack of afforbility.

You can mention how the CMHC has led to lax lending by the banks, with the same US-style zero down, money back mortgages due to the risk being immediately transferred to the tax-payer. Anything will do. Now is our moment...The prudent, the cautious, those who do not want to put our country at risk of financial ruin.

Big Drop in SFH Average

See Larry's Post.


Ok lets not get too excited, we have seen this movie before and it didn't end well. We saw a big drop in mid-2011 only to see it rise like a phoenix to new heights and I am not even talking about 2009 when tweedle-dee and tweedle-dumb rigged the system so that we were denied our correction.


Fingers crossed. 


Lets see what the official number say and how the GVREB spins it.